NAO Workshop #962 PM, Tuesday, June 22, 2010, Las Vegas

Merging Organizations for Sustainability

Gary Crum, PhD, MPHExecutive Director, Southwest Virginia Graduate Medical Education

Consortium and Area Health Education Center (GMEC-AHEC)One College Avenue, UVa-Wise, Wise, VA 24293

gec8a@uvawise.edu

Susan Alford, MBAAHEC Director for GMEC-AHEC

Southwest Virginia Technology Development Center141 Highland Drive, Lebanon, Virginia 24266

swahec@svchs.com

Slide 2

FOREWORD

These MS PowerPoint™ slides are admittedly more wordy than is typical in order to let your handwritten notes be minor and to let your attention to the oral presentations be unfettered.

We are more than pleased to share our experiences and the lessons learned from our merger of two small, rural organizations, but must start by stating the obvious: we are not the end-all of knowledge about such things, and are not legal experts. Your own merger situation will be unique in some ways, we are sure, but do feel free to call if you have any questions down the road and think we can help.

Gary Crum and Susan Alford 276 328 0249

Slide 3

1. First – who are we? The intertwined history of the Southwest Virginia AHEC and the Graduate Medical Education Consortium (GMEC): Appalachian health workforce initiatives

2. What is currently going on with Virginia’s AHECs (budget cuts and new AHEC coordination infrastructure developments)

3. What is the current status of the GMEC-AHEC merger? Why is a complicating second merger being proposed between GMEC and the Southwest Virginia Health Authority?

VIRGINIA COMMONWEALTH UNIVERSITY (VCU)

UNIVERSITY OF VIRGINIA

(UVA)

Sw Va HEALTH AUTHORITY

Budget: zero (but significant political

power)

Slide 4

Merger in Southwest Virginia

Sw VaAREA HEALTH EDUCATION

CENTER (AHEC)Budget: $90K

Sw VaGRADUATE MEDICAL

EDUCATION CONSORTIUM

(GMEC)Budget: $215K

BOARDS MERGED 2009

Slide 5

Key factors in merging AHEC and GMEC: Historical relationship – AHEC helped to form GMEC in 90s History of collegial, overlapping Boards and activity in same statewide agencies (e.g., Va. Rural Health Association) GMEC area not mandated, but by practice was inside AHEC’s All Virginia AHECs lost all state money recently, which they needed for federal match though VCU’s grant. Sw Va AHEC staff was down to one professional (Susan Alford). GMEC’s medical resident rural rotation program budget was state money available as AHEC match, and had one professional and one support staff person (Gary Crum and Elizabeth Mullins) GMEC $ was being deeply cut by the state during the recession but still was viable, and the AHEC had (steady?) federal funds – both had some modest reserves.

Slide 6 OUTLINE FOR TODAY’S WORKSHOP

Sustainability and increased effectiveness: basic reasons to merge Specific merger problems discussed and paths to success suggested :

1. Choosing/wooing a candidate for merger2. Merging missions/goals/roles3. Merging geographic areas4. Incorporation/legal/auditing issues of

mergers5. Merging grants and other funding

streams6. Merging board members and board

officers7. Merging staff , office space, phone #s,

etc.8. Organizational angst: who “wins,” merging special identities and founder histories, hidden agendas – and solidifying your new identity1. Audience questions and merger

experiences

Slide 7

“MARRYING” ORGANIZATIONS

Basic Reasons/Benefits:

Economies of scale and other improved cost-effectiveness ratios (= sustainability)

Mission impact enhancement

Positive publicity

This is more than collaboration, it is the recreation of two previous organizations into one, and may be frightening to those involved

 

MarriageExpectations?

“I can’t wait to get out of this sweaty shirt so you can wash it!”

Slide 8

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Slide 9

1.Choosing/wooing a candidate for merger:

Good human marriages are made between people that have similar family values and habits, similar social support groups, similar wealth, and have known each other a while. Organizations are much the same.

--------------------

Wooing an organizational partner is not so much a marketing task as an ability to recognize and communicate natural compatibilities.

