July 24

Prashant Yadav

Economies of Scale or Diseconomies of Enormity: Should there be more mergers and acquisitions of international development NGOs?

In the for-profit sector, mergers and acquisitions (M&A) are ways to ensure that the strongest, most effective organizations survive and achieve more significant scale as compared to the weaker and less effective ones. This improves cost-effectiveness in the overall market and spreads best practices more widely. While not always done for the right reasons (and often causing more harm than good), mergers and acquisitions in some instances do help create better market structures.

Seeing the larger numbers of NGOs in the field of international development has always made me wonder why we don’t see more M&A activity in the non-profit sector. The 2011 acquisition of AED by FHI-360 made me ask similar questions. The announcement last week that Save the Children will acquire Merlin made me revisit those questions once again. In the past we have seen mergers and acquisitions in the non-profit world when an NGO is either facing financial trouble or lacks a succession plan – e.g., the founder, the chief inspirer or the chief fundraiser are about to retire, and finding their replacement or successor is unlikely. But the Merlin and Save the Children merger was motivated more by strategic alignment reasons, and not merely because “merging was our only way out.” So why don’t more organizations do likewise?

Why don’t NGOs merge or get acquired?

The raison d’être of NGOs is being closer to the community, being more responsive to local needs. Mergers and consolidations may create non-profit entities that are impersonal. NGOs that are funded primarily by small individual donors cannot risk alienating their main sources of funding by appearing impersonal to their donor/supporter base.

M&A is typically seen in sectors that are highly fragmented. And while the international development NGO sector certainly is highly fragmented in some ways, it also has some very large international NGOs that appear almost too big to fail. So while consolidation may help in some areas of development NGO work, other areas have a market structure that needs more competition. Figuring out this nuanced view of which development NGO activities can benefit from M&A and succeed in creating greater value requires more careful thinking. In my opinion such thinking and strategic tools have been lacking so far.

A prerequisite for M&A activity is the constant pressure to continuously improve performance. Traditionally competitive pressure on development NGOs has been at best moderate, if not weak. International development is more about partnerships and less about competition. Even when there is some competition, there are no standard metrics to compare the performance of one NGO against another. And even where there are metrics, it is hard to audit or verify them. Although somewhat geared more toward domestic NGOs, the 2011 work of my colleagues Natalie Privett and Feryal Erhun analyzed some of this using stylized but mathematically rigorous models.

Commercial sector M&A is facilitated by “match makers,” i.e., agencies that help the merging/acquiring/selling organizations to meet. The match makers constantly keep scouting for opportunities and also help create models of valuation which are acceptable to both parties. Currently, there are no specialized match makers for M&A in international development.

New drivers in a changing landscape

However, the landscape of international development has changed drastically in the last few years. New large global donors like the Bill and Melinda Gates Foundation have emerged, making some aspects of international development, especially development assistance for health, less reliant on small individual donors. Large donors have transaction costs and often look to contract medium to large-sized organizations. This makes smaller international development NGOs less viable, and increases pressures to grow and consolidate.

In addition, as development aid becomes more constrained, large global donors who fund many international NGOs are seeking ways to improve the efficiency of their investments. They are looking for greater “value for money” (VfM). (See a recent report on higher VfM in global health from the Center for Global Development.) For international development NGOs, it has become crucial to demonstrate greater VfM – not only to large donors, but in many cases also to small individual donors who are becoming wary of the impact of development.

Unanswered questions

I leave you with lots of unanswered questions and perhaps no answers. What we need first and foremost is a strategic framework and a broad knowledge base that helps us understand better if and how M&A can create value for the field of international development.

International development NGOs operate in a market for an array of services. If M&A is indeed viable, should NGOs merge with or acquire organizations with similar activities and expertise in order to enhance scale? Or should they merge with or acquire complementary organizations to expand their service offering? The answers to these questions remain unclear, as the decision of increasing depth or breadth from a merger or an acquisition is much more challenging for NGOs than it is for for-profit firms.

Perhaps industrial organization theorists, international development NGO managers, social scientists and field researchers need to tackle these questions together. In the meantime, I welcome your thoughts and comments.

Prashant Yadav is a Senior Research Fellow at the William Davidson Institute (WDI) and Director of the Health Care Research Initiative at WDI.

aid agencies, Bill & Melinda Gates Foundation, NGO, nonprofit, philanthropy, scale