Anatomy of Failed Merger

Negotiations to combine colleges are incredibly complex, as two Massachusetts institutions showed after abandoning a union that, while academically beneficial, would have been a financial drain. Here's how they reached that conclusion.

August 5, 2015
 
Montserrat College of Art

Two neighbors on Massachusetts' North Shore -- Salem State University and the Montserrat College of Art -- spent more than half a year immersed in detailed and time-consuming merger negotiations, only to find in the end that a union that seemed beneficial at first would actually end up being a financial drain.

Mergers by nature are complicated undertakings, particularly when a public university is considering absorbing a private institution, as was the case with Salem State and Montserrat.

On the surface, a merger made sense.

Salem State wants to grow its physical footprint, and Montserrat has a 19-building campus just four miles and a 15-minute drive away. Both institutions have robust art programs -- though each has different strengths -- and combining them would create a programmatic powerhouse for art education in Massachusetts.

And if Salem State, the stronger partner, were to more or less absorb Montserrat, it would also get its 380-member student body.

Such a windfall is desirable in New England, where college enrollment is suffering due to a declining number of high school graduates in the region. In fact, enrollment declines led to the recent and sudden closure of Marian Court College, another North Shore institution just 10 minutes from Salem State.

“This merger, everybody believed it was a good idea. And they still believe it’s a good idea,” said Stephen Immerman, Montserrat’s president.

But all the positives of a potential merger couldn’t outweigh one unrelenting fact: Salem State -- in both the near and long term -- would actually lose money if the deal went through.

“No matter how we modeled it, it just projected in ongoing losses,” said Scott James, Salem State’s vice president for enrollment management and student life. “The efficiencies couldn’t account for increased costs.”

The cost of upgrades to Montserrat’s buildings, of bringing Montserrat's faculty up to the pay standards of Salem State's faculty, of merging things like software programs, of shuttling students from campus to campus, and the thinning of per-student funding from the state -- all of these factors in the end weighed against the merger.

The finding, announced July 14, was a blow to both institutions, which entered into negotiations with a positive outlook.

Yet negotiations between Salem State and Montserrat are a compelling case study for other colleges considering a merger, a strategy many analysts in higher education say could be on the rise as more and more small and midsized colleges struggle financially.

“I suspect that there are lots and lots of conversations going on about this,” said Susan Resneck Pierce, a former college president who is the author of On Being Presidential (Wiley) and a consultant to colleges and presidents.

A few recent merger examples from the Northeast:

  • Clarkson University plans to merge with fellow New York college Union Graduate College in January
  • The Berklee College of Music last month began exploring a merger with the Boston Conservatory
  • The Salt Institute for Documentary Studies is also considering a merger with the Maine College of Art. 

“Small colleges… are having difficulties because they don’t have economies of scale,” she continued. “A merger might allow an institution to offer a full range of programs, but with a more robust student body.”

Montserrat in particular was considering the merger as a means of continued longevity.

The 45-year-old college is not necessarily on the brink of shutting down, but its long-term health is in question, given factors like flat enrollment, little cash, and the high cost of providing studio art and design degrees.

“Operationally we’re in the black, but a 1 to 3 percent [surplus] on an annual basis is not going to be transformational,” said Immerman, who was hired from Massachusetts Institute of Technology, where he was an administrator, in 2009. Montserrat, at the time, was in “deep trouble,” and Immerman was tasked with turning things around -- a difficult endeavor.

“We have been able to transform it, but ultimately not in ways that would allow it to be as competitive as we would want it to be,” he said. “I wouldn’t call us fundamentally strong. I would call us stable and tenacious, but the point is that over the long haul you have to be realistic about what the opportunities will be.”

It was this calculus that led Montserrat to approach a handful of North Shore colleges to see if they would consider a merger. Salem State took the proposal seriously, as its strategic plan called for expanding its physical footprint in the near future.

Where to Start?

When Salem State decided to consider a merger, its first step was learning how to negotiate: they’re open to a merger, now what?

There’s relatively little literature for colleges on how to consider a merger. And while many in higher education agree that mergers could increase, data are sparse on mergers and their frequency.

“This isn’t the type of thing that somebody has a playbook for, which is one of the challenges of the process,” James said. “We were sort of middling through, saying ‘What is it that we need?’ ”

Salem State consulted with other colleges that had merged -- including Lesley University, which merged with the Art Institute of Boston in 1998; Middlebury College, which merged with the Monterey Institute of International Studies in 2010; and the University of Massachusetts, which acquired the Southern New England School of Law in 2010 -- learning more about the processes they had used.

For Montserrat, the very first step toward a merger was digging itself out the troublesome position it was in when Immerman took office. Immerman reduced the college’s debt, renovated its academic programs, created a small but consistent budget surplus, and improved fund raising levels.

“We chose to start exploring after we gained a certain amount of strength,” he said, adding that he and Salem State’s president, Patricia Meservey, informally began discussing collaborations about five years ago.

Entering negotiations from a place of strength is important, according to Laura Schweitzer, the former president of Union Graduate College who retired last month.