Slide 10

Some pertinent human marriage myths *

Two people in a good marriage automatically grow closer with time Pursuing your own individual needs is incompatible with making a marriage work The goal of marriage is for both partners to get exactly what they want

--------------* http://www.dummies.com/how-to/content/deflating-six-common-marriage-myths.html#ixzz0hhWZTe7o

Slide 11

Good organizational candidates for merger with your organization might have many of these characteristics:

Similar mission – such as a mission that covers all of your mission and more, or has the same mission emphasis for a different demographic group (e.g., nurse recruitment versus M.D. recruitment), or has an overlapping or juxtaposed geographic area Overlapping board memberships, past and present Staffs that often find themselves in meetings or at conferences with each other Staff that do not unnecessarily have redundant skills Complementary funding streams (e.g., one brings a federal grant in-hand while yours brings needed state matching funds for that grant, or seasonally-staged incomes)

Slide 12

If one partner is ‘wounded’ – like facing insolvency – then, yes, it will probably enter the merger at a disadvantage and be a little like a junior partner. This creates a parent-child “transactional analysis-type” relationship between the two organizations, but if that is a nurturing relationship rather than a dominating one, and if both organizations are fine with their respective parent-child roles, then it can be a positive merger just the same. Also, it is probable that each organization will bring some kind of ‘parenting’ to the merger – perhaps one with more total money and other with more permanent (“harder”) funding or more unrestricted funding; or one with stronger political connections and the other with stronger staff capabilities.

Slide 13

A Path to Success. One approach would be to have each organization’s staff or governing body to do a SWOT analysis (Strengths, Weaknesses, Opportunities and Strengths), and then do one for their potential partner [this can be done by your organization even without the other potential partner(s) knowing yet that a merger is under consideration]. When representatives of the two later meet together, a SWOT for a merged operation might be jointly done. Then the two organizations can meet separately for discussion of the pros and cons of completing the merger. If it looks good, a memorandum of understanding (MOU) or “merger agreement” could be drafted by the two CEOs and Board Chairs and separately taken to the two governing bodies for refinement/signature.

Slide 18

A Path to Success. Each organizational mission/values needs to be given respect in any merger. This discussion is perhaps the most important, because it is one of deep motivations. Some differing mission characteristics are related to “right versus right” ethical dilemmas (after Rushworth Kidder):

a.Long-term versus short-term perspectives (e.g., replacing retiring MDs versus creating a statewide pipeline for getting teens into medical school)b.Community versus small group or self perspectives (e.g., increasing community-wide nursing services versus creating a stronger nurses union to achieve nurse pay increases)c.Truth versus loyalty perspectives (e.g., offering scholarships for those who score high on standardized tests versus offering scholarships only to grads of area high schools)d.Mercy versus justice perspectives (e.g., increasing local AA groups versus working for stiffer drug crime sentences)

Slide 14

Chains do not hold a marriage together.  It is threads, hundreds of tiny threads which sew people together through the years. 

~Simone Signoret

Source for these and other similar-format quotes: www.quotegarden.com/marriage.html

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Slide 15

2. Merging missions/goals/roles

Some organizations are so different that a merger is like putting chocolate ice cream on a chili dog – together they ruin two good things.

----------------------------------

Your missions need to be compatible (not necessarily the same) in the people served, the values of their leaders, the services rendered, the technology involved, and/or the human skills required.

Slide 16

The values and roles of each organization is as important as the missions – analyze plans for conflicts, and resolve them. Avoid mismatched values – similarity of mission is not always enough:

Aggressive, dog-eat-dog values versus collegial and cooperative values. Do you like to destroy enemies more than building bridges? Do you like honesty more than winning?

High dollar, state-of-the-art tastes versus frugal ones - do you hold golf fundraisers at Hilton Head or hold bake sales at Kroger? Do your Board members wear black tie and gowns to the annual meeting, or sneakers?

Should the Board meet often, work/’schmooze’ the community, and micromanage the staff, or should it let the CEO make the day-to-day decisions and the CEO do the schmoozing? Do your respective CEOs have similar management styles (e.g., authoritative versus collegial) to Board expectations? (More on this last question later under the section about merging staffs.)

