Chapter 5: Mergers and Acquisitions in Higher Education: Is There an Opportunity to Build Competitive Advantage, Collective Strength, and Mission Focus?
Posted on December 11, 2019Download as a PDF
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Higher education is in an unprecedented place in its history; competition has never been more intense for an increasingly smaller traditional student population, and many institutions now offer online programs and cater to adult and part-time students, not to mention the existence of corporate universities, continued for-profit participation in the industry, government regulations, and the often negative misperception too many have from the media concerning the value of a degree given the rising costs.
These realities are all contributing to the intense pressure on colleges and universities as higher education businesses. If that long and complex opening sentence were not daunting enough, my purpose in writing this very short paper is to provide a bit of forage for presidents to consider with regard to cross-institutional discussions and perhaps at least thinking about matters as heady as mergers or consolidations. It is my view that all institutions have gifts that they bring to the table that are valuable and can be complementary to other institutions in many contexts. Would it not be amazing if we could align these complementary strengths for the mutual benefit our institutions, higher education, and most importantly for students?
Thomas Friedman, author of The World is Flat2, wrote that America has the right stuff to thrive. “We still have the most creative, diverse, innovative culture and open society—in a world where the ability to imagine and generate new ideas with speed and to implement them through global collaboration is the most important competitive advantage.” This optimistic statement applies equally well to American higher education, even in the current era of dramatic change. While there are clearly challenges remaining and they will likely be long-term, we have as an industry definitively moved from a craft-oriented 17th century model of delivery to one that now includes a dizzying number of technologically mediated delivery platforms for people to learn and document that they have learned, from online programs to prior learning approaches to massive online self-paced courses to blended curricula delivery models of all variations.
The accomplishment of American higher education is not the result of only individual institutional efforts and undertakings.
Not only does American higher education represent one of the few sectors of the economy with a favorable international trade balance, but we have the “finest universities” that are able to produce a high proportion of the most important knowledge and educate people in our dynamic society and for global work2. The accomplishment of American higher education is not the result of only individual institutional efforts and undertakings. It is the result of the sum total of efforts by governments at the federal and state levels, by founding religious orders in some cases or industrialists in others who had the ambition to start our colleges and universities. It is also the result of literally hundreds of thousands of faculty and staff over many decades working to make it work. Throughout the history of higher education, we have paid attention to each other’s successes, worked together in many cases, and have collaborated in effective ways, although our contemporary super competitive world may not feel quite that way.
Faith-based institutions of higher education like mine have beliefs, values, practices, and world views that have never been more needed in the world we live in. That is not to say that large public universities, elite and exclusive institutions, as well as other private and public institutions or community colleges do not also have their niches and contributions to make. All of us serve students in unique ways. However, we should now assess whether the current model of over 4,300 institutions of higher education3 well serves the need and whether we should consider a new evolution of higher education that is both localized but perhaps coordinated as educational businesses in regions, by sectors or in other ways to accomplish the goals of improved quality, stronger support services, and reduced costs.
Every single college and university has to meet the market and economic realities of the current world and particularly with respect to the demographic shifts that have been occurring in the United States. That is, the population of traditional college students in many parts of the country is declining, creating intense competition among institutions for that group of students. It is also the case that many more institutions offer online programs for adult students given that group can replace traditional students to some extent. In addition, there is a broadening competition for international students to meet the enrollment needs. There are also challenges associated with the costs of higher education given regulations, the costs of offering a quality education, and marketing in a competitive environment. The addition of “free college” models such as in New York or Tennessee and which many political candidates in the 2020 presidential cycle are urging us to consider is influencing change in higher education. Online degrees and other forms of delivery (e.g., MOOCs, competency degrees, etc.) all challenge more traditional institutions’ business operations (e.g., marketing, IT systems, etc.).
Indeed, smaller institutions are in many ways increasingly less able to be at, or to create, a large enough scale of business-side operations to provide the high-quality services needed to best compete for students given the complexity of delivery and marketing today. Many institutions are struggling to support complex contemporary information technology systems, learning management systems for online delivery, and the digital recruitment environment and simply do not have the advantages or larger scale business office systems (HR, risk assessment, legal, etc.), and they often do not have in general far-reaching and regional or national marketing and admissions abilities or other necessary support operations to be as competitive as possible. Small institutions simply do not compete in these areas in the complex industry that is higher education today. While many of these same higher education institutions excel at the educational aspects of their missions, have strong faculty, and are excellent at demonstrating their founder’s values and charisms to their students, too many are simply not competing successfully as higher education business entities, and it is unlikely that the forces they confront will ease or disappear in the near or long term.
Why Mergers and Acquisitions?
