When Business and Charity Collide

When Stephen Schwarzman's $100 million gift to the New York Public Library was unveiled in March, it came alongside a plan to re-invent the nonprofit, an effort involving a new hub-and-spoke system, a lending and research center and digital access improvements. If people didn't know better, they might have assumed he bought the library outright and placed it directly into Blackstone Group's for-profit portfolio.

But the Schwarzman donation and ensuing revitalization reflects a shift among nonprofit organizations, especially those that count dealmakers and other business leaders among their advocates. For a nonprofit to survive today, many have to take a for-profit approach. Sometimes that can mean introducing more efficiency -- the New York Library's hub-and-spoke system being one example – and other times it can mean installing a higher-profile board, a useful tool when fundraising. Increasingly, this drive for sustainability has also resulted in deals between nonprofits, as demonstrated by the rollup efforts seen among various local chapters of the United Way and the Girl Scouts.

Some charities are even designed solely to help other organizations address these issues. Youth I.N.C., for example, is a New York City nonprofit that was established by former Goldman Sachs banker Steve Orr. It was founded on the premise that a “not-for-profit” tax designation should not preclude growth creation.

Ted Virtue, the founder of MidOcean Partners, describes that his efforts as co-chairman of Youth I.N.C. is not all that different from his day job. The charity, which also counts TPG’s Richard Schifter, AIG’s Win Neuger and Permira’s John Coyle among its boardmembers, screens other charities and then identifies select organizations that will benefit from a profit-oriented approach.

"We basically work with nonprofits to bring in resources and intellectual capital that will help grow the organization," Virtue describes, though further clarifying that “growth, in this case, is defined by helping more kids."

The organization currently assists roughly 20 separate nonprofits, helping the groups build out their boards of directors, IT infrastructure and fundraising capabilities. Youth I.N.C. will then oversee the initiatives to make sure progress is being made. "It's analogous to what a private equity firm does, or what I do day to day," Virtue adds.

The M&A alternative
 
The drive for efficiency is becoming more crucial if a charity is going to endure, especially since competition among nonprofits is steadily climbing. According to the National Center for Charitable Statistics, 850,000 public charities and 104,276 private foundations are registered with the Internal Revenue Service, all competing for roughly $250 billion in philanthropic contributions. Moreover, the sluggish economy is expected to affect donations. The Center on Philanthropy at Indiana University, for example, released a study in July saying that 83% of fundraisers polled anticipate that a slowdown in the economy will have a direct impact on support.

Many organizations are already showing signs of strain. In August, for example, the Boston Globe reported that the Massachusetts Horticultural Society froze its accounts and sent letters to creditors asking that they forgive the debts, and instead write them off as charitable contributions.
 
Jerald Jacobs, who heads the nonprofit organizations practice at law firm Pillsbury Winthrop Shaw Pittman, doesn’t think it’s a reach to believe that the combination of competitive forces and the growing financial sophistication of nonprofits will translate into more M&A among these groups.

“You’ll see an organization with a declining membership, and in order to survive, they’ll seek out a larger competitor to absorb them,” Jacobs says. “It’s the same motivation as deals involving corporations, except when it involves nonprofits, there is a certain feel-good quotient behind the transactions.”

In recent months, the UK has seen a rash of nonprofit deals, including mergers involving Help the Aged and Age Concern, One Parent Families and Gingerbread, and Rainer and Crime Concern.

Jacobs notes he has seen more deals occurring stateside as well, though he hesitates to declare it an outright trend. With that said, a few notable charities have quickly built out their presence using M&A to stimulate growth. Autism Speaks, for instance, was founded in 2005 by General Electric vice chairman Bob Wright and his wife Suzanne. The nonprofit soon went on an acquisition spree, with National Alliance for Autism Research, Cure Autism Now, and Autism Coalition for Research and Education all banding together under the Autism Speaks banner.

The impetus behind the transactions often depends on the individual organization. Smaller groups, if they’re focused on advocacy, may be seeking a louder voice in Washington, while the larger organizations may be attracted to the prospect of reaching an even bigger and more diverse audience, either by geography or cause.
Other times, Jacobs adds, it’s about eliminating redundancy. “It may be driven by the desire of members to pay dues to or spend time volunteering at just one organization as opposed to four or five separate groups,” he says.

On paper these deals often make perfect sense. However, without money or numerical valuations serving as an equalizer, politics often creep into the equation. And that factor can make deals in the niche difficult. Jacobs, for instance, says he has seen transactions stall because “the two sides couldn’t agree on the dinner dance and the golf tournament.”

“There’s an emotional component because there isn’t any money involved,” he adds, and makes reference to Henry Kissinger’s famous line about the viciousness of battle “when there is so little at stake.”

But if egos can be pushed aside, mergers can often help further a cause. And as Virtue pointed out, that is the ultimate goal when business and charity collide.