The Paradox of Higher Ed M&A

Interest in mergers and acquisitions has grown among institutional leaders and board members over the past few years. While we might characterize this as “nontraditional” strategic thinking, it is to be encouraged: industrywide change is afoot, and leaders are appropriately asking how to position their institutions for success in the coming decades. M&A could be one such avenue.

But the interest in growth by M&A has also been fueled, at least in part, by a narrative of Darwinian inevitability that has become commonplace among higher ed industry prognosticators: as financial, demographic and other headwinds continue to increase for colleges and universities, the operating model will become unsustainable for many small and regional institutions, so the argument goes. These forces, the prognosticators say, will lead to the absorption of these small institutions into larger, more sustainable universities or systems through mergers and acquisitions, lest they risk disappearing altogether. The weak will be gobbled up by strong institutions hungry for growth.

As evidence, these prognosticators often cite a recent uptick in higher ed M&A activity. While there is broad agreement that the number of these transactions has increased in the past few years, the reported frequency is often overstated, and credible data are hard to come by. Some commentators elide categories by grouping transactions between higher education institutions along with mergers involving private companies serving the higher ed industry; the latter occurs far more frequently. Other market observers will note that the total number of institutions federally reported in the Integrated Postsecondary Education Data System has declined by more than 500 in recent years. But this figure captures both mergers and closures, which obscures the reality of institutional behavior: unlike a closure, a merger takes two. Furthermore, many of the disappearing institutions are small for-profits and not traditional colleges and universities.

The blurring of lines between mergers and closures is telling: the inevitability of an impending M&A spike relies on the implicit premise that there will be a significant cohort of M&A-ready universities standing by to absorb colleges bound for closure. The evidence does suggest that some small institutions may be on a path toward increasing instability and insolvency—but how many will actually find a willing and healthy partner to offer them an M&A lifeline?

In the past few years, my colleagues and I have heard from a growing number of what we might call “M&A-curious” institutional leaders, particularly on the prospective-buyer side of these transactions. These leaders come armed with strategic plans and board directives to expand their institutions’ enrollment or academic portfolio, and they are interested in exploring how they might achieve these ambitions through inorganic channels—i.e., through acquisition.

In reality, when presented with the profiles of struggling institutions, most M&A-curious leaders balk. It is not hard to understand why. Institutions that have reached the point of seeking acquisition are often facing operating losses, significant debt, negative enrollment trends, poor facilities conditions and/or regulatory noncompliance. The M&A-curious leaders tend to reach the conclusion that the headaches of a potential acquisition outweigh the potential benefits. (A version of this dynamic seems to have played out in the public eye this past week, as the San Francisco Art Institute announced plans to cease operations after merger talks with the University of San Francisco collapsed.) This is the paradox of higher ed M&A: the same factors that make an institution available for acquisition generally make it unattractive to many potential acquirers.

For every successful higher ed merger or acquisition, there is significantly more window-shopping. Some M&A explorations fall apart after thoughtful analysis: academic programs may be misaligned or the finances may not work despite good-faith negotiations. But in other cases, deals fall apart because of queasiness: no one at the acquiring institution is motivated to navigate the complexity required. By failing to realistically weigh the true costs and benefits of an alliance on the front end, the window-shoppers in these latter cases waste scarce time and energy.

Of course, even in the corporate sector, many more M&A transactions are surely explored than executed. But in the corporate sector, the paradox does not apply: companies are often targeted for acquisition because of their attractive features, such as innovative products and sharp growth trajectories. In higher ed, acquisitions rarely occur unless the smaller institution is struggling and has few other options. This distinction may explain why some board members— veterans of corporate M&A—find themselves disillusioned by the options available to their university.

Given this paradox, we are faced with a reality in which the challenges of the next decade, in combination with the reluctance of larger institutions to absorb smaller ones, could yield more closures than mergers. This would be an unfortunate outcome for the students, faculty, staff and broader communities of struggling institutions.

What must change to subvert the paradox and convert the window-shoppers into dealmakers?

First, the category of higher ed M&A must be reframed as a mission-oriented activity. The very term “M&A” strikes many in higher ed as evidence of the intrusion of the corporate and financial sectors into academia. But this doesn’t reflect the reality. The institutions with challenges that push them to seek an acquirer often serve populations with tenuous access to higher education. Had the University of Tennessee system not acquired struggling Martin Methodist College in 2021, for example, the state of Tennessee would have risked a future without a healthy, public four-year college in the approximately 300-mile region along Tennessee’s southern border between Memphis and Chattanooga. (Disclaimer: I was a member of the Huron team hired by the UT system to conduct third-party due diligence on this acquisition.)

Through this lens, larger institutions in the state and region— particularly but not exclusively publics— have a mission-driven imperative to preserve access. But most successful deals are not acts of pure beneficence. To be sure, the MMC acquisition was a win for both the citizens of southern middle Tennessee and for the stakeholders of Martin Methodist College. But it was also a strategic win for the UT system. Some public universities in Northern Alabama had begun offering in-state tuition to students from Tennessee border counties. The MMC acquisition was in part a competitive maneuver to keep those students in state and to turn around negative degree-completion trends in essential fields like teaching and nursing.

The key to breaking the cycle of window-shopping is to find similar win-win-wins among institutions with compatible aims. One common formula will involve geographic expansion for the acquirer, enhanced college access for communities and a preserved legacy for the acquired. By recalibrating expectations and seeking win-win-wins along these lines, the higher ed M&A ecosystem will become healthier for sellers and acquirers alike.