“You have to look ahead. You have to be strategic and thoughtful about it, and don’t wait until you’re so weak you have nothing to give,” she said.

Ronald Salluzzo is a consultant who works with institutions considering mergers. His clients include St. Bonaventure University and Hilbert College, which decided against a merger after a year of negotiations, as well as Union Graduate.

He says there’s no one-size-fits-all way to go about a merger -- but it’s important that academic alignment is at the forefront of considerations.

“Every one of them looks different, because the people doing the negotiating have their own triggers, have their own key things that need to be done and their own biases,” Salluzzo said.

A merger, he says, isn’t even worth considering unless there’s a shared “belief that, academically, the institutions would be far better off together then they would be independently.” Even after such an understanding is established, successful negotiations are far from a guarantee: “There’s still 100 ways it could fall apart.”

Even though negotiations between Salem State and Montserrat were unsuccessful, both colleges agreed from the outset that, in a strictly academic sense, a merger would have been a boon to each institution.  

“That was probably the first question: ‘Does this make sense for us programmatically and academically?' ” James recalled. “It absolutely did.”

Where a lot of institutions considering mergers go wrong, Salluzzo contends, is not considering the most difficult issues from the start, but instead leaving them until the end of negotiations.

“Both institutions should have their deal breaker list [and early on] go through each of those deal breakers,” he said. “It’s not even worth doing due diligence on each other until you’ve gotten that done.”

Montserrat wanted to provide security for as much staff as possible, maintain its identity and maintain its name in some form or another.

For Salem State, one of the biggest imperatives was that the university couldn’t lose money if it went forward on the deal.

“Politically we would have had to demonstrate we’re not spending taxpayer money to make this happen,” James explained. “So we had a little bit of public opinion to weigh.”

Yet in order for the college to fully uncover the financial implications of a merger, it had to map out what a merger would look like. That meant a lot of meetings between administrators of each college, and copious sharing of data.

Opportunity Cost

As Salem State considered a merger, it looked at five factors: strategy, academics, enrollment, real estate and finances. As they picked each factor apart, negotiators realized things weren’t as straightforward as first imagined.

While acquiring more space was top of mind for Salem State, officials there decided that space for the arts, although a priority, wasn’t the top priority. Had the university invested in the merger, it would have had to put other expansions on hold, such as the planned construction of a new science building. And much of Montserrat’s campus needs updating -- an expense that would have become Salem State’s burden.

“Part of what we struggled with is what things would be put off” because of the merger, James said, adding that in the end there were “a number of initiatives that we thought were more important.”

Meanwhile, though enrollment would initially increase if Salem State absorbed Montserrat’s students, officials didn’t think large enrollment gains would last for long. About half of Montserrat’s students are from outside Massachusetts, and Salem State expected that to drop off after a merger.

And state funding was unlikely to increase significantly in the coming years -- meaning the same amount of state dollars would be stretched across a larger student body. Salem State has an existing undergraduate enrollment of 7,600.

Though a merger would have significantly elevated Salem State’s art programs, even this came to be an issue, as some worried about perceptions that the university would be duplicating programs at the Massachusetts College of Art and Design, a fellow public institution. 

And finally, when Montserrat and Salem State began looking for efficiencies -- areas where, simply by combining, they could save money -- there were fewer than expected.

Montserrat already had such lean staffing, it turned out that in some areas -- like campus security and policing -- Salem State would actually have to hire new employees.

Because Montserrat’s studio instruction style necessitates small classes, economies of scale were limited. And some of its art programs, like graphic design, are expensive to operate because they require the constant updating of expensive software.

There was the cost of transition to consider as well.

“Implementing Salem State’s information technology structure and connecting [Montserrat] with a main campus four miles away, that’s a big cost,” Immerman said, adding there would have been an “operating deficit from the start” of a merger.

Montserrat, which averages about $1 million in fund raising annually, according to the college, tried to drum up donations to support the merger, but was unsuccessful.

“It just didn’t materialize,” Immerman continued. “As you can imagine, there’s not a whole lot of people lining up to pay the operating expenses.”

So earlier this month -- after hundreds of hours of study and negotiating -- Salem State and Montserrat pulled the plug on a potential merger.

Even after long merger negotiations, the process of actually merging can be long and cumbersome. Not only do governing boards have to agree to terms but approvals are also needed from accreditation and state authorities, which in this case would have been the New England Association of Schools and Colleges and the Massachusetts Board of Higher Education.

And combining Montserrat’s $700,000 endowment with Salem State’s $16 million endowment would have required additional involvement from both the attorney general and Massachusetts Supreme Court.

Clarkson and Union Graduate, for example, approved a merger in May, but the colleges needed another eight months to work out the logistics of the partnership and receive approvals from authorities.  

As more and more colleges consider mergers -- “there’s probably 10 conversations going on right now within 100 miles of us,” Immerman guessed from his office at Montserrat -- they’ll find themselves undertaking an exploration similar to Salem State's and Montserrat's, and likely running into similar complications.

After all, even if institutions agree on the most basic of things, there’s still 100 ways a merger could fall apart.

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