To briefly recap, the landscape in higher education continues to be rocked by change, including 1200+ closures (the majority of which were for-profits), mergers, and mega-mergers. These massive changes have been driven by changing demographics and a booming economy. Another factor is the declining number of students attending college; for the first time since the Great Recession, the number of students attending college has dropped to below 18 million.
As Jack Welch, the former Chair and CEO of GE, once said, “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.”
Higher education leaders need to embrace new ways of thinking, including mergers. In the second part of a blog series, we want to offer some thoughts to help guide a merger.
As most leaders know, a merger involves combining two or more entities into a new entity. It can take the form of one institution purchasing one or more organizations or a joining of “equals” (although in truth, rarely is there a merger of equals, regardless of whether it is stated as such or not).
Mergers are an emerging area for higher education, and it’s critical when considering a merger (either as the lead organization or one being added) to take a strategic long-term approach.
Here are some of the reasons why you should consider a merger:
Why would an institution consider a merger? For institutions that are doing well (and often take the leadership role in this agreement), a merger can help them extend their brand and transform their institution. That’s especially important in this turbulent environment when many institutions are focused on surviving the impending demographic cliff for traditional students and facing an economic vice. By identifying a potential institution with which to merge, a lead instruction can take proactive steps by adding important infrastructure (such as online capacity), a student body and access to more potential candidates, proven programs and a talented faculty. These additions can help the institution broaden its scope as well as reinvent itself as a leading-edge institution.
Obviously, institutions that serve as the other partners of a merger benefit from these types of arrangements. These institutions, which may be experiencing incremental growth, be at a standstill or be struggling, can gain through being elevated in ways that other efforts cannot. In these cases, the merger offers a fast-track elevation to a different level. A merger allows these institutions to emphasize their strengths while also eliminating inefficiencies. A merger also can mean that these institutions can learn from the partnering organization, which may be better in many specific areas.
How to successfully lead a merger
Here are some suggestions to help your institution successfully move through the merger process:
- Retain capable advisors who have experience in mergers and acquisitions. Outside qualified expertise can help you ensure that your institution handles all the necessary analysis and requirements – both financially and culturally — to successfully work through the merger process. This is one of the most critical steps in the merger process, and both parties need to be very clear on why you want to merge before even considering moving forward.
- Maintain a balanced perspective throughout the process. Avoid being emotional, whether those are feelings of excitement or frustration. As a leader, you set the tone for faculty and staff as your institution goes through the process. It will be easier for everyone if the overriding atmosphere is even-keeled.
- Carefully consider various offers. Don’t jump at the first offer to merge and don’t hold out when you have a good offer in hopes of a marginally better proposal.
- Use the market to determine your institution’s valuation. Know when your position is weak or strong.
Not surprisingly, a successful merger requires a significant amount of analysis prior to the finalization of the merger. Therefore, it’s important to delve deeply into key factors, which include:
- Why are you merging the institutions? What are the benefits of a merger to your organization? To the other organization(s)?
- Are there synergies to be realized? Is there duplication that needs to be eliminated?
- What programs will be retained?
- What does the org chart look like going forward?
- What does the board look like?
- How will you deal with employees and programs that are deemed to be “excess”?
- What is the historical and projected performance? What are the trends for each institutions’ historical financial performance? What is the institutions’ projected financial growth?
- Are there differences in institutional culture between the two organizations? Do the two cultures lend themselves to a merger? If not, would it be worth the efforts needed to bring them together?
- If a for-profit university is one of the merger “partners”:
- What was the valuation used in your institution’s last round of financing? What was the institution’s most recent 409A valuation (appraisal of the fair market value of the for-profit institution’s common stock)?
- What were the prices paid in recent sales of shares by employees and early stage-investors of for-profit institutions?
Leaders in mergers
The Change Leader also encourages leaders to be attentive to the following when considering merging with another institution:
- Move from a position of strength, not desperation. Focus your energy on differentiation. It can take many forms, in particular the pedagogical foundation and manner in which learning is delivered. Colleges that offer students the same kind of education they can get at many other institutions will be among the first to fail.
- Consider the continuum of collaboration options. These can include shared services, collaborations, partnerships, mergers or acquisitions.
