LeadingAge Magazine · September-October 2017 • Volume 07 • Number 05

Governance Meets Mergers and Affiliations

September 18, 2017 | by John Mitchell

Increasing consolidation among aging services providers, especially mission-driven organizations that may need to reshape their identities, creates special responsibilities and difficulties for boards.

For any nonprofit provider contemplating a merger or acquisition, Kimber Latsha, an attorney who has overseen many such transactions, has some down-to-earth advice.

"A merger or acquisition is a lot like dating," says Latsha. "You want to be sure to find the right partner for a good, long-term relationship."

This directive sums up the recent arrangement decided upon by Glacier Hills, a life plan community in Ann Arbor, MI, and Trinity Health Senior Communities, based in Livonia, MI. The Glacier Hills board of directors finalized an agreement in July 2016 to join Trinity as one of nearly 50 communities. The deal enables Glacier Hills to maintain governance by a community board of directors.

"Glacier Hills concluded that, given the changing landscape in integrated health care across the country as well as locally, and the increasing risk of remaining as an unaffiliated single-site community, it would be open to the right opportunity to strategically align with another organization of similar values and mission," says Ray Rabidoux, president emeritus at Glacier Hills.

According to Latsha, managing partner of the law firm of Latsha, Davis & McKenna in Exton, PA, the Glacier Hills/Trinity agreement exemplifies a trend in the nonprofit aging services arena. He notes that the pace of mergers or acquisitions is accelerating given the rapidly changing landscape as residential communities become more and more part of the nation's health care fabric. Retirement communities, Latsha says, now routinely participate in Accountable Care Organizations (ACOs), bundled payment systems, and population wellness management systems. These are common strategies to manage chronic conditions and keep residents out of the hospital. More and more hospitals are relying on help from residential communities to achieve population wellness. Trinity Health Senior Communities, for example, is part of Trinity Health, one of the largest multi-institutional Catholic health care delivery systems in the country.

Also, Latsha says, mergers are often nudged along by the planned retirement of a key leader, such as the CEO. Rabidoux, as president and CEO at Glacier Hills, initiated the arrangement with Trinity in 2015 before he retired as CEO in 2017. (Rabidoux was succeeded as president by Reed Vander Slik.)

"This (CEO retirement) is a good time to take stock, to assess the long-term goals and prospects of the organization," says Latsha. In addition to meeting new market challenges, nonprofit residential communities have a long-standing commitment to their core mission: to serve. But, he noted, it doesn't always work out this way. Sometimes a merger or acquisition can be akin to a forced marriage.

"I'm working on two projects now," Latsha says. "One is a well-planned merger where both parties got to know each other and are in agreement about their mission. The other, unfortunately, involves a nonprofit that woke up one day and found [itself] in severe financial distress. The only viable option that emerged is to sell to a for-profit company."

The pace of mergers or acquisitions is accelerating given the rapidly changing landscape as residential communities become more and more part of the nation's health care fabric.

Mission Compatibility

The Glacier Hill/Trinity agreement offers a good example of the former scenario, where the two organizations share the same commitment to service.

“Any successful relationship has to start with mission compatibility," says Steven Kastner, president and CEO at Trinity Health Senior Communities. "It was clear from the start of our discussions that our organizations had clear synergies around mission. Even deeper than that, we knew that our boards had a fiduciary responsibility to ensure that ethically, this relationship was in keeping with our core values. We spent a considerable amount of time around determining an integration strategy for our mission and core purpose."

A study released earlier this year supports the characteristics of mergers typified by Glacier Hills and Trinity. The Stanford Social Innovation Review, partnered with the Kellogg School of Management at Northwestern University, analyzed 25 nonprofit mergers that occurred from 2004 to 2014 in the Chicago area. Their main findings included:

  • In 80% of cases, a prior collaboration existed between the merging organizations;
  • In 80% of the cases, the merging parties engaged a third-party consultant or facilitator;
  • In 85% of the cases, the board chair or a board member from one of the organizations emerged as the chief merger advocate;
  • In 60% of the cases, the acquired organization initiated the merger discussion; and
  • Over 50% of the mergers began during a time of leadership transition.