Many understand mergers and acquisitions as something for-profit companies engage in to increase shareholder value, grow profits, consolidate operations, and improve services, products, and value for consumers. Oftentimes business mergers involve a strong company taking over a weaker one. The fact is that many mergers and acquisitions in business are quite amicable and strengthen both organizations. Certainly that is not always the result, and the largest challenge in mergers appears to be the merging of cultures rather than the business operations themselves.
The fact is that many mergers and acquisitions in business are quite amicable and strengthen both organizations.
There is no question that mergers or acquisitions may also be undertaken by not-for-profit organizations, including universities, as a way to enhance educational services provided to the market, to extend limited resources, and to leverage assets, including good will. Although non-profit and university mergers have not been widely undertaken in the past, the number of not-for-profits considering such an undertaking is increasing.4 Clearly, mergers and acquisitions (M&A) are much more common in the nonprofit world than most would think, as one study of 3,300 deals across four states over 11 years shows.5 The key difference with non-profit mergers is that they are accomplished typically with no acquisition costs and as such the issue of valuation is often considered in a different way than it is in the for-profit business situation. It is more typical for non-profit mergers to come about through default—due to financial distress, market competition or leadership changes.
It is quite clear in higher education that relatively few universities are using M&A strategically as a way to strengthen organizational effectiveness, spread best practices, expand reach, and to do all of this more cost effectively as well as for financial returns. There are higher education acquisitions, and this has been true for a number of years, but these tend to be one-off situations between two institutions coming together rather than based on a larger strategy of adding several acquired institutions.6
There are indeed barriers that need to be overcome in M&A in higher education. For one, there are no financial incentives driving these arrangements as there are in the for-profit arena, and that situation is unlikely to change. In addition, institutional leadership is less directly motivated to make changes given that one side or the other may lose their positions or overall control. Boards of colleges and universities, while commonly populated with business people, are reluctant to consider M&A as a strategy rather than as a last resort. There are certainly costs associated, such as legal matters, accreditation—no small hurdle depending on the region—and other logistics associated with acquiring other universities. Unfortunately, research on nonprofit M&A tends to be based on experience with individual transactions and qualitative data rather than quantitative studies.
Colleges and universities should consider M&A for various reasons. We should do so as a way to increase our market advantages, further improve our economies of scale, diversify our risks, capture a greater market share, or reduce overall costs, and most importantly to increase net revenue and collectively better serve students. Working together, the merged institutions can expand operations to another market they currently do not have easy access to without partnership. The acquired college or university already has its own personnel, a brand name, and other intangible assets, which could help to ensure that the new merged institution will start off in a new market with a solid base.
Working together, the merged institutions can expand operations to another market they currently do not have easy access to without partnership.
“The notion of an individual ‘a-ha’ moment is as old as Newton's apple, yet experience tells us that collaboration is actually the driving force for most innovation.”7 That is certainly true in higher education as it is in other industries. Amazing university systems in the United States like Penn State or Indiana University or the SUNY system have been built on the basis of collaboration and hard and continuing work. This could work in mergers and acquisitions as well.
In the end, we need to find the time to cooperate, work together, and collaborate for the good of our individual institutions and students and in some cases to merge or even be acquired. The more successful we are, the more we can contribute to our communities. There are impediments to our cooperating with one another that must be overcome. Working together to take advantage of our collective abilities to cooperate, collaborate, and coordinate will need us to summon the will to do so and a vision to see the benefits. What should give us all hope for the future is that we are very adept and adaptable institutions. Mergers or even acquisitions can be accomplished in such a way as to maintain the individual identities of the institutions and their missions and names while they strengthen their business operations in admissions, information technology, human resources, and any number of other functions. This is a path that many in business have pursued to great advantage, and it is at least worth consideration in higher education. Last, there is no reason that merged or acquired institutions cannot thrive, using their name and unique approaches as a member of a larger, stronger institution or consortium.
1 Friedman, Thomas L., 2006. The World is Flat: A Brief History of the Twenty-first Century. Farrar, Strauss and Giroux: New York.
2 Cole, J.R., 2009. The Great American University: Its Rise to Preeminence, Its Indispensable National Role, and Why it Must Be Protected, Perseus Books Group: New York.
3 See that National Center for Educational Statistics table 317.10 at https://nces.ed.gov/programs/digest/d17/tables/dt17_317.10.asp downloaded on June 23, 2019.
4 See http://www.lehmannstrobel.com/articles/mergers-and-acquisitions-nonprofit-style/ downloaded on April 26, 2019.
5 See https://www.bridgespan.org/insights/library/mergers-and-collaborations/nonprofit-mergers-and-acquisitions-more-than-a-too downloaded on April 26, 2019.
6 See https://www.insidehighered.com/news/2017/08/01/higher-ed-mergers-are-difficult-likely-grow-popularity-speakers-say downloaded on April 26, 2019.
7 Burns, B., and Crow, M., 2015. Innovating Together: Collaboration as a Driving Force to Improve Student Success. EDUCAUSE Review, March 2.