- Look for complementary partners, not just similar ones. For example, your institution may have a strength in a specific area. If you can find another institution that offers a complimentary strength, this might be an ideal way to extend your educational reach to appeal to more students. Philadelphia University and Thomas Jefferson University successfully used this approach to create a merger. Each enrolled about 3,700 students; however, these institutions had only two academic programs in common. By completing a merger, the institutions were able to work together to create value by offering more academic options, while keeping every major that existed at each institution. This type of merger also did not result in the elimination of any faculty or staff positions, although some individuals were reassigned to different roles.
- Seek solutions that work for your community of scholars. Proximity may be a plus, but geography needn’t be a limiting factor in these networking times. For example, Jefferson, which was the lead institution in the merger, now has two main campuses located seven miles apart in Philadelphia, plus other national and international sites. This arrangement is not as easy as being housed in one location, but the benefits include offering both urban and suburban experiences for students.
- Be as transparent as possible; engage faculty early on. Not everyone is going to be on board, but frequent communication is essential — with faculty, staff members and students, as well as with alumni, donors, elected officials, industry partners, and other audiences. Philadelphia and Jefferson communicated honestly and regularly about the various aspects of the merger, creating trust in the process and encouraging early buy-in by faculty on both campuses.
- Be prepared for accreditation challenges. Accreditors may work slowly in giving approval to a merger. This actually can be a benefit because institutional leaders will be able to sort out issues that could otherwise be problematic. Furthermore, institutions need to expect to work with a variety of accrediting stakeholders. For example, Philadelphia and Thomas Jefferson had to meet the standards of more than 30 agencies throughout the merger process. These entities included the Middle States Commission of Higher Education, U.S. Department of Education and the National Collegiate Athletic Association.
- Refocus recruitment efforts during the transition. Mergers can create confusion in the marketplace. To combat this possibility, Philadelphia and Thomas Jefferson used sophisticated market research and positioned the merger to differentiate the Jefferson experience from those at similar colleges. Additionally, the institutions faced recruiting issues for the fall 2017 class because the name of the combined university had not been determined. Additional training was given to student hosts so they could discuss the merger during campus tours.
In merging institutions, leaders also need to strive to create a clearly structured culture. Institutions should start this process prior to closing the deal so that cultural integration can begin. This effort needs to begin at the top, actively include faculty and staff, and cover both organizations that will merge. This can be accomplished through:
- Finding ways to hard-wire and support change. At the top of the list is aligning the top leader around the planned cultural direction so they can model what is expected. In addition, a fact-based and common language needs to be created while at the same time the leaders need to gain insight into existing cultures by recognizing similarities, differences where friction can happen and joint opportunities. It’s also important to measure cultural integration during and after the integration through tracking metrics on retention, productivity and employee satisfaction.
- Diagnosing how the work gets done. By understanding the current workflow at each institution –as well as the ideal workflow at a common institution—processes can be put into place so that the merger allows a seamless integration of these workflows.
- Setting priorities of what needs to happen first. Set the cultural direction early and use it to support the deal’s goals. Focus on the cultural elements that drive economic value and tailor an approach that integrates them. Deliver a clear and coherent program that is woven into normal integration activities, including the realization that true behavioral change requires both rational and emotional intervention throughout the system. Cultural programs need to be woven into all integration initiatives and leaders need to hard-wire the desired culture into the new institution’s operating model.
Mergers are increasingly going to be a part of higher education’s landscape based on the nation’s rapidly changing demographics and economics. However, in order to succeed, these agreements need to be done in a manner that is well thought-out, i.e., with great attention to due diligence prior to the moving forward, and meticulous attention to detail / project management leading up to and during the actual event.
The leaders of these institutions need to be at the top of their game – they must forge an agreement and then lead the integration of the institutions’ programs, faculty/staff and students in a way that leads to transformational change for the new entity.
A merger’s success requires focused analysis, outside assistance, patience and a commitment to creating a shared culture. The process also needs to include faculty and employee involvement, consistent and honest communication, a flexible but well-thought-out timetable, and an evaluation of the work of the institutions that will be merged.
When done right, mergers can help institutions extend their reach so they are positioned to not just survive, but to thrive in today’s turbulent environment.