Slide 17

Success in marriage does not come merely through finding the right mate, but through being the right mate. 

~Rabbi Barnett R. Brickner

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Slide 18

3. Merging geographic areas

Most organizations have a spoken or unspoken geographic perspective – you must know what that perspective is.

Will the merged area become too large for the staff to be able to serve for an expanded mission (e.g., travel as needed, print enough materials, etc.)?

If the geography is set in law (like state or regional AHECs) for one or both organizations, and the geography is incompatible, it can be a “deal breaker.” This can be an additional problem in determining who is on the Governing Board as well: things like federal AHEC grant requirements for 75% membership from the AHEC’s service area.

Slide 19

Paths to Success: In dilemmas like this, be prepared to ask the tough questions out loud – and fight for a path to success. If the feds say your Board must be 75% from one area and the other organization’s area is larger, can it live with just 25%? Can you set up a second (overlapping) board and have one staff -- and have the two boards meet the same nights? Can you have a single staff managing by contract the second organization and still get some econo-mies of scale? Can you have an advisory group representing the other area and sending its chair as a member to the full board, to keep the feds happy? Can you have an out-of-area organization represented by someone of that organization who lives over the line in your area? How does your funding chain of command feel about these types of machinations?

Slide 20

If you made a list of the reasons why any couple got married, and another list of the reasons for their divorce, you'd have a hell of a lot of overlapping. 

~Mignon McLaughlin

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Slide 21

4. Incorporation/legal issues of mergers

Good legal advice should be sought before announcing any merger. Some of the issues that may need to be considered:

Are both nonprofit 501c3? What IRS reporting timetables need to be considered?

Are the corporate purposes of both compatible (corp. boards are legally expected not to violate their own corporate purpose for existing). Will one take over the other (often best) or will both disappear into a new organization?

Should the Boards be merged but still operate as separate organizations for a while (convening twice each meeting to do separate business/minutes using the same people)? continued . . .

Slide 22

continued . . .

What steps need to be approved by the state secretary of state’s office, or other incorporation regulator in your state?

What audits have been done or need to be done so that both organizations know the financial strengths and limitations of the other? (The merger of funding streams is covered in more detail in next section)

Slide 23

“I thought we agreed not to fight in front of the children”

Slide 24

Never get married in the morning, because you never know who you'll meet that night. 

~Paul Hornung

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Slide 25

5. Merging grants and other funding streams

Grants held by each of the two organizations are obligations of only that organization. Mergers may have to be delayed until grants end; however, most funders (but not legislatures) are usually OK if . . The funders are notified in advance and

allowed to give input The principal investigator is the same, or

someone equally qualified The resulting merged entity is still eligible

for the grant as it was originally funded (e.g., still nonprofit, still centered in such and such area, still with a Board meeting such and such criteria, still with the same or lower “indirect” costs, etc.)

Slide 26

In merged funding streams, expect annual auditing costs to go up, plus other problems that might arise include . . .

Transfers of funds that were restricted donations (e.g., Mrs. Smith left this money in 1986 to corporation X – can we take it with us to corporation Z? This may require getting the donor or his/her estate’s written permission.

Merging funds that have differing funding fiscal years – this is not a legal impediment so much as a budgeting complication that one or both organizations may not have previously faced.

If other funding oversight organizations are involved tangentially in the operations of one or both merging corporations (e.g., through a state government, university, or social service agency financial service arrangement), then these other agencies need to be contacted early to see if there are barriers to the merged agency taking with it its funds.

Slide 27

If two stand shoulder to shoulder against the gods, happy together, the gods themselves are helpless against them while they stand so.

~Maxwell Anderson

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Slide 28

6. Merging board members and officers

The best situation is when there are overlapping Board members (past or present members of both) who can allow both of the two old boards in a sense to have more than 50% of the new one – even one overlapping Board member can accomplish this by counting him/her as a member of both boards. Some Board members may welcome the opportunity to step aside during a turbulent time, especially if they are not gung ho for the merger or are overworked.

