Next Investors logo grey

How to ensure your NFP merger doesn’t become an unintended take-over

Published 22-OCT-2019 11:30 A.M.


8 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.

Click Here to View Latest Articles

MERGERS and acquisitions have become a natural part of the not-for-profit landscape with more than twice the number of organisations considering a merger than was the case ten years ago. While they bring the promise of greater efficiencies and better service delivery, they also pose the risk of smaller entities being swallowed up by their larger and more powerful merger partners.

So how do boards and executive teams ensure their merger doesn’t inadvertently become a takeover, gobbling them up rather than enabling them to become a fresh entity with a shared and exciting new identity?

To successfully answer this question, I spoke with 15 directors and CEOs from leading Australian NFPs to learn more about their experiences of merging. Did the merger process and the end result meet their expectations? What worked and what didn’t?

I also conducted additional online research of five other NFP merger transactions – some of which went ahead – and drew on my own 20-year experience in the business consulting sector.

All of those I interviewed reported both good and bad merger experiences. Some transactions met or exceeded expectations, whilst others were considered abject failures. However, every transaction was a learning opportunity, providing valuable insights into how to merge successfully.

I have distilled these qualitative discussions and my additional research into SIX best practise M&A tips.

Hopefully these will ensure other NFPs looking to embark on a merger avoid some of the potholes on the merger highway and achieve the outcomes they were hoping for.

Best practise tips for NFP mergers

  1. Know your WHY

I know how easy it can be to get caught up in the excitement of a possible merger and rush ahead without truly considering why the merger should happen in the first place. However you do this at your peril.

The resounding feedback from the directors and CEOs I interviewed was that it is absolutely essential you know why you entering into a merger in the first place. What are the expected benefits? Why will your customers, clients and members be better off if you merge?

Even more important is that these WHY discussions are more than just a passing conversation at a board meeting. They need to be the subject of dedicated, focussed discussions which are regularly revisited throughout the merger process and during implementation.

Knowing your WHY will enable you to remain focussed on what is best for the merged entity ... not just what is best for the other party. It reduces the risk of agreeing to things in the excitement of the deal that could result in the merger becoming an unexpected take-over.

  1. Weigh up the benefits and risks

A merger is a strategic choice and one which provides many organisations the opportunity to better pursue their purpose and grow or adapt to a changing environment. While a merger may be a viable choice in the majority of circumstances, you will need to determine if it is the right choice for your organisation.

It is important to objectively and dispassionately consider all possible risks early in the process. A useful exercise is to develop the case against merging. This will ensure you have not only considered the benefits but also weighed up the negatives.

Of the transactions I researched for my study, around a third did not do this effectively. The end result was a merger that didn’t deliver the benefits anticipated and instead caused significant difficulties for the organisations involved.

So before embarking on your merger, ask yourself the following question – do the benefits and risks represent a better proposition than the alternatives?

  1. Identity the deal breakers early on

A merger, like any negotiation, will require some ‘give and take’. While mergers provide the potential for partners to derive enormous benefit such as cost efficiencies and improved service delivery, there can be a downside such as loss heritage or identity and reduced director or executive influence.

It is vital the merger partners discuss these issues early in the merger process, well before there is any significant commitment. This enables both parties to determine the point at which the merger no longer makes sense for one of the partners.

Mergers can be expensive and time consuming so there is no point spending significant resources only to discover there isn’t agreement over, for example, the location of the head office.

These discussions need to be detailed and honest, with the tough questions asked (and answered).

The key questions would-be merger parties need to be asking:

Once these questions have been asked, each party should consider their own position first and then come together to reach agreement.

Understanding and agreeing the position early in the process means you are less likely to give up what’s important, simply to get the deal done. When you have committed a lot of time, energy and resources to a deal it can be tempting to agree to something that is more akin to a takeover.

Avoid the temptation!

  1. Don’t scrimp on due diligence

As merger discussions progress, conversations are likely to become increasingly friendlier. Trust builds and it can be tempting to save costs and undertake a ‘light touch’ due diligence.

Don’t fall into this trap. Due diligence is about ensuring you know everything about your partner and that you have considered all the benefits and risks they bring to a possible merger. Are their financials accurately stated? What services do they actually deliver? Is their compliance up to date? Are their registrations valid? What is their culture?

Many of the directors and CEOs I spoke with during my research, felt that a more robust due diligence process would have helped them avoid what proved to be an unsuccessful merger.

What was saved in a ‘cheap and easy’ due diligence resulted in significant costs to rectify issues later on.

Keep in mind that conducting a thorough due diligence early on will also enable you to identify parts of the other party’s operations, strategy or culture that could become more dominant over time and hence reduce the sense of a merger.

  1. Create ‘one’ culture

Merging two entities also requires merging two cultures. Whilst both partners usually operate in the same sector and have similar clients, cultures can be quite different.

Even where the cultures are quite similar there can be a tendency to hold onto the legacy of the previous organisation. It is quite common to hear people refer to which side of the merger they were on months, even years down the track.

Sadly a clash of cultures can dramatically slow down the merged entity realising the benefits of joining forces.

Also where two separate cultures persist, there will be a tendency for one to become more dominate over time so developing one culture as quickly as possible is vital. This involves determining what that desired culture should be and developing a plan to ensure this happens.

  1. Communicate, communicate, communicate

Do keep in mind that interest in your proposed merger goes well beyond the boardroom table. It involves everyone from clients, employees, donors, government and members to a host of other stakeholders in your sector.

It is vital you communicate your intentions with these parties because in the absence of this, rumours and misinformation will abound. This can lead to staff departures, member revolt or a loss of funding. Whilst much of the detail of merger discussions and negotiations must remain confidential, it is important to develop and implement a detailed communication plan early in the process.

Identify the relevant groups you need to speak with and ensure you control the conversation.

So, in response to my original question, can the board and senior executive team ensure their merger doesn’t inadvertently become a takeover and they achieve the outcomes they were hoping for?

Yes, they can, provided they put in the effort to ensure the reasons for the merger are clear, that these reasons are kept front of mind, that they don’t scrimp on due diligence and consciously make an effort to create one culture.

About the author ...

Dr Jason Talbot is the Managing Director of Graphite i2i, a specialist boutique management consulting firm which provides business transformation, performance improvement, M&A, strategy and governance services to medium and large organisations. The company’s highly innovative business assessment and transformation methodology, 6C Framework, provides CEOs and Boards with a holistic view and understanding of their businesses capabilities, allowing them to readily identify areas in greatest need of attention or determine where future opportunities lie. Prior to setting up Graphite i2i in 2012, Jason worked in senior roles for Grant Thornton, Andersons, PricewaterhouseCoopers, Deloitte, National Australia Bank and Ernst & Young – in Australia and the UK.

  • The above article is based on qualitative interviews with 15 directors and CEOs from leading Australian NFPs which have undergone a merger in the past three years. It is also based on online research of five other NFP merger transactions – some of which went ahead while others didn’t - and Jason’s 20-year experience in the business consulting sector, much of which involved private company M&A, private equity transactions and not for profit merger strategies.

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.