Apr 17, 1997 | By Russell Pomeranz

The Arts Needs Its Own Version of Merger Mania

Put two corporate chief executives together at a cocktail party and speculation flies that a merger or acquisition is in the works.

Put the heads of two major arts organizations together at the same party and most people will assume that they are discussing cultural matters.

For the sake of the future of the arts, both the perception and reality of such conversations must change. To ward off an incursion by major corporations into arts groups' traditional turf, non-profit leaders should seriously consider joining forces to make their operations more competitive.

The fine arts have demonstrated an ability to do strong business in recent years. Art exhibits and entertainment extravaganzas such as the Picasso show at the Metropolitan Museum of Art in New York and the "Three Tenors" concerts across the country have packed people in.

When audiences show the potential to generate significant sums of money, large entertainment organizations like Disney, Sony, and Time Warner are usually not far behind. Instead of just being patrons of the fine arts, those companies are almost certain to try to cash in on them.

A savvy corporate marketing department could create a veritable theme park of the fine-art forms that would appeal to the very same people who now crowd museums, symphony halls, and non-profit theaters. Such creations would feature large, comfortable spaces and sophisticated technologies interspersed with high-profile artworks and performers.

The prototype for this concept was the Disney Company's attempt to build an American history theme park in Virginia several years ago. The articulation of a plan to make money off the humanities represented a new thrust by a major corporation into what had traditionally been the domain of non-profit organizations. The Disney plan failed because of opposition to the company's choice of a site near the Civil War battlefield at Manassas, VA, but the idea could succeed elsewhere.

Indeed, non-profit arts groups can no longer assume that they are immune to competition from large for-profit organizations with financial and marketing muscle. Some competition has always existed, but it is sure to increase—and at this point, non-profit arts groups would be seriously overmatched.

Even the largest museum or presenting organization rarely has a budget that exceeds $200-million. For-profit entertainment organizations spend that much on a single movie. Clearly, it would be difficult for even the largest non-profit organizations to compete with businesses with such substantial resources.

To remain competitive and to protect their market share, non-profit organizations must add more financial clout, build bigger and more exciting buildings and exhibition spaces, take more programming risks, and direct their marketing to a larger and more national audience. They must also decrease administrative overhead, make sure efforts to attract new audiences are not duplicated, and take advantage of the technological and economic benefits of large-scale operations. As the business world has found, an effective way to accomplish those goals is through mergers and acquisitions.

The situation in the arts may be similar to what has occurred in the non-profit hospital world. The recent merger of Columbia-Presbyterian and New York Hospitals probably had as much to do with for-profit competition as it did with running a more efficient operation. Thus, while the idea of the Metropolitan Museum of Art merging with the Museum of Modern Art of the Philadelphia Museum of Art—or both—may sound absurd, it may make sense against strong competition from corporations with very deep pockets.

There remain many obstacles to mergers and acquisitions in the non-profit world, however. Perhaps the greatest is the difficulty of determining what represents an ethical expenditure of money donated to tax-exempt organizations.In the corporate world, resistance to mergers can usually be overcome by hefty payments to executives fearful of losing their jobs. Shareholders may be outraged by the amounts involved, but they often make out well themselves. If they own shares in the company that is being acquired, they usually enjoy a gain as the market value of the company rises. If they own shares in the acquiring company, promises of a larger and more profitable company and subsequent higher stock prices will probably keep them satisfied.

In the non-profit world, such financial maneuvers are more problematic because chief executive officers and boards cannot trade power and authority for cash. Donors would be uncomfortable paying for golden handshakes and parachutes.

Yet if the survival of the non-profit arts industry depends on competing with large for-profit entertainment companies, acceptance of such practices, albeit on a smaller scale, is going to be necessary. Foundations may have to take the lead in allocating money to allow mergers to happen. Grants could be made, for instance, to develop long-term plans, to hire consultants familiar with mergers and acquisitions, and to provide job-counseling services to displaced workers.

The arts world is proud of the way it has collaborated with business over the past several years to maintain its financial position. But, ironically, that strategy may backfire in the long run, since business has simultaneously learned more and more about the function, role, and management of non-profit organizations—about about the potential for tapping into their constituency. If the market is large enough, business will no doubt try to move in. Mergers may be the only way non-profit groups can maintain control over the destiny of the arts.

This article originally appeared in the April 1997 edition of the Chronicle of Philanthropy.