Two other LeadingAge members also announced an affiliation agreement earlier this year: Springpoint Senior Living, based in Wall Township, NJ, and Cadbury Senior Lifestyles of Cherry Hill, NJ. In a statement, Cadbury leadership cited the alignment of values as a key factor in the decision.

"Springpoint has an impressive track record of successful affiliations and a strong commitment to excellence," says Victor Amey, president and CEO of Cadbury Senior Lifestyles. "Their mission and culture are most compatible with ours, making them uniquely qualified to ensure the continued success of Cadbury.”

Board Responsibilities

What do these kinds of monumental decisions mean for the governance responsibility of boards? Anthony Argondizza, president and CEO at Springpoint, says the task responsibility for engineering such an agreement breaks down to about 30% board duties and 70% management function.

"For Springpoint, our board is a governance board and functions at a high level," said Argondizza. "They will trust that management has exhausted the due diligence process and that each respective committee has vetted the deal and done their part to avoid or limit risk and maximize the benefits of the merger or acquisition."

He also said that some anxiety during such a transition is normal. A good, well-disseminated plan in both organizations help ease such tensions.

"The best advice I could provide is to have a well-established communications plan and begin execution of that plan as quickly as possible," says Argondizza. "Be true to what is needed to be done, but pay great attention to culture and legacy. Change may be necessary, in all shapes and forms. However, timing and process must take into consideration the hard work and vision of the prior sponsor and management team."

Rabidoux with Glacier Hills also speaks to the responsibility of the board, as well as the executive leadership, in carrying out such transactions.

“Leadership must view the board as partners in this endeavor and be fully transparent and assistive to the board in responding to their questions and concerns," he says. "It's leadership’s responsibility to do its absolute most thorough job possible in anticipating every risk and detail of such a transaction and to use the best talent it can find to assist in identifying and bringing information forward to the Board."

According to Rabidoux, the details can have serious consequences. For example, he notes in a case where a fee is necessary to join a new community, potentially "thousands or millions" of dollars of resident refundable entrance fee liability must be protected. With such factors in play, he said, the board must view itself as part of the team with the management team, the attorneys and consultants who have been retained to help structure the deal.

"The best advice I could provide is to have a well-established communications plan and begin execution of that plan as quickly as possible. Be true to what is needed to be done, but pay great attention to culture and legacy.”

Nonprofits and Mission

Another factor for consolidations among nonprofit providers is that it can give an advantage in a marketplace with for-profit competitors. Argondizza says such mergers typically help the affiliating organization to better manage debt and improve margins.

"There is a great story to be told on the nonprofit side of senior living that can’t be matched by for-profits," he says. "Taking advantage of those stories, the preservation of legacy, the commitment to mission and values is something that is hard to combat for the for-profits."

Rabidoux pointed out that the consolidation underway in the nonprofit sector is no different than what is happening in other sectors—such as hospitals and even for-profit housing companies. Often nonprofit organizations have rich, mission-based histories. But it can be a challenge to balance such a legacy in the face of increasing fiscal, operational and outcome demands.

"Combining resources, leveraging financing and operating efficiencies to continue to advance our missions is a good thing," he says. "In the case of our affiliation with Trinity, it opens up great new opportunities to better coordinate health care, manage costs and assure quality outcomes in our market.”

In the end, all parties echoed Latsha’s warning: don’t wait until a financial crisis to consider a merger or acquisition. Instead, make the options part of the regular and ongoing board fiduciary responsibility.

""What stood out for me in this transaction was the foresight of the Glacier Hills Board and leadership to look long-term strategically," says Kastner. "Unfortunately, as a large organization, we often are approached by potential partners that are in the crisis mode and need help right away due to some unfortunate circumstances."

And finally, don't forget about the residents. They will be apprehensive about any organizational changes. After all, it's their home.

"Through a thoughtful dialogue with residents over time and the respect that Trinity has shown for those concerns by either residents or board members, the impact on residents has not been adverse. Continued respect and sensitivity for that transition will be needed," says Rabidoux.

John Mitchell is a writer who lives in Cedaredge, CO.