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All types of associations are undergoing mergers — foundering ones, healthy ones, and even ones that have tried, unsuccessfully, to merge before.  This Executive Update feature article outlines the issues and considerations to take into account for associations contemplating a merger. 

The number of association mergers is destined to increase dramatically over the next several years. Financial constraints, new opportunities, and new challenges are causing association leaders to look carefully at the possibility of merging with related or competing organizations.

Among the situations that can stimulate merger discussions are overlapping markets, similar services, geographic considerations, and the departure of a CEO of one of the associations.

Moreover, mergers are being accelerated by the rapidly changing economy and methods of doing business caused by the electronic age. Technologies for delivering information (the primary job of most associations) are moving far beyond meetings and periodicals to encompass the Web, electronic publishing, online databases, and other complex and evolving forms of information delivery.

For many associations, revenue from meetings and publications have long provided the necessary financial support. Will these income areas start to shrink as technologies change? It is not clear that electronic publishing will yield income of a similar level.

Mergers are especially likely among associations with considerable dual membership, and many fall into this category as associations have expanded services and increased their overlap with other groups. For their part, members are increasingly opposed to paying dues to overlapping organizations, particularly when their own organizations are merging.

Mergers can take various forms, such as:

• A merger into a single, completely unified association.
  
  
• Creation of a single corporation with several sub-associations within an umbrella association. In this plan each sub-association would have its own officers, governance, staff, and finances.
  
  
• A single financial operation, but one that permits sufficient independence within the merged associations to preserve their own governance.
  
  

While merger discussions can result from the problems of one or both parties, many associations that are merger candidates have every appearance of being healthy. They have adequate finances, dedicated leadership, and the general membership appears to be well served. But members become uneasy when overlap with another association leads to direct competition in meetings and other educational activities, as well as public policy positions.

Any merger offers a number of potential disadvantages, particularly in the short term. These often relate to the reduction of leadership opportunities, a short-term loss of dues income, loss of brand name identity, increased employee turnover rate, and increased legal expenses as contracts are renegotiated. However, when negotiations can be successfully carried out, the resulting single association normally provides superior service to its industry or profession.

Potential Advantages
Although the aforementioned problems can lead to mergers, in fact, the best time to consider a merger is before it becomes necessary — when strength can be combined with strength. The energies and creativity of each association can then be devoted to merger considerations, rather than trying to focus on merger and survival. In the ideal situation, the most important reason to merge is to tap into complementary strength. Mergers often help to unify the pertinent industry or profession, both domestically and internationally, and provide new abilities to address competitive challenges.

While combining of duplicate activities is the root of many mergers, an overriding consideration is often the protection of the key beneficial elements of each association. Having combined duplicate activities, the merged associations often save sufficient resources to respond effectively to approaching opportunities, allowing more benefits and services to be offered.

There are still other advantages. The surviving association is often in a favorable position to:

• provide improved leadership in the development of new information generation and distribution technologies;
  
  
• create sufficient financial resources to fund a unified electronic database of most of the world’s scholarly literature within a specific area; and
  
  
• reduce costs by combining management information system functions related to computer-based information and management systems.

Major Issues to be Decided
What are the key questions to be decided by the merging organizations? First, can the associations agree on a name for the new organization? Can they agree on how the governance team will be put together and their responsibilities? Can they agree on a mission statement and goals? Can they agree on a chief staff executive? Can they determine the headquarters location? Can they agree on an initial budget?

Usually, it is better not to try to solve all of the issues prior to merger. This is because the deciding of many or most issues ahead of the merger is bound to create more opposition to the merger.

Thus, it is best to tackle the most difficult questions first. If these cannot be reconciled, there is no need to deal with the less important issues. The inevitable exhaustion that the negotiating teams suffer make them less likely to compromise as time goes by and their commitment begins to fade.

The name can be very important to keep the two associations from totally losing the relationship to their historical background. Normally the new association name combines some element of each of the original names unless negotiators agree that the final identification will be totally different from each.

A merger cannot be viewed as a win-or-lose situation, allowing the practices of one of the organizations to remain unchanged. The seeds of a failed merger are sown when one side or the other regards the merger planning process as something to be won or lost.

It is important to determine the direction of the merged association to be sure that agreement can be reached on the goals. The merger process is like an oversized strategic plan, requiring agreement on vision and goals. Even though it appears that both organizations are headed in the same direction and share goals, the emphasis at a given time can be quite different. For the merger to work, agreement on goals and vision must be firmly in place.

A determination needs to be made at the very outset of the legal considerations and how they will be handled. Do the states in which the associations are incorporated have any laws that affect the plan to combine? The basic issues to be dealt with include the transfer of property to the surviving entity, control of the surviving association, and activities of the surviving association. Other legal problems relate to the voting rights of members, control of the board of directors, activities merged, and disposition of reserve funds.

The Governance Challenge
Among the earliest and most significant challenges to be worked out in a merger is how to handle governance, given its impact on the future mission of the merging associations.

The direction of the association is often determined by the composition of the board (the number of members from each association selected to serve) and the original affiliation of the initial officers. The dominance of leaders of either organization on the surviving board can have significant influence on direction.

Governance is frequently a very sensitive issue, and a common temptation is to choose some leaders from each association as officers and directors. Some associations overcome status quo thinking by prohibiting current leaders from serving on the new board, providing the new organization with fresh thinking and a sense that a merger is more about the future than about the past.

