Mergers and Amalgamations in NFP Organizations - Research Paper Example

Mergers and Amalgamations in NFP Organizations and NGOs Mergers and Amalgamations in NFP Organizations and NGOs Introduction Companies today strive to hold their market position due to the increased competition pressures and the impact of recent global economic downturn. Organizations are seeking new ways to remain competitive in the industry and to promote constant and stable growth. Traditionally, mergers and amalgamations are considered to be the best ways to confront with stiff market competition effectively and to enhance market share growth. Mergers and amalgamations strategies try to increase geographical market coverage by taking advantages of the synergies of the combined operation. As scholars point out, mergers and amalgamations assist a growing company to quickly expand its market territories without investing huge money or establishing new business entities. Corporate practices indicate that mergers and amalgamations would benefit organizations to defend the threat of new market entrants effectively. Although these expansion techniques raise some potential operational challenges to the management, they are considered to be more effective than any other business expansion approach. Reports indicate that the rate of mergers and amalgamations have dramatically grown since 1980s. Today, not for profit (NFP) organizations and non-governmental organizations (NGOs) also widely practicing these expansion techniques so as to promote quick growth. This paper will discuss the practice of mergers and amalgamations in not NFP organizations and NGOs. NGOs and NFP organizations An NGO can be for profit or not for profit although majority of the NGOs are not for profit firms. An NGO is formed by a voluntary group of individuals or organizations who combine with the goal of providing services or advocating a public policy. A non-governmental organization is not usually affiliated with any form of government. However, some NGOs, particularly those operate in authoritarian countries, can be influenced by some form of governmental control. It must be noted that political or rebellious organizations are not considered as NGOs. The major issues addressed by NGOs are related to common human concerns including basic human rights, environmental safety, developmental assistance, and disaster relief. In addition, NGOs deliver their services in local, national, or international context. Generally, private donations, governments, or multinational corporations are the major sources of funds of an NGO. Unlike an NGO, a not for profit organization operates to achieve a specific mission rather than to earn profit. A NFP organization uses surplus revenues to accomplish its predetermined goals and objectives. In other words, although non-profit organizations are allowed to generate surplus revenues, they do not have the permission to distribute surpluses as dividends among the group members. Direct donations, governmental funds, grants from charitable trusts constitute major funding sources of not for profit organizations. Mergers and amalgamations The terms mergers and amalgamations are very popular in the 21st century. Companies integrate with each other with intent to combine their assets for the purpose of increasing the chances of survival and growth and gaining better access to new market territories. It is a common misconception that the terms mergers and amalgamations can be used interchangeably. Even though both these terms are closely related each other in terms of their basic concepts and purpose, there are many technical differences between these business expansion techniques. Mergers and amalgamations can be simply defined as the act of integrating two or more commercial entities or business concerns into one. Merger refers to the fusion of two or more business entities and one or more entities lose their identity during this integration process. In contrast to this, amalgamation can be considered as a process of blending together of two or more business entities where all the entities lose their identity and a new separate entity is formed. Under the merger technique, a company’s assets and liabilities are added to another company’s assets and liabilities. In addition, the shareholders of the companies merged will become the shareholders of the larger single company. On the other hand, shareholders of the companies merged will be allotted fresh shares by the newly formed company. Mainly, merger can be of three types such as horizontal, vertical, and conglomerate. In the case of horizontal mergers, two competing companies merge together to take advantage of their same product lines and markets and thereby get rid of severe market competition. As Zain (2008) notes, a ‘customer-company or company-supplier relationship’ is reflected when two companies are merged under vertical M&A concept. This type of merger would assist a company to ensure uninterrupted supply of necessary goods and services and hence to focus more on marketing and distribution activities. When two companies in the same or related industries offering different product lines merge together, it is called conglomerate merger. Mergers and amalgamations in NGOs and NFP organizations Today, the practice of mergers and amalgamations is common among NGOs and NFPs. By promoting these techniques, non-profit organizations try to consolidate “their dues, voluntary leadership obligations, sources of information, networking