Consider running a larger Board than usual if many Board members want to remain on the combined board. The total number from each board should represent no less than 50 percent of the new Board even if that means one Board should unilaterally choose some new people to represent it after the merger.

Slide 29

As for officers, when merging boards you might have a person affiliated with both to serve as a convener until new officers can be selected, or have the two chairs serve as co-chairs. Avoid choosing new officers all from one of the previous entities by having a nominating committee set up made from members from both boards.

Finally, before merging boards you need ideally immediately merge the corporations legally and create a new set of bylaws – otherwise you may find your corporate responsibilities will suggest that you should to run two meetings every meeting: adjourning one corporation’s board and then calling to order the second to approve the same items (we know this seems stilted and may be ‘overly proper’ if your organizations have no ‘enemies’ or ‘oversight organizations’ to be concerned about). This will allow you to use the separate missions, bylaws and corporation purposes to justify explicitly in separate minutes the votes. In other words, the justifications may be different, but the vote(s) not be contradictory to either corporation’s mission.

Slide 30

Once a woman has forgiven her man, she must not reheat his sins for breakfast. 

~Marlene Dietrich

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Slide 40

7.Merging staff , office space, phone #s, etc. – what needs to be considered?

Organizational chart (do this prior to merger and talk to staff)Websites (have one lead automatically to the other and merge into a single home page with both old names displayed prominently for a year)P.O. Boxes (forward one to another)Fax Numbers (keep both for a year, if you can afford it, but advertize only the new permanent one as soon as possible)Subscriptions & Memberships (do not pay twice!)Logos (this is difficult – get a new logo, perhaps made up from a combination of the old ones, or if one is very well known, use it)Business cards and stationary (important to change right away – throw out the old logo stuff ASAP) – also, take dual inventories and merge listsEquipment (e.g., copiers – do you have too many? Do repair contracts need weeding out?)Health insurance (you are a bigger group now, get a better rate)Liability insurance (including board member liability insurance – keep up to date)Electronic file backup systems (review IT ‘disaster recovery’ plans)Retirement plans (if at all possible, make sure staff do not lose benefits/vesting even if it means additional financial allocations to individual staff to make things right)

Slide 41

During a transition year, you may want to spend money telling people about the merger and sharing the new logo/name of the organization. You do not want to lose people who are assuming you have the same fax number, and do not want to keep the old one forever. This is common sense and will result in different policies for each merged organization, depending on factors such as the following:

1.Do you have a large constituency group that will be confused and alienated by not being able to reach you at the old places?2.Do you have any for-profit activities that depend on uninterrupted customer access?3.Can you afford to run a dual system for a while?4.How important is it to you for the merger to be well-known and accepted in the community?

Slide 42

Merging staff requires close consultation by the Chairpersons of the Board with the two CEOs – if one is now to report to the other, this needs to be explained early and feedback obtained. Often the assumption of which organization will keep the CEO is understood based on budgets, experience, credentials, etc. Also, as mentioned before, the styles of management may vary between key staff members and the Board – seek a CEO that can carry the day by being what is typical, or leading into the atypical.

An entirely new CEO might be advisable, though expensive unless others are let go. A new person over the new organization sends a signal to the public and the staff. On the other hand, loyalty to the current staff can help to make sure the merger is not scuttled by the staff – who can scuttle it simply by not conveying key facts and timetables.

Our bias is for keeping everyone you can without hurting the new organization’s chance to succeed.

Slide 43

All staff need to know early to whom they will report (organizational chart) after the merger, and whether they will need to change benefit packages, work locations, titles, or salaries. Try to hold everyone as harmless as possible, but realize that not everyone may be happy with the changes. The motives for a merger should be bigger than the concerns of one staff person, or the merger is probably not worth the trouble. But also keep in mind this fact: the changes are due to a friendly merger, not a hostile takeover – do not throw your weight around or make harsh demands without realizing it could be a “deal breaker.”

You are not beating up an enemy, you are wooing a partner.

