How Global Health Can Survive The 2018 Budget

 

Global health organizations — especially those working on issues related to sexual and reproductive health — risk deep cuts in federal funding in the Trump era. While federal budgets have always fluctuated by administration, the 2018 proposed budget could be an extinction event for some nonprofits, according to the New York Times. Sad, indeed.

“We’ve never, ever seen anything like this,” said Scott Schroeder, a Chief Marketing and Development Officer with experience at Plan International and Pathfinder International. “In a normal world, a 10%-15% proposed cut would be devastating, but this administration has actually proposed zeroing out last year’s $608 million family planning allocation.”

While the Trump Administration’s proposed budget is unlikely to be passed in full by Congress, global health practitioners expect the net cuts will be massive. In this environment, global health leaders would do well to start exploring mergers and acquisitions (M&As). For global health organizations to remain stable, they will need a broader arsenal of growth options — and vulnerable ones will need to reinvent themselves or risk disappearing.

The Case for Global Health M&As in the Trump Era

It’s the extinction event risk that makes mergers and acquisitions newly relevant. But, how many nonprofit boards and leaders will be visionary enough to think about collaboration now (while it’s not too late), and how many will think “this won’t happen to us” and wait too long? The issue is once an organization enters a downward spiral, it is already too late.

The organization isn’t negotiating with leverage, instead hoping to be rescued — while another more resilient one picks-up the scraps without the grand “strategic partnership” that could have been had both parties acted sooner.

Even during “normal” funding periods, not enough nonprofit leaders think proactively about mergers and acquisitions. And, even when they do, they come across a number of well documented barriers, as this 2014 Stanford Social Innovation Review article points out, ranging from a lack of knowledge to a desire to maintain current leadership status. The real potential for an extinction event in the global health sector might remove or reduce such barriers, especially the personal motivations that keep many such transactions from occurring.

It is generally agreed upon that healthy organizations can use mergers and acquisitions to deliver more impactful programs at lower cost or develop new capabilities (especially those that could useful in a Trump Administration, like the ability to cultivate consumer or corporate donors). However, in the global health space particularly there are some unique advantages to scaling through M&A.

First, there is anecdotal evidence to suggest that being a larger, multi-service healthcare organization (combining HIV/AIDS care, maternal health, child health, etc.) increases the probability of being awarded prime contractor status, which allows an organization to dictate how its grant dollars will be spent. Grant writers speculate this is because major funders see global health issues as interconnected and consider multi-service organizations better able to deliver a broad suite of care. Second, organizations at scale are more likely to have the resources to expand into new geographies. This “first mover” advantage allows organizations to establish strong brand recognition and constituent loyalty before other entrants to the market appear.

Vulnerable global health organizations also have a lot to gain through proactive mergers and acquisitions. They can pool their remaining non-government funding resources to keep essential programs and operations running, and combine the best of their teams and assets to reinvent themselves. Furthermore, by doing this, they can avoid having to downsize in-country staff and programs, which are the most costly and challenging to rebuild. As one senior program director explained, “Preparing to bid for and deliver against even a relatively small USAID grant can take years to prepare for and weeks to undo.”
 

Which Organizations Are at Risk?
 

Large global health organizations with over $250 million in annual revenue are often sophisticated enough to weather big storms. Even if significantly government funded, these organizations have the people, processes, and technology to adapt — and to pursue funding alternatives. For example, Population Sciences International, an organization which reported $652 million in revenue in 2015, is approximately 35% U.S. government funded; however, the organization also has a healthy social franchising business to support its sustainability.

Whereas mid-sized global health organizations, with $50 million to $250 million in annual revenue, are at increased risk of survival, especially if they are: 1) largely U.S. government-funded; 2) lacking an endowment /other safety net; and 3) dealing with other typical organizational challenges, such as leadership turnover or an outdated strategic plan. Any combination of these factors could result in financial instability and open the door to an unplanned merger or acquisition.

For example, EngenderHealth, a reproductive health organization that reported $60 million in revenue in 2016, seems to be at risk given its reliance on government funds. In 2016, 69% respectively of its operating revenues and other support came from the U.S. government. According to a note in the financial statements, “The operations of EngenderHealth’s programs at present levels are dependent upon continued funding from the U.S. government, primarily USAID.” EngenderHealth is not the only organization in this category.
 

Nonprofit leaders are well served to think about mergers and acquisitions proactively before it’s too late.

 

An Unlikely Place to Shop for Acquisition Targets: Silicon Valley

When thinking about potential for mergers and acquisitions, the obvious choice is at risk peers with an aligned mission. However, larger organizations in particular looking to make an acquisition should also look at healthy, non-traditional candidates, like the emerging class of social sector start-ups. These organizations often excel in areas where traditional organizations sometimes struggle, such as technology, transparency, and consumer marketing. “These startups differ from traditional nonprofits because technology and often a growth mindset are at the core of what they do,” said Shivani Garg Patel, Co-founder of nonprofit tech start-up Samahope and current Principal at the Skoll Foundation. “In uncertain times, nonprofits need to think out of the box to continue to grow and thrive.”

Acquiring a successful social sector start-up is a win-win proposition for entrepreneurs and established nonprofits. Entrepreneurs are able to scale their innovation at faster speeds. And, established nonprofits are able to acquire new capabilities that would otherwise be challenging to build, sharpening their competitive edge and making them more resilient.

Realistically, even before Trump’s presidency, there was a move toward consolidation in global health with Mercy Corps, Save the Children, and Management Sciences for Health all making acquisitions of small- to mid-sized organizations. Combining this trend with Trump Administration policies will accelerate consolidation in this sector, especially among vulnerable organizations. And it’s not difficult to imagine a similar dynamic playing out in any other field highly dependent on U.S. government funding.

It’s up for debate whether consolidation through mergers and acquisitions within the global health field is a good thing, or if something is lost when small and medium sized organizations cease to exist. Regardless, nonprofit leaders are well served to think about mergers and acquisitions proactively before it’s too late.