Anatomy of a merger: Financial and administrative implications of association mergers.

AS THE FAMILIAR TELEVISION AD GOES: "WHY DON'T WE MERGE? I'm sure you'll love working for me." Despite this cautionary note, one need only peruse the daily financial pages to recognize that in the for-profit world mergers and acquisitions have been and continue to be a fact of life--directly or indirectly related to attempts to increase shareholder value. In 2000 alone, the Federal Trade Commission reported a record number of corporate mergers--more than 4,000 filings (required for each sizeable merger) were reported to federal antitrust agencies. While fewer statistics are available regarding association mergers, ASAE's 1996 Policies and Procedures in Association Management reported that 7 percent of the 1,572 association surveyed in 1995 indicated that they planned to merge with another association between 1996 and 1999.

There are good and bad experiences with mergers. As reported in the June 2001 issue of CFO Magazine, a study by KPMG, Inc., showed that of the 700 most expensive merger deals between 1996 and 1998, only 17 percent enhanced shareholder value--not a high rate for that measure of success.

While results of mergers vary, organizations continue to investigate their possibilities. So, it's not unlikely that the subject of mergers or affiliations may come up in your internal staff discussions or be prompted by your board. Alternative organizational structures--whether it be an integration, such as a full merger; an alliance or affiliation, where the branding rather than the legal corporate entity is retained; an administrative consolidation; or simply a collaboration--are being driven by technology, member expectations of greater value for less money, less seed money, industry niches no longer able to support multiple associations, decreasing financial health, or other reasons. These transitions to an alternative organizational structure can happen quickly or take years, but in any case, they are not necessarily simple solutions or exercises. In fact, merging associations may be more difficult than combining companies, since associations have no equity ownership and are essentially bound to a netwo rk of volunteers.

The National Defense Industrial Association (NDIA), Arlington, Virginia, is a product of mergers and affiliations that have taken place since its founding in 1919 as the Army Ordnance Association. It became the American Ordnance Association in 1957 and then, primarily as a result of the number and breadth of its technical-oriented divisions, first merged with the Armed Forces Chemical Association in 1965 and then the Armed Forces Management Association in 1974. In 1973 it changed its name to the American Defense Preparedness Association, again reflecting the broadened mission perspective. The '90s saw the affiliation of the National Training Systems Association with ADPA in 1992 and the merger with the National Security Industrial Association in 1997, the latter being the result of six attempts that took place between 1965 and 1996. Similar ventures continue and, as this article goes to press, we are close to announcing the affiliation of the Precision Strike Association with the National Defense Industrial A ssociation, which became our organization's new name in September 1997.

Although a merger or affiliation can be driven as a consequence of the aforementioned considerations, the best opportunity for making such an event a success is to consider it as a sound business strategy before the need ever arises. Thus the exploration of opportunities where the strengths of two organizations can be built upon or complemented should be a part of every association's strategic plan. Some areas of consideration for identifying opportunities where combining organizations may be a good thing include

* duplicate programs that can be consolidated;

* possibility for better value to be provided to members and customers through services, networking, and influence;

* business interests that complement activities, chapter initiatives, or other member service coverage;

* opportunity for market expansion with wider and more inclusive industry representation and strengthened advocacy position; and

* achievable cost savings through economies of scale, reduction of overhead, elimination of nonessential functions, or incorporation of new or improved business processes and procedures.

In testing your organization's compatibility with a possible merger candidate, consider other key questions.

1. Are your respective markets overlapping?

2. Is there geographic compatibility in terms of area of service?

3. Are the cultures of the organizations complementary--and do they provide growth opportunities or will they clash or be otherwise disruptive?

4. Are the respective assets of the organizations comparable?

With a long history of merger activity, the NDIA experience affords recommendations in the administrative and financial arenas that may be helpful for your organization if it chooses to pursue such opportunities.

Background basics

There are some overriding issues that drive the potential for overall success of merger activity, so a brief mention of them is in order.

First, a merger is like a marriage. On the surface, it may make sense to a lot of people, but one needs to question whether the underlying conditions are right. What is the culture and business philosophy? Looking at each of the parties in the potential merger, do the board management philosophy and level of involvement, the informal organization work ethic and attitudes, the attention to resource control, the commitment of management, and level of goodwill make for the right mix? Is there a powerful, sustaining impetus behind the venture that will help overcome the obstacles--real and imagined--that will undoubtedly arise? Be aware that no matter how hard you try, there will be victims of the merger.

Second, mergers are rarely a situation of equals coming together. Operating as such when it is in act not a reality can delay decisions, hinder emphasis on important external issues, and contribute to the psychological costs of disruption, stress, and loss of productivity that accompany any merger. The question of "Who is in charge?"--that is, the selection of the new president or executive director for the merged organization--needs to be decided very early on, as situations involving co-leaders working together for any extended length of time tend to be fraught with disaster.

