The Merger Vortex

MINNEAPOLIS -- Mounting fiscal pressures on higher education institutions would seem to have created a ripe environment for mergers between colleges and universities, yet many administrators remain unconvinced such deals will actually happen.

Listen to those who have completed or considered mergers, and it's not hard to see why leaders are skeptical. The process is fraught with difficulty.

Still, the idea that more mergers are coming has persisted. The topic was explored in depth Monday at the National Association of College and University Business Officers annual meeting. A panel offered different perspectives from leaders who have guided their institutions through completed mergers within a university system, one whose private institution was absorbed by a much larger public university, and one whose public university decided not to go forward with acquiring a private college.

Their general consensus was that mergers are extremely difficult, but they are likely to take place in increasing numbers in the future. That means high risks and high potential rewards.

“Trustees don't know how to manage this; university administrators don't know how to manage this,” said Allen Morrison, chief executive officer and director general of the Thunderbird School of Global Management, which in 2014 agreed to become a part of Arizona State University after a controversial deal that would have had it acquired by the for-profit Laureate Education chain fell through.

“And yet it is happening and it needs to happen,” continued Morrison, who joined Thunderbird in late 2014 when the deal with Arizona State was finalized. “If it is managed properly, it can be incredibly positive for all the parties involved. But if it just is left to fumble along, we're going to have some real serious issues.”

The NACUBO panel spoke days after Inside Higher Ed released its annual Survey of College and University Business Officers, finding some interest in mergers but skepticism that they will actually happen. One in eight chief business officers said senior administrators at their institutions had serious internal discussions about merging with another college or university in the last year. But about nine in 10 said mergers were not likely.

Monday's panel discussion started with an overview of trends that seem to point to more mergers in the future than have happened in the past, however. Pressure from falling enrollments is building on small institutions with fewer than 1,000 students, said Kasia Lundy, managing director of Parthenon-EY, a consulting firm within Ernst & Young. The number of U.S. higher education transactions in the mergers and acquisitions category has gone from 12 in the 2000s to 22 between 2010 and 2017, she said.

“We are now on track, I think, to have three times as many mergers in this decade as we had in the previous decade,” she said.

Reasons for institutions to merge are many. They can save money by becoming larger organizations. Large institutions might want to acquire smaller ones if it adds to the depth or breadth of their operations. Merging into larger institutions can also give small colleges the protection of a better-known brand name or additional institutional resources with which to improve their performance.

Panelists warned that the merger process is extremely long. Leaders can expect it to take between one and three years. And if they perform proper due diligence, they might find that, despite the time and energy invested in a deal, the best move is to walk away.

Salem State University made the decision to walk away from a merger it had been exploring with Montserrat College of Art in 2015. Leaders said at the time that the numbers “just didn't work.”

Karen House, the vice president for finance and business at Salem State, did not elaborate Monday on the public university's reasons for not acquiring the private art college. She said the deal was attractive because the art college drew more students from out of state than did Salem State and because of its quality programs. Leaders also wanted the art college to succeed for the sake of their shared region in Massachusetts.

Salem State leaders looked at the corporate world and at other cases in higher education to try to find a template for evaluating and carrying out a merger, House said. They found little that was applicable because of the lack of historic M&A action in higher education and because the for-profit world is very different. As a result, university leaders in many ways created their own process and learned lessons from it.

For example, they did not identify a set of criteria they would use to make their decision early in the evaluation process, House said. Laying out the factors that would lead them to say yes or no to a deal at an early date would have made the entire evaluation more efficient, she said.

The process included a steering committee with top leaders from both institutions, as well as two trustees from each side. The committee met regularly to exchange information. It eventually was led by a part-time project manager, and the sides evaluated seven years’ worth of financial statements.

Trustees played a critical role in the final decision. Administrators had invested enough time and energy in the prospective deal that they had a difficult time evaluating it. Trustees supported the idea but also challenged administrators to prove it was the right move.

“They were aware there was this really immediate desire to get to yes,” House said. “At one point they said, and it was a caution, ‘Be careful that the vortex of the deal doesn’t draw you in. You really need to make the right decision for the right reasons.’”

The University System of Georgia, on the other hand, has completed a dizzying number of mergers between its institutions. In 2010 it had 35 institutions, including roughly 10 in parts of the state where the population of 15- to 24-year-olds was projected to decline. So the system embarked on a series of mergers that had it combining administrations -- but not closing campuses. It has 28 institutions today and expects to be down to 26 in January, said Chancellor Steve Wrigley.

The system has proceeded with the clear goal of serving students better, Wrigley said. That meant asking how to meet students' needs and raise attainment levels -- questions that conflict with the impulse some state systems feel to protect local interests.

“Those are different questions than how do we protect our institutions,” Wrigley said. “And you get very different answers about policies and budget decisions and allocations and directions when you ask those kinds of questions.”

It wasn't easy, of course. When the university system pursued its first set of four mergers, it laid out an aggressive timeline of consolidating institutions within 18 months so that it could meet accreditor timelines and federal financial aid deadlines.

Challenges included identity issues on campuses and consolidating student populations with different levels of college readiness, said Shelley Nickel, the university system's executive vice chancellor for strategy and fiscal affairs. Blending institutional missions and culture was also difficult.

“This does not happen in 18 months, believe me,” Nickel said. “That's something that goes on for years and years.”

Officials estimate the university system has saved $24 million through its consolidations. They say the money has been redirected to student success initiatives, like advising, in order to try to raise retention and graduation rates.

Ultimately, Nickel said, every consolidation is different. Leaders learn something new with each set of institutions they consolidate. They have learned to have certain details in place when announcing a consolidation -- including the new institution's name and its president. Another lesson is that transparency through the process is key.

“These are people's lives that you're dealing with,” Nickel said. “They want to know where they're going to end up on the org chart, and you need to think about that in the decisions that you make.”

Morrison, of Thunderbird, recommended engaging a broad group of stakeholders during the merger process. Alumni are an important part of an institution. So are donors. It's a leadership challenge, he said.

“The consequence of these things will be highly impactful,” he said. “It impacts things like the endowment -- what do you do about the endowment -- and you have people who have given the institution often millions and millions of dollars that have buildings named after them. How do you engage them in this discussion?”