When the Los Angeles County Museum of Art last week proposed a merger to stave off the pending closure of the smaller Museum of Contemporary Art, the big art institution was hardly alone.
All over the county, and indeed nationwide, non-profits of all sizes and stripes are seriously considering mergers or in some cases takeovers by larger agencies as a survival strategy amid an economic crisis that has seen major downturns in giving.
Among recent mergers in the local non-profit world: The Exceptional Children’s Foundation of Los Angeles merged with an educational and therapeutic services provider called the Kayne Eras Center. Wheels for Humanity, a North Hollywood-based organization that ships refurbished wheelchairs to poor countries, began operating under the auspices of United Cerebral Palsy of Los Angeles.
And that’s just for starters.
“We have seen a 50 percent or higher increase in the number of inquiries just in the last month,” said Bob Harrington, director of strategic restructuring at La Piana Associates Inc., an Emeryville consulting firm. La Piana has overseen more than 70 non-profit mergers in the last 10 years but is now getting two to three such inquires each day.
“Either they are considering a potential merger,” Harrington said, “or they want to get information regarding the process. It’s being driven by economics. We expect to see the number of mergers at least double.”
Historically, mergers among non-profits have occurred roughly as frequently as they have in the business world, according to a study last year by the Bridgespan Group, a Boston organization that advises charities on management. The study examined 3,400 nonprofit groups engaged in mergers across four states over a span of 10 years. Among its other findings: The most common causes are those already familiar to businesses financial distress or leadership departures.
While mergers and acquisitions in the for-profit world are declining due to the difficulty of getting credit, most non-profit mergers cost less than $100,000 for legal and consultant fees. And though there are no available studies on the recent spike, those in the field say reduced charitable giving has severely cut nonprofits’ income making them more open to the presumed benefits of mergers: that the sharing of assets, resources and personnel can reduce costs while at the same time the larger organization expands the number of people served.
In the case of the Los Angeles County Museum’s proposed merger with the Museum of Contemporary Art, LACMA officials have said MOCA would benefit from the larger county museum’s strength in fundraising, extensive gallery space and greater attendance. LACMA’s $68.2-million budget for last year was more than triple that of MOCA’s
The MOCA board, which also is considering a $30 million bailout from philanthropist Eli Broad, had not decided late last week.
Economic sense
A similar argument won the day when the Exceptional Children’s Foundation merged with Culver City’s Kayne Eras Center in July.
Negotiations began earlier this year when the former head of Kayne Eras decided to leave his post and called his friend, Scott Bowling, the chief executive of Exception Children. In the discussions that followed, Bowling said, it became clear that Kayne Eras, despite its smaller size, could fill a service gap. Exceptional Children served disabled children from birth to age 3, but not beyond that. Kayne Eras, meanwhile, targeted children aged 5 to 21. But the merger moved forward because it made economic sense.
“One of the primary business reasons for the merger was the diversification of funding streams,” said Bowling, who is chief executive of the combined organization. “Just as it’s good to have diversification in investments, it’s good to have multiple funding streams so all your funding eggs are not in one basket.”
In addition, the merger provided an “economy of scale,” he said. “When two businesses come together, you don’t need two CEOs, you don’t need two CFOs and you don’t need two directors of development. You can buy supplies in bulk to leverage savings.”
Bowling said, he expects the combined agencies which operate on a total annual budget of just over $26.5 million to realize a cost savings of up to $750,000 a year.
Last year’s acquisition of Wheels for Humanity by United Cerebral Palsy of Los Angeles, on the other hand, seemed to be more beneficial to the smaller entity.
Founded in 1996 in a Studio City garage, Wheels for Humanity refurbishes donated wheelchairs and sends them to needy people in 66 countries including Guatemala, Vietnam and the Ukraine. But it had been struggling for years.
“We were basically a mom-and-pop nonprofit,” said founding President David Richard. “We slowly grew, but I never knew if we could pay the phone bill or make payroll; every month I’d have to stop operations and call foundations to cry.”
The merger with the larger organization, completed last year, has changed all that. Now called UCP Wheels for Humanity it employs 10 workers and operates out of the same North Hollywood warehouse it has occupied since 2000.
The combining of resources has taken the weight off Richards’ shoulders. It has also, he said, given him access to a top notch chief financial officer whose services he couldn’t otherwise afford. That enabled his agency to apply for a $2 million government grant and resulted in the delivery last year of more than 5,000 wheelchairs compared to the usual average of 3,750.
“We thought we could bring lots of attention to that organization and it could bring lots to us,” said Ronald S. Cohen, the chief executive of Cerebral Palsy of Los Angeles, to whom Richard now reports. “It all fits; they’re no longer out there running by themselves.”
Difficulties emerge
However, the rising numbers of mergers, however, is prompting some experts to take a harder look at the practice.
Regina Birdsell, president of the Center for Nonprofit Management in Los Angeles, a consultancy serving the nonprofit world, said she fears that some merger decisions may be being made too hastily in the current economic panic.
“If they move too quickly,” she said, “history usually shows that (smaller agencies) don’t survive mergers.”
Instead of acting “because your cash flow is tight ideally what you should look for is complementary missions. You really have to think of a merger not as a quick fix, but as a longer term strategic solution,” Birdsell warns non-profits.
One example of a smaller non-profit being “swallowed up” in a merger is the acquisition of the Green Coast Foundation, a tiny Los Angeles group, by Environment California, a small statewide environmental advocacy group with a $500,000 annual budget.
Green Coast Foundation was established in 2005 to conduct research in renewable energy technologies. But founder Douglas Buchalter whose day job is in commercial real estate realized that he couldn’t keep revenues flowing. His annual $150,000 budget was funded by small contributions, as well as Buchalter’s own money.
The upshot: Earlier this year Buchalter turned over $10,000 in cash, proprietary Web tools his agency had developed and access to staff researchers, all of which the larger environmental group plans to use. Buchalter, however, has not been entirely pleased with the outcome.
“Our contact has been minimum,” he complained. Though still confident that his group’s mission will ultimately be furthered by the new ownership, he said, “I’m not confident that it’s happening today.”
Bernadette Del Chiaro, Environment California’s clean energy advocate who championed the merger, accepts a share of the blame, saying that she only just recently returned from a maternity leave.
“I have not yet been able to maximize and really take advantage of the acquisition,” she said, “but we are optimistic” that it will be done.