The role of association operations

Clearly, the administrative and financial areas are the hub or point of interaction for merger and transition activities and for the process actions--a point also where many of the stresses of the merger process first appear. The term that generally comes first to people's minds when considering a merger is that of due diligence--the care that the organization exercises to avoid harm to the organization or its resources and property. Careful due diligence is key in the decision to move to board approval of a merger. A simplistic view is that due diligence is a financial exercise, merely an examination of the books. In reality, it needs to be a thorough investigation of the overall business condition of the organization being considered, including the building of the business case for proceeding forward. Due diligence offers the opportunity to ensure that any cross-functional and transition activities are viewed by a joint-organization committee or process-action approach, and that all activities are thoroughl y addressed. Everything from cancellation costs of duplicative commitments, insurance coverage, health and benefit programs, to results of membership surveys and actions of the board and executive committee needs to be a total expose because of the consequent legal and fiduciary ramifications and should be appropriately carried out by an independent, professional auditing or legal firm. The amount of time spent on due diligence relates to the thoroughness required by the staff and board in assuring the membership--and stakeholders--of the soundness and business efficacy of the proposed decision. That time can take a few days, a few weeks, or several months, depending on the type of association and the complexity of the organizations. Attention to a comprehensive due-diligence checklist (available from most audit firms) as part of the initial decision to even pursue a merger or affiliation will help all association functional areas and board standing committees, such as finance or executive committees, to fami liarize themselves with and better address their responsibilities in the process.

Priority prep work

In the development of the business case supporting a merger, particular attention should be paid to nearly every aspect of your operation. Typically, NDIA conducts a thorough review of the following areas before getting serious about merger talks.

Financial operations. The merger of two organizations involves the merging of financial operations, budgets, and account structures. Hence, account definition, costing and allocation methodology, recurring and nonrecurring costs, and disparate revenue sources need to be considered. Forecasting the transition period and the future, or out-year, budgets for several years is critical to a sound business case. Key assumptions and their supporting rationale need to be developed relative to such items as potential member attrition and disparate revenue sources. Rather than a discrete set of revenue and expense projections, a range for each year projected is more useful for presenting potential outcomes (in other words, base calculations on both optimistic and pessimistic scenarios). The assumptions should be documented with supporting rationale and presented in a consistent format such that variations can be easily effected and provided to the board in a timely manner for its decision making.

Human elements. The business plan needs to address not only the financial resources, but the human resources, as they are closely coupled. Staff reorganization, individual displacement, and loss of key staff can have a dramatic effect on the merged organization's capability to meet financial projections. Here are some actions that NDIA has taken to help with smoother transitions during mergers.

1. Create a staff merger map. A direct consequence of staffing concerns is the need for a staff merger plan that addresses the elements of structure, control, orientation, and training. These elements are a product of the organization mission, vision, and core competencies, all of which should drive the specific functional positions required. Typically a total combined staff reduction of 10-15 percent can be contemplated due to duplication, overlap, and relevance to new requirements. Therefore, your plan will need to address how you will effectively resize the new organization with appropriate attention to staff, member, and organization needs. Normal attrition may be a convenient solution, while deletion of unnecessary positions with an appropriate severance package another.

If the merger proceeds, of course, the merged staff will need to know how the new organization will function. Essentially you need to provide them with the new rules of the road. All staff will have to have a knowledge and familiarity with what each heritage organization brings to the new mission capability, and all will need some element of training whether it be informal on-the-job coaching, or structured classwork on new systems.

2. Pay attention to staff morale. During merger planning and transition, special attention to staff sensitivities regarding the impending merger should be a daily activity. Acquainting everyone to the new mission and communicating up, down, and sideways to dispel fear, rumor, and doubt is key to each staff member's hierarchy of needs. At NDIA we've found a basic fact sheet, distributed by e-mail with a follow-up question-and-answer session with the entire staff, most helpful. The fact sheet covers the following issues:

* recognition of who made the decision to initiate the merger;

* explanation of why such a merger was conceived, evaluated, and approved;

* expected benefits of the merger to the organizations;

* articulation of the mission and vision of the new organization;

* date that the merger will take effect;

* name of the new organization;

* description and organization chart of the new organization;

* implications of the merger for the combined staff as well as individuals;

* revision or restatement of individual job assignments;

* distribution plan for organizational assets;

* composition of the new board of directors; and

* philosophy of the new entity.

The above list is not necessarily all-encompassing; tailor it to your specific needs, circulate the draft through your various departments to ensure its thoroughness, and pay attention to rumor control. Add items to the fact sheet as concerns or feedback develop. Be prepared for the sticky situations, as politics and culture will naturally interplay.

3. Review revised benefits. Employee benefits of the two entities need to be reviewed and estimates made for a new or harmonized program. Retirement plans should receive particular attention, given out-year liabilities and costs of termination, such as for a defined benefit plan if the choice is to move to a 401(k). You may also need to consider grandfathering in particular benefit coverage for certain staff. The overall task is feasible as long as your final program is equitable to all employees in its coverage--a set of options tables is generally sufficient for analysis and presentation.