The Role of the Chief Staff Executive
The chief staff executives of both associations must be fully involved in the merger discussions. If both are committed to the merger, the final result is likely to be more satisfactory than if one or both oppose it. Keep in mind that some mergers are precipitated by the announced departure of one association’s CEO.

Obviously, the services of both CEOs are much more valuable in the merger negotiation process than afterward, and subsequent changes in the board’s composition often lower the CEO’s personal negotiating power. Therefore, the best time for the chief staff executive to gain assurances regarding his or her future is during negotiations. Each CEO may wish to discuss with the chief elected volunteer of the association (president or chairman) what the association is prepared to do if he of she is not chosen to head the surviving association.

In their article "The Urge to Merge" (Association Management, March 1993), Fritz C. Lewis and Charles R. Chandler recommend that the two CEOs meet early to establish a close working relationship. Ideally, they can work out a solution regarding what will happen to each in a merged situation (one as a chief staff executive and the other in charge of day-to-day operations). The chances for a successful merger are reduced appreciably unless this decision is made early. Frequently, working out who will be the CEO of the merged organizations becomes the job of an outside consultant. Employment or consulting contracts are often used if agreement cannot be reached otherwise.

In Meeting the Change Challenge, Douglas C. Eddie points out that the association’s chief executive is the "pre-eminent driver and orchestrator of an association’s change." The author further believes that the board "provides reliable ideas and perspectives, confers legitimacy, and approves the allocation of resources, but change of leadership is primarily vested in the association CEO."

Implementing the Merger
The merger process should be overseen by a small planning committee comprised of key volunteers and staff. That committee will oversee subcommittees charged with integrating specific functions. "Back room" functions would include accounting, payroll, human resources, and purchasing. Due to its overriding importance, information technology requires the highest priority and often a separate subcommittee.

Most associations use consultants to assist with merger negotiations and to carry out the merger, counting on their outsider’s perspective and specialized knowledge. In his book, Non-Profit Mergers and Alliances, Thomas McLaughlin identifies the consultants’ roles as coach, planner, cheerleader, dictator, referee, beggar, and schemer, to name a few.

Mergers can be thrown off track by the "discovery" of previously unknown information — often political in nature — as a result of a due diligence investigation by either association.

Legal and Financial Considerations
Legal considerations for associations involved in mergers include:

1. Exchange of financial information.
2. Agreement on administrative and operational aspects of the new association.
3. Determination of control of the new association.
4. Agreement on bylaws.
5. Agreement on disposition of assets.
6. Agreement of how all debts and obligations will be handled.

These tightly tailored legal and administrative procedures require counsel representing each merging association.

In The Law of Associations, George Webster states that a letter of intent to merge, signed by the two associations, should be sent to members early on, not to obtain a membership vote but to encourage feedback prior to any formal agreement to merge. This letter puts both associations’ members on notice that merger negotiations are taking place and alerts the leaders to potential problems.

To merge with another organization, a nonprofit corporation must follow any procedures that are required by the governing state’s nonprofit codes. A nonprofit’s articles of incorporation also may specify merger requirements.

Finally, the respective boards of directors must examine the legal and financial obligations of the proposed merger partner to ensure that they pose no unacceptable, material risk of liability. Other areas of concern include transfer of property, membership and voting privileges, the powers of each board of directors, and the disposition of reserve funds.

The easiest way to ensure compliance is for one of the involved associations to remain incorporated in its state. Then, no new nonprofit exemption needs to be sought and no new federal and state tax identification numbers are required.

In spite of the numerous legal concerns, the greatest amount of work to be done involves the respective associations’ finances, including the following steps:

• Reviewing the issues raised in the management letters prepared annually by the auditor.
• Discovering the types of obligations each association has incurred.
• Reviewing ownership of assets.
• Developing pro forma financials, including cash flow computations.

Informing and Supporting Employees
Although merger planning is from the top down, merger implementation is from the bottom up. While the boards carry out the key merger discussions concerning goals, the staff executes the projects to achieve those goals. Staff must understand the goals, therefore, and undertake each integration project with these goals in mind.

However, management also has a role to play. Since some 60 to 80 percent of the budgets of many nonprofits are devoted to personnel costs, dissemination of information relating to mergers is critically important. Salary inequities between the two organizations are the hardest issues to resolve and need to be recognized early in the merger.

Merger decisions also have considerable impact when no salary inequities are apparent. Virtually all mergers result in elimination of jobs, making fear of job loss, salary loss, and benefit reduction natural companions of mergers. All of this leaves association employees anxious and worried about their future, a situation that often results in poor morale, rumors, and decreased productivity.

So, to avoid finding itself on the defensive and continually denying rumors, the association’s management needs an effective communication plan, identifying each audience to be addressed — such as staff — and making sure the message being communicated to all audiences is consistent. At the same time, reports should be limited to the information needed by staff on what has been decided, not what has been proposed.

Naturally, staff members will look to the CEO for information about their job security, an issue that will arise as soon as staff learns that the merger negotiations are under way. It is the staff CEO’s job to work with those who are offered jobs in the new organization or who find their duties to be considerably altered.

Summing Up
Consolidations and mergers in corporations are occurring at an ever-increasing pace and serve as the forerunner of an increasing number of association mergers. Financial constraints and new opportunities or challenges are causing association leaders to look carefully at merging with related or competing organizations. Mergers are being accelerated by the rapidly changing economy and methods of doing business in an electronic age.

Clearly, leaders of associations that are at a crossroads must be ready to consider both the pros and cons of a merger, even if it has been considered and rejected before. Neither industries nor propositions will support overlapping organizations, and economic problems can only hasten consideration of a merger.

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