I have been asked to speak to you about the role mergers and acquisitions can play in enabling nonprofit arts organizations—museums, in particular, to survive, grow, prosper, and assert themselves in an increasingly competitive world.
My epiphany that mergers would be critical to the arts was not merely a result of observing the merger madness that has swept over the for-profit sector or my inherent desire as a director of finance to slash costs. The idea hit me several years ago when I read about Disney's attempt to build an American History theme park in Manassas, Virginia. What was so astonishing to me was that Disney's number crunchers were able to articulate a money making scheme based on American History. History, as I imagined and remembered it, is the domain of museums and universities, not the basis for large entertainment companies to invest millions of dollars to ultimately increase shareholder equity. But I took this concept one step further and wondered, what is to prevent Disney, Time-Warner, Sony, and any other mad-cap entrepreneur from buying an art collection and charging admission to see it, or building an amusement park around it, or renting it to a mall or store to entice visitors? A theme park of art-related products and works could attract a sizable crowd with correspondingly sizable revenues. As demonstrated by the popularity of the recent Cezanne and Picasso exhibits or the Three Tenors Performance, there does seem to be a significant market interested in fine arts exhibitions and activities. Where there is a market, there is money, and where there is money, for-profit organizations pay attention.
Ultimately, the issue isn't whether Disney should or should not encroach upon traditional nonprofit territory. The fact is that they can. The problem is, how does the nonprofit sector stand up to them? At this point, the nonprofit art organizations and museums cannot. No museum begins to have the financial, marketing, and facility muscle or flexibility to compete. The largest museum in the U.S. is the Met with total income of approximately $250 million. Mike Ovitz, a fired Disney executive, made approximately $100 million in less than one year's worth of work, and he wasn't even the boss. The nonprofit sector is overmatched.
The societal challenge to the nonprofit arts sector is that huge non-profit entertainment companies play a larger and larger role in the way Americans view themselves and define their artistic interests and prerogatives. The museum, however important, is pushed into a small niche in the arts and entertainment industry. To re-establish its place in society, the nonprofit needs its own organizational critical mass to assert its agenda. To do that, they need to be bigger, stronger, more confident, and more aggressive. That comes from expanding their capital base, cutting costs, marketing to a much wider and larger audience, making broader use of new technologies and long-term, industry-wide planning.
The big-picture approach characterizes for-profit mergers that have been so prominent in the new today. Based on the mantra, growth is necessary to survive, big is better, and the sad reality is many medium-sized companies have limited long-term survival prospects. Chase merged with Chemical Bank to maintain its revenue base, cut its costs, and assert its role as an industry leader. Travelers took over Salomon Brothers to strengthen its trading department, and ultimately establish itself as a full-service investment bank with an international presence. The lessons creativity, ambition, and vision demonstrated by the for-profit sector should not be lost on the nonprofit sector.
Unfortunately, merger examples in the nonprofit sector are harder to find and are generally less dramatic in scope. We've seen several large nonprofit hospital mergers over the past few years. We've also seen small arts organizations merge, though this is usually due to some sort of financial distress. Some organizations have talked about it, but there just doesn't seem to be much impetus or desire on behalf of major museums to play this game. Most museum executives I talked to claim to be getting by with a tolerable surplus and that seemed to justify a lack of action.,
Unfortunately, other immediate and long-term realities may force the nonprofit arts sector to seriously consider significantly more merger activity. That so many arts organizations and museums are breaking even or getting by in one of the most robust economies this country has ever seen, should be a warning. I'm not sure it is inaccurate to say that the arts are just one recession or stock market crash or prolonged correction away from a severe consolidation. When individuals can no longer give appreciated stock; if foundation investment earnings are seriously curtailed, if new tax laws cutting capital gains tax rates prove to be a disincentive to give, if local governments start cutting back, if donors decide that giving to nonprofit social service organizations makes more sense in tough times, when individuals watch their wallets more closely, more and more museums will be at risk. Museums and arts organizations need the financial strength to weather such storms. The foresight to combine organizations spreads out the risks and enables on larger institution to survive when two smaller ones would not.
In addition, nonprofit arts organizations must also respond to greater pressure on their bottom lines from funders. Foundations have stipulated that they will only give to organizations that not only run in the black, but are clear about their long-term strategic plans. Individuals, I would guess, approach their charitable contributions the same way. They want their investment to help an organization that is going to be healthy for a long time.
Mergers also make sense on an organizational level. They cut costs. Just doing the math illustrates this point. Two organizations of equal size of, say, $5 million merge. If their missions are somewhat similar, significant savings are obvious and attainable. A more interesting calculation, however, by museum bean counters might be to measure the savings of a number of organizations combined. What would be the savings if fifty $5 million organizations merged over time? If, as some people have mentioned, the merger savings rate is ten to fifteen percent, the museum would would have at least an extra $25 million to spend.
