Considering Diversification?

Large for-profit conglomerates have used diversification as a means of flexing their capitalization muscle and hedging against risk for a long time. Over the past few years this has been seen in large to moderately sized nonprofits too, at least partially in response to seismic shifts in funding streams. Sometimes these stream shifts have been as earth shaking as those created in the New Madrid earthquake that made the Mississippi River flow backwards, and it became easy to find bargains available for acquisition. Other times it just seemed to be the best prospect for short term survival.

However, the risks of mergers and acquisitions can often outweigh the potential benefits, especially if they are being done in order to diversify. This is because diversification, while it does moderate risk by spreading & diluting it, also dilutes the potential for earnings even more. A brief but solid article about the issue can be found in a McKinsey Quarterly white paper here:
https://www.mckinseyquarterly.com/Corporate_Finance/M_A/Testing_the_limits_of_diversification_2924

NPManagement.org has an article in the pipeline that will expand on the implications of these factors in the not-for-profit arena, which will provide some examples. But for now, here are a few things to keep in mind:
Are we considering the merger/acquisition because we are the best people to run the new business?
Will we be able to integrate the businesses, or will they cause us to disintegrate?
Have we been creating synergy in our own business already? If not, what makes us think we’ll be able to do so in the new, combined business?

Although NPManagement.org is technically on its summer hiatus, stay tuned because the article on this topic should be delivered soon.

ejt
NPManagement.org