opportunities, and meeting commitments” (Jacobs, 2008). NFP managements believe that a merger or amalgamation would assist them to perform their activities more efficiently and effectively because larger firms have more influence. In the modern era, most of the NFPs struggle to find new members and source of funds and to develop new programs and activities. The severe market competition is the major factor threatening the sustainability of NFPs. Hence, today’s marketing experts consider merger/amalgamation as a better approach to increase the competitiveness of NFPs. In case of for-profit firms, it is widely argued that the process of merger would adversely affect the welfare of the society because this process often creates market monopoly. However, this argument would not challenge an NFP-NFP merger as these organizations use their whole surpluses to serve the targeted audience or to achieve their specific goals and objectives. The process of combining two or more non-profit organizations is more difficult than combining two or more business organizations due to many reasons. While considering mergers of for-profit firms, managers give specific focus to aspects like revenues, expenses, profits, capitalization, cost cutting, and other economic influences. In simple words, shareholders’ value maximization would be the most important force driving merger or amalgamation among business corporations. In contrast to this, a non-profit merger/amalgamation is very hardly driven by perceived economic opportunities or issues. In case of a non-profit merger, managers pay particular attention to some other key factors including survival of programs or activities, leadership, employees and consultants, and location of headquarters. In other words, it is very difficult to quantify the economic benefits under a non-profit merger or amalgamation. Advantages or disadvantages of a non-profit merger seem to be personal to each member. A notable percent of planned non-profit mergers actually do not proceed as a result of several potential process challenges (Jacobs, 2008). However, more and more non-profit mergers/amalgamations are being reported despite these challenges; and the increase in leadership professionalism can be attributed to rise in non-profit mergers over the last few decades (Jacobs, 2008). Today, non-profit managers and volunteers are increasingly well educated and seasoned business people, because people perceive non-profit membership as a way to obtain information and advocacy services, networking advantages, and credibility. If they find that a merger would provide them potential operational advantages, they will be interested to pursue those opportunities aggressively. Recent corporate governance scandals and the subsequent formation of Sarbanes-Oxley Act have influenced non-profit personnel to take their duties and responsibilities more seriously. Once the executives identify potential benefits of a merger, they need to address the possible volunteer resistance to change. Since most of the non-profits have business people on their governing boards who are experienced with mergers and amalgamations, the non-profit organizations can easily proselytize for the integration benefits. Some NFPs have merged two or more times over the past 10 years whereas many others are closely observing mergers happening in the non-profit world in order to consider possible mergers for their organizations in future (Jacobs, 2008). In addition to the potentiality of the merger, troubles in merger’s mechanics also lessen the scope of non-profit mergers. In many cases, technical challenges and relatively huge expenses associated with a non-profit merger has deterred the parties from the integration process. Since mergers are sophisticated business transactions, many of the NFPs may not have adequate expertise to deal with those processes. Several non-profit mergers have failed partially or completely due to lack of efficient volunteer or staff leadership. Most non-profit mergers are not actually formal legal mergers but they are only formal legal considerations (Jacobs). “In a merger, one or more non-profit corporations merge into another, with the latter becoming the ‘surviving corporation’ and the other(s) is automatically dissolved by virtue of the merger” (Jacobs, 2008). In contrast, in an amalgamation process, two or more NFPs are dissolved and a new organization is created by the virtue of consolidation. For some diplomatic reasons, non-profits consider merger as a way to be a new organization rather than cause a party to remain as the surviving corporation. There are three phases of activities including inquiry and consideration, planning, and due diligence involved in the process of merger (In a non-technical sense, the term ‘merger’ represents both mergers and consolidations). An NGO merger may be initiated by the impetus of the volunteer leadership and subsequently the plan would be supported by the senior staff. As in case of merger in any other industry, each potential NGO partner evaluates the pros and corns of the proposed merger. After a series of meetings and discussions, consideration is given to a written agreement if both the parties agree on common terms and conditions. Generally, organizations seek the service of experienced consultants during this initial phase of negotiation. In the planning stage, the resulting organization is designed and governing committees have to be appointed. A series of other decisions concerning