Get Real: What Are The Questions Boards Need to be Asking During Mergers and Acquisitions?

So you’re on a not-for-profit board and the question of a merger or acquisition comes up. What’s your primary objective as a board member as you navigate these often complex discussions?

Is it:

• To safeguard the organisation’s legacy?
• To rigorously examine the potential business case and its financial viability?
• To thoroughly explore the risks and push for detailed due diligence on the potential partner?
• To dust off your AICD training (or get legal advice) on your fiduciary duties as a Director during a transaction?

From where I stand, it’s none of the above. That’s not to say these objectives aren’t important, but fundamentally your primary objective as a board is to ensure your organisation is effecting the positive changes in the lives of people or communities it is seeking to support. During a merger transaction or acquisition, this fundamental purpose shouldn’t change.

Mergers and acquisitions can be complicated and lengthy transactions with many moving parts to consider (see our how-to guide1 on not-for-profit mergers if you’re interested in a blow-by-blow). However, the overriding principle that needs to govern all decision-making is whether this transaction is going to increase the impact your organisation can achieve for your clients.

From our experience supporting organisations considering mergers or acquisitions, we’ve found that there are four things boards must remember to allow the focus on impact and client to remain paramount.

1. Do you know whether your organisation is having an impact?

If your organisation were to close its doors tomorrow, what would the impact be for your clients? Do you know if you’re actually quantifiably achieving the positive change you’re seeking to make? These questions apply whether your organisation is considering a merger or not, but it’s surprising how frequently boards can’t answer them. If the purpose of a merger is to increase impact, you can’t judge the change a merger may have on your ability to deliver that impact unless you know its current status.

Having the ability to track and measure impact is key for all organisations, but particularly those engaged in merger conversations. Even just weighing up a merger costs time and money, let alone implementing one. Before you begin, ensure you have a solid understanding of your own organisation’s performance, including its strengths and weaknesses.

2. Check your ego (and that of your organisation’s) at the door

We’re all involved in the social sector because we’re passionate about doing good. At the same time, we’re human and can’t help having egos too. One of the major causes for derailment of a partnership transaction are people-related issues. These can be things like:

• Board representation – how many seats does each organisation get on the new board?
• Board selection – who from each board gets to be on the new board?
• CEO selection – you start this process with two CEOs but at the end of the day, there can only be one, so who will it be?
• Leadership team composition – what criteria is used to select the leadership team? How do you retain exceptional talent during this period of uncertainty?

If not handled well, these issues can lead to confusion and ill-will, or even complete relationship breakdown between parties. Boards play an instrumental role in setting the tone for merger proceedings. Have tough conversations early and make sure lines of communication are open and clear from the start. If you can keep yours and your leadership teams’ personal feelings in check and stay focused on the larger purpose, these potential showstoppers can be avoided.

3. Remember to explore your options

We often speak with organisations that have been the subject of a merger or acquisition approach. It’s always flattering to be asked but it’s important to pause and consider a few things before taking any action:

• What is your organisation’s current strategy, and how does the merger or acquisition align to it?
• If it is not aligned with your strategy but seems like a good idea to achieve your organisational objectives, are you clear as to why?
• Who are the other participants in your ecosystem? Is there a more suitable partner than the one who has approached you?
• Is there a values-alignment between your two organisations?

Ultimately, all organisations should be looking to find ways to drive better outcomes for their end beneficiaries. A merger could do this in any number of ways including extending an organisation’s reach to new locations, creating new capabilities, reducing cost, or by providing a more compelling case for government or philanthropic support. Then again, you don’t want to waste valuable resources vigorously investigating a merger business case if a simple run through the questions above tells you this isn’t the right opportunity to pursue.

4. Don’t be afraid to get pointy when the time comes

Finally, if you have worked through those three items and you still think a merger or acquisition is a good idea, there are some practical issues to explore before you can commit as they can significantly change your approach.

These include:

• Governance – given the constitutions and legal structures of the entities involved in the transaction, exactly how would the merger or acquisition be executed? Are there significant changes in constitution (for example, objects) that would be required for that to happen?
• Stakeholders – not-for-profits have many stakeholders who need to be considered when entering into a transaction including clients, staff, members, philanthropic supporters and government funders. You will need a plan for how and when to engage with them.
• Business case and due diligence – the board needs to align with management as to what they want to see in the business case and how deep to go in the due diligence activities.

We hear from our clients how frequently the topic of mergers or acquisitions comes up in their organisations, and boards have a vital role to play in these discussions. Whether the right decision is to merge or continue solo is dependent on factors unique to each situation, but what is universal is the role of the board in managing these considerations in a way that strengthens your organisation and supporting your executive to not to lose sight of what it’s all about: better outcomes for your clients.