Mergers also enable organizations to grow by adding a strategic service or element that fills in gaps of the existing organization. Creating a "synergy" is a justification often mentioned in the for-profit sector. Suppose they wanted a much larger photography department. Suppose a museum had a great space but a limited collection or vice versa. Instead of duplicating efforts or starting from scratch, why not merge? An example of this concept might be the organization I currently work for. Though we are not a museum, we have been around for 25 years, have a budget of approximately $3 million, have never had a deficit, and provide grant money to composers. We need bricks and mortar, a presenting organization or even a museum with an interest in contemporary music to provide us with that opportunity to display a product we believe in. The emerging synergized organization would expand our base of support and certainly increase the long-term survival prospects of both outfits as well as enable it to grow.
The contribution mergers can make to the financial stability of the nonprofit arts sector is also a result of the intelligent reallocation of revenues that become available. Let me give you three examples:
1. Increased spending on marketing. In the nonprofit organizations I have worked for, marketing and advertising has often been an afterthought and an expense least likely to appeal to funders. This is changing, however. The power of marketing is more and more apparent in today's business world. In order to compete, raise revenues, get your message out, expand current markets and even to create new markets, more will have to be spent.
2. Increased investment in research and development. When a small start-up museum based on a new or revolutionary idea tries to get going, they must raise significant administrative facility and marketing monies just to overcome the threshold of existence. The incubation of pragmatic and artistic ideas under the umbrella of a large organization seems to be a more effective way to test the feasibility of an idea. Money saved from mergers would allow this to happen.
3. Increased spending on technology. Three $5 million organizations might each have trouble purchasing a $100,000 program or piece of equipment that will enhance a particular function of the organization. Some administrators have also mentioned to me that it is difficult for a small to medium size museum to justify MIS staff essential to managing technological growth and efficiencies. A larger organization able to add staff devoted exclusively to technology will be in a much more competitive position.
The eventual result of the reallocation of resources is the evolution of perhaps a different type of organization, a nonprofit arts organization with a greater percentage of income based on revenue instead of traditional support. Several significant advantages are apparent, one of which is especially important—that is, the access to and creation of capital. Let's face it: museums are under more and more pressure to provide enjoyable spaces, add recreational activities such as restaurants, concerts, et cetera to provide a full experience for their constituents. The Getty Museum just set the new standard with a $1 billion facility in California. In order to compete, other museums will need significant capital to upgrade their facilities. Again, issues of scale are relevant to raising capital from traditional sources, such as banks, or even issuance of bonds. The larger and stronger the financial base of the organization, the better change that they will gain access to funds to make necessary improvements. In addition, less reliance on the exhausting, time-consuming, and uncertain capital campaign to raise money will serve nonprofit arts organizations well.
What might also be interesting it the idea of creation of capital in nonprofit organizations. Museums and arts organizations, just like the for-profit entertainment companies, have a product that could pay for itself. Instead of donors paying for operations, their contributions should really go for an endowment or organizational capital. For-profits use stockholder equity as capital to grow. Similarly, the nonprofit organization that can build and use its endowment as a capital resource enhances its growth potential. Museums are also different from other nonprofit arts organizations because their collections can also be considered part of its capital base. My two colleagues on the panel will speak to that very shortly.
Ultimately, there are reasons merger mania has not hit nonprofit arts organizations. In the for-profit sector, there is usually enough money and stock to placate even the most principled objector. Not so in the nonprofit sector. Hence, the incentive for nonprofit board members and executives to give up their influence and jobs is limited. Similarly, these mergers and alliances in the for-profit sector are often driven by people such as investment bankers, executives, and shareholders who are in a position to make a lot of money. Merger instigators in the nonprofit sector would have to be motivated by what makes sense in the short and long-term.
Another impediment to mergers is that there is a certain local sensibility to museums that may not easily translate into large multi-national conglomerates. Finally, there is also this nagging sense among board members, staff, and perhaps society that nonprofits shouldn't focus on large sums of money, regardless of the noble way in which it is spent. I think that perception has to change. For-profit organizations have saved money, and grown to tremendous size, strength, influence, and scope through the accumulation and reallocation of resources required through mergers and acquisitions.
The nonprofit sector has been slow to commit to such a course. It would be a shame for an industry based on promoting human creativity through art not to approach their own business needs in a similarly creative manner.
This article is comprised of remarks that Mr. Pomeranz made as a panelist at the Fourth Annual Directors Forum in 1997.