Association for Public Policy Analysis & Management

The U.S. nonprofit sector contains approximately 1.41 million registered public charities (Urban Institute, 2015), the vast majority of which have annual expenses of less than $500,000. Many commenters have questioned the welfare implications of a nonprofit sector of many small organizations, suggesting that this configuration results in unnecessarily high administrative costs and lost opportunities for activity coordination. These same commenters frequently propose that greater consolidation of nonprofit organizations might help to solve this issue by increasing organizational resources, coordinating activities, and thus achieving economies of scale and specialization (Sullivan, 2016).

The market for corporate control in the business sector is a well-studied and mature field of research that considers the causes and effects of merger and acquisition activity. In the nonprofit sector, however, research on such questions is sparse due to data limitations and inattention. Recently, a number of researchers have conducted case studies of nonprofit mergers, with the goal of identifying best practices for merger activity (Haider, 2007; McLaughlin, 2010; Haider, Cooper and Maktoufi,2016; Seachange Capital Partners, 2016). While these studies provide important and valuable insights into the nonprofit merger process, they have two key limitations. First, each looks only at mergers in a small “window” of the nonprofit sector defined by a specific geography or affiliation with a specific funder. Second, they generally focus on interpretive measures of merger success, limiting comparability between cases.

Our project attempts to address these limitations by exploring the financial consequences of nonprofit mergers. We do so through a novel data collection and analysis effort that draws together data from multiple sources. To identify merger and acquisition events, we rely on lists acquired directly from state charity officials who track these activities. We cross-validate these events by comparing them with financial reporting in Schedule N of the IRS Form 990. Having identified merger and acquisition events, we use a nonparametric coarsened exact matching (CEM) procedure to construct a matched sample of organizations not involved in merger and acquisition activity, matching on observable characteristics likely to be correlated with merger, including recent financial performance, geography, and NTEE codes (National Taxonomy of Exempt Entities, which categorize the organization’s primary substantive focus).

We use Core Trends Files from the Urban Institute to measure financial outcomes for the organizations in the treatment and comparison groups to make inferences about the consequences of merger and acquisition activity in the nonprofit sector. Our study has important implications for nonprofit organizations considering mergers, for state regulators that monitor nonprofit merger activity, and for methodologists who analyze data from IRS Forms 990.

References

Haider, D. How nonprofits partner. (2007). Stanford Social Innovation Review 5(3): 52-55.

Haider, D., Cooper, K., & Maktoufi, R. (2016). Mergers as a strategy for success. The Metropolitan Chicago Nonprofit Merger Research Project.

McLaughlin, Thomas A. (2010). Nonprofit Mergers & Alliances. Wiley.

SeaChange-Lodestar Fund for Nonprofit Collaboration. (2016). Two-year grant survey analysis. Available at: http://seachangecap.org/wp-content/uploads/2016/09/SeaChange-Lodestar-Survey-Report-Redacted-Version.pdf