Affordable Housing Institute : US

Should non-profits fear merger?

 

“My, what high overhead you have, my dear.”

 

If not, why have they been so rare?

Bringing efficiency to mission is a balancing act, but business gurus such as Michael Porter have emphasized that in a world of finite social resources, philanthropy too must be entrepreneurial. That efficiency is often achieved by growing larger, and merger tolerance and even embrace is coming to the affordable housing non-profit sector, as recently highlighted in the Boston Globe:

 

The wave of mergers rippling through the corporate world is also washing into another sector: Nonprofits.

There have been several mergers and strategic alliances among Boston nonprofits in the last few years, including an agreement between two health centers in Dorchester to share resources, the combination of two after-school initiatives, and a decision by the Commonwealth Shakespeare Company, known for its free Shakespeare performances on the Boston Common, to join with the Wang Center for the Performing Arts.

Although sustainable affordable housing requires government money (at any scale), because government has a terrible track record with direct ownership, we (and the UK) have evolved effective forms of public-private partnership, whereby government sets the rules and provides the resources (capital, subsidy, or land), but the private sector delivers the housing.

But which private sector?

 

I have only your best interests at heart.

 

Ever since the origins of affordable housing, charities have played a leading role, right up through the present-day Section 501(c)(3) non-profit (and in the UK, RSLs).

A much nicer landlord?

For many reasons, most non-profits have tended to be very small, and very proud of their amateur status, almost as if they are allergic to business principles.

 

“And that’s how you play, merge the missions.”

 

Fear aside, there’s a reason business uses the practices it does: they’re efficient, and in complex and therefore competitive ecosystems, efficiency wins.

 

Even if it’s initially derided and unpopular.

 

Indeed, it’s striking how we in the US, despite our self-satisfaction, are well behind our British affordable housing counterparts. Perhaps because in the UK ecosystem non-profits are the only affordable housing entities (they’re called registered social landlords, RSLs), UK housing associations have a long and distinguished history of scale, professional management, and merger receptivity.

UK housing associations are likewise finding that consolidation and scale are not the enemies of mission, but its levers:

 

Capital, consolidation, information = leverage

 

One of Circle Anglia’s first steps after it was created through a merger of two groups was to return to its lenders and ask if it could borrow more money. If all goes to plan, it could become the first registered social landlord to borrow more than £1bn – while saving some £2.8m per year in improved efficiency.

The July merger between Anglia and Circle 33 created a single RSL with almost 33,000 homes in southeastern and eastern England.

Other, even larger, mergers are in the pipeline. One proposed, between the Affinity and William Sutton housing groups, would create an RSL with 52,000 homes, narrowly overtaking Places for People as England’s largest group landlord.

 

On Wall Street, the practice is called M&A, mergers and acquisitions, because in the for-profit universe, ‘merger’ normally means ‘takeover financed with stock rather than cash.’ But it means something very different in the non-profit world, where stock is not tradable and the concept is not buyout but synergy:

One of the more striking mergers will be completed in July when two venerable Boston charities that help at-risk women and families, The Women’s Union and Crittenton, combine.

 

At left, technology mentor Donna Ibel (left) with Paula Foley at The Women’s Union. At right, case manager Denise Reynoso with Dante Aiello, Grace Maldonado, and Jeffrey Maldonado (rear) at Crittenton. The two Boston charities will complete their merger in July. (Photos by Dina Rudick (left) and Matthew J. Lee Globe Staff)

 

Consolidation is part of evolution, as it allows the observant herd to respond to overpopulation:

On a national level, a similar story is playing out: The number of nonprofits has increased 64% in the last decade to nearly 850,000.

 

Non-profits wax as government wanes, as their charity reduces the burdens of government:

 

Eclipsing the need for government.

 

The rapid growth of nonprofits is both a response to cuts in government services, and a sign of how much easier it is to form a new nonprofit than to restructure an existing one, said Rob Hollister, dean of the University College of Citizenship and Public Service at Tufts University. ”We’ve evolved a sector that is quite fragmented and doesn’t have the financial base that is needed in order for it to thrive,” he said.

 

It would work so much better if consolidated.

 

Overpopulation of a sector isn’t just inefficient, it is also counterproductive, too many caribou grazing for the same green grass:

Contributions from individual donors have fallen, and some Americans have developed ”donor fatigue” after giving generously to people displaced by Hurricane Katrina and the tsunami in Asia, said Bob Harrington, a senior manager of La Piana Associates who specializes in strategic restructuring.

 

There used to be many more donors.

 

Shifting to private donors means a shift toward more competition among recipients:

Funders [are] putting increasing emphasis on measurable results for programs, and … executives [have] to work harder to attract the same amount of money.

Faced with the reality of a booming number of nonprofits and shrinking financial resources, several nonprofit leaders and analysts say the time is ripe for mergers.

Affordable housing is an incredibly logical sector for such consolidation: ownership, property management, and financial control all become better as non-profits become larger, because greater scale allows greater specialization:

 

Over the past year, 27 housing associations have sought rule changes to allow them to merge or set up new groups, and another 35 are discussing these with the Housing Corporation. Clare Miller, the corporation’s director of regulation policy, says that merger activity is ‘increasing year on year, but not exponentially so’.

 

It is unlikely that this urge to merge is merely a response to Sir Peter Gershon’s public sector efficiency programme. The chance of getting hold of development grants and playing a lucrative role in the push to build more affordable housing are also powerful incentives.

On the ground, what happens in a newly merged organisation? For the 1,200 staff in Circle Anglia’s London and Norwich offices, work has continued much as before. Employees were promised that there would be no compulsory redundancies, but the RSL still expects to save about £1.5m per year in salary costs, mainly through natural wastage and a reduction in the number of senior executive posts.

The installation of a new IT system should save a further £750,000, and borrowing costs are expected to fall, in spite of Circle Anglia’s intention to seek an extra £150m on top of loans worth £850m negotiated by the two groups before the merger.

 

With all those benefits, why has the urge to merge not manifested more here in the US? One major challenge for non-profits is balancing the complexity-scale tension:

[Continued tomorrow in Part 2.]

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