Facilities considerations. As a part of your facilities review, you'll need to decide whether the current space and location(s) adequately provide for staff needs and member service requirements--the latter probably being the primary criteria. Selecting one location over another, incurring potential lease-termination costs, operating out of multiple locations, all moving to a new leased location, or building a new facility can all result in some significant transition costs. Ensure that they are appropriately reflected in the business plan for board approval and in your transition operating or capital budget. Consult early on with your property manager and agent--make them part of the decision team. You'll generally find their insight and market acumen invaluable.

During facilities review, you will need to give special attention to your communication, computer, and information management systems. Upgrading to a new baseline and standardization of operating systems, hardware, and software are priority decisions. Leasing or obtaining services from an association services provider should be in your decision tree. Get your information and communication services providers together as a group, make them part of the planning process, and get them to give you new insights on capabilities and options.

With all the advances in information technology currently available, the facilities plan for the new organization needs to consider the potential reduction in office space that can result from a well-conceived telework plan. A lot of your financial reports, meeting registration tasks, and other activities can be effectively and efficiently accomplished--with appropriate security safeguards--from a sufficiently equipped home office. Given that a large measure of association business is information related, with a great shift to the e-business side in the last few years, the positive aspects of teleworking for the employee can be effectively meshed with the organization's needs to better satisfy both. With e-business requiring both a 24/7 mind-set and operation compared to bygone days of 9 to 5, teleworking offers an attractive way to provide that needed operational capability. You may not achieve any major savings but you will probably do a lot for your participating employees' morale, particularly, for exampl e, in large urban areas where commuting time and related expenses are substantial.

Supplier evaluation and other considerations. The merger period is an excellent time to build long-term support relationships with all your suppliers. And while we are mentioning suppliers, don't forget those that provide office supplies, printing services, and so on. The transition period can provide an excellent opportunity to renegotiate contracts or move to new suppliers with substantial savings given your new business volume.

A merger offers the opportunity to think out of the box on how to accomplish the association's mission, to provide new and improved service to members, and to do it with a reduction of costs--fundamental aims of any merger. All your overhead cost areas should get a thorough review, determining which activities continue to support your new requirements, can be made more efficient, should be outsourced, or are no longer needed.

NDIA routinely reviews existing contracts with its own and the merger candidate's suppliers, allowing them to compete for the contract for the new organization. As a result of some of its merger and affiliation activity, NDIA has realized cost savings of 10-20 percent in telecommunication, printing, insurance, and other areas.

* Legal and general counsel services. Use a statement of work in your request-for-proposal solicitation and ask for information on knowledge and relevant experience, fee and retainer structure, work quality, withdrawal terms, and discharge provisions.

* Audit services. With the merger, you'll have exposure to at least three providers--those of both associations as well as the due diligence provider--so craft a statement of work they can respond to.

* Payroll services. If the merged organizations have been processing their own payroll, it's a good time to reevaluate to see if the new association's needs support the use of outsourcing as a more effective approach.

* Banking and investment management services. Chances are you'll have at least two suppliers to select from in each area. The time you need to spend on structuring a decision process for just those two can be easily expanded to include other sources. Use this as a ready-made opportunity to reduce fees and review your analysis reporting.

The list will go on depending on what other operations are in place--or need to be put in place. While the task may seem daunting, consider it an opportunity to take advantage of the intrinsic benefits of open competition.

Transition tenets

Well, you've done all your planning, the business plan objectives appear achievable, both boards have given approval, the certificate of merger has been issued, and now the actual transition-integration process is ready to begin. Now is not the time to relax, as the transition period is where all the good work beforehand can start to fall apart. The diligence part of your due-diligence review needs to be maintained. What was on paper now becomes reality and practice. Staff orientation and familiarization--preferably at a neutral, off-site location--should be the first priority. Senior-level commitment to making the merger work through retention of the best, coupled with a large measure of goodwill, must be readily apparent--with a consistent message maintained on a daily basis.

You will need to continually conduct process reviews by those directly involved in the specific functions and plan workarounds--remember you are now integrating a new range of cultures and implementation details may have been overlooked in some areas. Patience, persistence, and follow-up should be each day's game plan.

You might need to operate out of both heritage associations for a period while new facilities are made available, so communication and information systems connectivity and associated costs should also be considered. Keep in mind that once the merger is announced and once you've started transition, member and customer communication and interaction with or through one site is a preferable solution even if only from a perception standpoint. Notwithstanding all the turmoil that may be going on in each of your functional activities, the merger transition needs to be seamless to your members and customers. Difficult, yes, but all aspects of your member and customer interface need to be actively thought out.

The specific time frame for the completion of an effective merge can vary widely--from three months to several years. Regardless of this time period, it is hoped, of course, that you and your members will eventually realize the expected outcomes that drove the merger in the first place. There is really no cookbook approach for success; much is dependent on the willingness of all parties to make it work. Having gone through, several mergers now, we at NDIA have found the efforts both time well spent and a growth process that benefits all involved. We are now on to the next.

Bronislaw Prokuski is vice president of administration and finance, National Defense Industrial Association, Arlington, Virginia.