The Nonprofit Ethicist | Perplexed about Mergers

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NPQ's The EthicistDear Nonprofit Ethicist,

My human-services organization is in the early stage of merger discussions with a nearby agency. The merger makes a lot of sense. But now I have learned that the agency submitted a bid on a project we started decades ago and anticipates continuing in some capacity—whatever the outcome of the merger. (The contract was open for bidding for the first time this year.)

We won the contract, but I’m perplexed by the other agency’s failure to be open with us. Knowing that our agencies are exploring a merger and—I thought, looking for collaborative opportunities—I expect more transparency. We’ve executed a nondisclosure agreement as we undertake due diligence, but I didn’t think a noncompete would be necessary—until now. Where is the line between professional courtesy and ethics?

Perplexed

Dear Perplexed,

How about the line between ethics and common sense?

Nonprofit mergers are always dicey, and it’s always wise to conduct a trial run to test the waters. Submitting a joint proposal would have been a good exercise to determine whether synergies are possible and your staffs can work together. Alas, that is water under the bridge.

Effective due diligence requires full disclosure. This includes information on projects in prospect, in addition to funded projects. The Ethicist assumes that you had access to the agency’s board minutes, and its board should have discussed pursuing this contract—but that is another issue.

The key to good ethics is anticipating the effects of a decision on others. Your “partner” should have considered that you could construe its interest in the merger as a façade for obtaining inside information that would aid it in preparing its proposal, which would sour your mutual relationship and inhibit future cooperation. Certainly professional courtesy and common decency required the agency to disclose its intent to bid on your long-standing contract.

  • Margo

    I don’t disagree with the Ethicists’s response (and love the note about ethics and common sense!) If I were inclined to argue for the ‘benefit of the doubt’ I would simply observe that at an early stage in merger discussions – even after due diligence has begun – it is difficult for two parties to think in terms of the potential “we” instead of the current “I”. In my experience that can take longer than seems reasonable and is ultimately the result of working together on a project or proposal rather than an abstract or legal commitment. Which returns us to the suggestion that a joint proposal would have made a lot of sense. In the spirit of transparency, consciousness-raising and good will, it would be smart to initiate a candid conversation about this experience and see what can be learned.

  • David McConnell

    I particularly agree with the last portion of Margo’s comment; it is time for a good old fashioned heart to heart talk. If you / your organization have a culture that would dictate disclosing the bid, and the other ‘can’t see why this is such a big thing’ you may have stumbled on one of the largest hurdles a merger – not for profit or otherwise – has to deal with – culture.

    I suggest both a good heart to heart discussion of this incident, and taking this opportunity to compare cultures. While it might not scuttle the merger, the comparison will point out areas of cultural differences that will need to be worked thru if the merger is to succeed.

    Good luck…………

  • EllenDueroRohwer

    I respectfully disagree. The agencies are still separate, and it sounds like, at the time of this bid, “potential” merger talks had just begun. If the other agency decided it was important to bid for its own (still individual) mission and existence, then talking to your agency about it could be improper colluding on proposals – a big no-no. Could have gotten you BOTH in hot water with the funding agency. If I were on the board of directors of the other agency, I would have recommended the exact same approach, and I would be surprised (and a little concerned) at your being miffed.

  • Jane Arsenault

    Most funders jump up and down and cheer when organizations work together so I don’t see the collusion issue and I also see no harm in acknowledging to one another that both organizations were pursuing the same RFP. I don’t see the ethical issue either unless there was already an agreement to disclose all funding pursuits (and that would be unusual in early stage negotiations.) I do see the common sense issue. The organization who did not disclose their intent to compete has risked losing the potential merger partner. If they value that opportunity, this was simply foolish. It may, in fact, be an indicator that they don’t value it. There are always signs in early partner discussions that a party is not serious…this might be one. Before more time and energy is wasted, the seriousness of intent to merge should be explored.

  • Peggy

    I must also disagree. Up until a point where merger discussions progress beyond due diligence and the feasibility is clearly determined, each agency must continue to operate at full capacity. In times such as these, holding back on the generation of additional revenue streams presents a risk to the viability of the organization, which is of tangible value to the potential merging partner. Having said that, I agree with Margot that the incident provides a venue for a bigger discussion and meaningful communication about expectations throughout the merger process. My role in implementing the merger of four agencies, before which there was little to no conversation about the process, has illustrated the need to test each and every assumption — on both sides.

  • Chuck

    I think all the points made thus far have validity so I won’t belabor them.

    Having orchestrated a number of mergers in my tenure as a Nonprofit CEO, I am surprised that “Perplexed” didn’t already know or suspect that their merger partner would be interested in the RFP and perhaps making a submission. Did your organization offer to collaborate or did you somehow think it was their job to suggest it?

  • Teri Bordenave

    Setting the tone from the start of a potential merger is critical to that ultimate collaboration’s success. Beginning the process with a joint program venture is a logical first “date” for two organizations who have begun the “courting” process. Trust is the essential ingredient necessary in this critical relationship-building and analysis process; better to have it in place from the start!