Slide 45

New office locations

Choosing a new office location probably will be necessary – you lose lots of your new economies of scale if you do not bring people together into a single office suite with a single receptionist, single phone numbers, etc. However, it is not impossible to run things from “branch” facilities, or to keep a presence in the same localities if you wish to do so, especially just for a while. What is the main risk of not bringing everyone together? It makes the merger less real to the staff, less likely to generate staff interaction and comradeship, and less likely that the public will understand how the merger is working.

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8Slide 46

The course of true love never did run smooth.

-- William Shakespeare

Slide 47

8. Organizational angst: who “wins,” hidden agendas, merging special identities and founder histories, – and solidifying your new identity

“Who wins? If both groups do not win (win-win) it is a ‘grief’ scenario not a ‘marriage‘ one – a loss of face for some portion of the staff/board, etc. Something is dying more than it is merging. Sympathy is needed, not celebration, and this presentation is not completely useful in such situations.

‘Hidden agenda’ merger is extremely difficult, even if many people are pretty much aware of those agendas. For instance, if a charitable organization is really a vehicle for person X to get elected mayor, or if it is a financial conduit for sending donated money back to another group, you are merging with a fiction. The public statements for the merger will be at best half-truths. This is a poor foundation for the future.

Slide 48

Merging special identities and founder histories means that one or both organizations may be too unique to easily throw its lot in with another one. Each organization must bring something to the table if it is to be a friendly merger of more-or-less equals, and a special reputation or history is a real asset to bring, but one that cannot often be utilized by the new organization unless the new organization’s name and public identity remain as the old ‘special’ organization. This will look like a takeover more than it is, perhaps, but that may be part of the cost.

If neither organization wants to yield its specialness, then this can be addressed by ADBA (also doing business as) arrangements or by creating a superstructure over both old organizations and then ADBA both of them under a new name like “Health System Collaborative of Lower Bearwallow” or something, but this reduces some of the benefits of merging.

SLIDE 49

Another approach for dealing especially with historical origins is through the creation within the new, merged organization of special events or awards named after the organizations’ different founding fathers/mothers. The new organization may have the name of one historic organization, but it has not forgotten the tremendous benefits brought to it when it merged with its sister organization “way back in 2010.” A permanent brass wall plaque commemorating the merger is another (fairly expensive) option.

Slide 50

Solidifying your new identity

a)Develop catchy motto and new brochure (spend more than 50 cents on the brochure!!)b)Press releases (announce the intention, then the doing of it)c)Press conferenced)Ad in paper and in ‘announcements’ sections of trade journalse)Option pieces and editorials in local papersf)Interview on local radio/TVg)Gala banquet to celebrate the merger – hosted by local or national celebrityh)New business cards mailed to each staff person’s contactsi)Putting upbeat recorded messages on old office phonesj)Provide exhibits/booths at local events and national conferencesk)Write constituents and potential funders an upbeat letter about how efficient this merger will bel)Develop a new community award named after a founder (see previous slide)m)Hire an advertizing firm (this can be expensive, of course)

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9Slide 51

Now its time for all of us – those who supported the merger and those who opposed it – to pull together for the benefit of the company.”

~Carly Fiorina, President of Hewlett-Packard Co.

Slide 52

9.Audience questions and merger experiences

Slide 53

FURTHER READING

Nonprofit Mergers Workbook: The Leader's Guide to Considering Negotiating & Executing a Merger. David LaPiana et al. Publisher: Fieldstone Alliance; Workbook edition (July 2000) ; ISBN-10: 0940069210

Strategic Restructuring for Nonprofit Organizations Mergers, Integrations, and Alliances. Amelia Kohm & David LaPiana. Publisher: Praeger (October 30, 2003) ISBN-10: 0275980693

The M Word: A Board Member’s Guide to Mergers, A. Vergara-Lobo, et al. Online 5/2/10: www.blueavocado.org/content/m-word-board-members-guide-nonprofit-mergers -- this is available for free and goes into additional topics not covered in this presentation such as hiring a merger consultant

You should never kiss a girl unless you have enough bucks to buy her a big ring and her own VCR, 'cause she'll want to have videos of the wedding. 

~Jim, age 10

A “Jim” Facsimile:

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