membership, dues, programs, meetings, staffing, benefits, governance, name, and headquarters are made in this phase. Another important process in the planning phase is the integration of the boards of the merging organizations. Finally, “due diligence refers to the process of systematically reviewing the legal and financial situation of each of the merger partners” (Merger process overview, 2012). Since the due diligence process avoids the personal liability of directors, it acts like an insurance policy for each of the governing boards involved in the merger. It is widely believed that non-governmental organization face less competition pressures and sustainability challenges. However, in today’s economic environment, NGOs are also threatened by intense competition and hence they are forced to adopt internationalization strategies and to build corporate culture. Severe competition has ended up in the disappearance of many smaller NGOs; and in order to confront with the competition pressures, NGOs are increasingly adopting merger or amalgamation techniques (Bastien, n. d.). In addition, the rising funding issues also influence small NGOs to think about combined operation. It is observed that small scale NGOs are not given adequate governmental funds to run their operations smoothly and efficiently. Hence, NGOs are integrating their assets and abilities to make their size huge and thereby obtain more governmental grants and other financial assistance. It must be noted that the rate of mergers among NGOs is less than that in the non-profit world. In the words of Ray Jordan (as cited in Dochas, n. d.), CEO of Self Help America, it is very difficult for smaller NGOs to sustain their operations unless they get positioned well through strategic alliances or mergers with other organizations. The merger of Irish based Self Help Development International and the UK based Harvest Help is a well known example of an NGO-NGO merger; and this merger is becoming a success because their norms and practices were very similar and both of them were at a similar stage in their organizational life (Dochas, n. d.). As compared to NFP mergers, the process of NGO merger is more complex because of the procedural difficulties and the possible delay involved in the process. In the view of Werker and Ahmed (2007), NGO mergers are less likely to be successful relative to merger operations in any other industry, because NGOs do not give much focus to coordination problems while planning mergers. The authors add that NGOs emphasize more on growth strategies and market conditions while considering a merger. However, some industry experts argue that mergers among NGOs would reduce the organization’s service efficiency. In case of for-profit NGOs, the merger may cause over market dominance and hence they may shorten their goals to profit maximization. Under such circumstances, actual beneficiaries would not obtain any advantage from an NGO merger. At the same time, some NGO mergers greatly assist the parties involved to achieve their goals and objectives faster than if they operate separately. For instance, the merger of International Trachoma Initiative and the Task Force for Child Survival has significantly contributed to their efforts of eliminating blinding trachoma (Chinnock, 2009). Conclusion From the above discussion, it is clear that merger/amalgamation is being increasingly used by NFPs and NGOs with intent to vie with stiff market competition and to ensure long term sustainability. This practice is more common among non-profits relative to NGOs. Since non-profits do not distribute their surplus revenues among their members as dividends, NFP mergers are less likely to create any harmful market monopoly. A non-profit merger includes three steps including inquiry and consideration, planning, and due diligence. Mergers among NGOs are less common because this policy may not be often successful due to various reasons. High level coordination problems threaten the scope of NGO mergers as NGO managements overemphasize growth strategies and market conditions. References Bastien, D. (n. d.). Competition, outsourcing, mergers: NGOs adapt to economic realities. World Crunch. Retrieved from http://www.worldcrunch.com/competition-outsourcing-mergers-ngos-adapt-economic-realities/business-finance/competition-outsourcing-mergers-ngos-adapt-to-economic-realities/c2s5630/#.UHu4H2_MjzY Chinnock, P. (2009). Merger of two NGOs will enable expansion of action against infectious diseases of poverty. Tropika.net. Retrieved from http://www.tropika.net/svc/news/20090319/Chinnock-20090319-News-Charities-Merge Dochas. (n. d.). Irish NGOs & Development Effectiveness. “How We Did It” Seminar series. Retrieved from http://www.dochas.ie/Shared/Files/4/How_We_Did_It_seminar_series_summary.pdf Jacobs, J. A. (2008). All about mergers of non-profit organizations. Association Law and Policy. Retrieved from http://www.pillsburylaw.com/siteFiles/Publications/E59EB05159610F1A1618CEC694535E42.pdf Merger process overview. (2012). FSABC and CCABC. Jan 16. Retrieved from http://www.ccabc.org/wp-content/uploads/2012/02/Merger-Process-Overview-Final-January-2012.pdf Werker, E. D & Ahmed, F. Z. (2007). What do non-governmental organizations do? Journal of Economic Perspectives. Retrieved from http://www.hbs.edu/research/pdf/08-041.pdf Zain, M. (2008). Mergers and acquisitions: The rational and benefits. DinarStandard, March 3. Retrieved from http://dinarstandard.com/leadership/mergers-acquisitions-the-rationale-and-benefits/ Read More