University Mergers: When Partnership Language Meets Business Reality
University mergers are no longer rare events—they’re becoming one of the only remaining strategies for leaders trying to preserve mission, protect students, and avoid closure. As the growing number of higher education institutions struggle financially and the number of institutions closing increases, institutional partnerships —events referred to in the corporate world as “mergers and acquisitions” (or simply “M&A”) —are becoming more commonplace. And like the corporate world, the expertise needed to successfully consummate such a transaction is highly specialized.
Will Higher Education Come Back from the Current Decline?
Higher education is in what is known in business-speak as a mature-to-declining market, i.e., there is more capacity (seats in classrooms) than demand (students). As such, traditional post-secondary institutions are facing significant headwinds that will worsen because of three things:
Competition – Too many higher ed institutions are competing for the same pool of students.
Demographic cliff – The pool of traditional-age students is and will continue to decrease for a decade or more.
Cost – The cost of a college education continues to rise and, for many students, requires incurring burdensome debt.
The Rising Importance of University Mergers in Declining Markets
Given this overcapacity, mergers are becoming more and more important in the industry. Let’s briefly take a look at the various types of mergers.
Mergers (or what is euphemistically called partnerships) among higher education institutions involve the strategic collaboration between two or more institutions for mutually beneficial outcomes. They can take various forms, including acquisition or consolidation.
- Acquisition involves one institution absorbing another, allowing the acquiring university to expand its offerings and student base while eliminating duplicate roles and services.
- Consolidation occurs when two or more universities combine to form a new entity, sharing resources and reducing redundancies to enhance overall efficiency (think PASSHE).
Unfortunately, there is one other possible outcome, one that most institutions do not want to consider: the institution closing, either abruptly or gracefully. This outcome occurs when an institution has fulfilled its mission and is past its time to continue serving students. Basically, this institution is not going to make it, and it will shut its doors. However, its responsibilities do not end at the time they declare they are closing – their students need to be “taught out,” and the staff and faculty need sufficient time to find new employment (if possible).
Market Pressures Lead to Unique Opportunities for Inorganic Growth
Declining markets provide unique opportunities for inorganic growth for those institutions in stronger financial positions. These institutions can expand their footprint by acquiring new locations, students, and programs at costs less than if they were to attempt to grow these organically.
However, there are opportunities for both sellers and buyers in this type of market, and we will explore both sides of this equation – buy-side and sell-side.
When Should a University Consider a Sell-Side Merger
Viewing higher education through a business lens underscores the need for sustainable operations – i.e., revenue must exceed expenses. In a mature to declining market characterized by oversupply and reduced demand, there is only so much that cost-cutting can do to right the ship. Sometimes, institutions must pursue other options.
In this buyer’s market, institutions that survived only with federal aid during COVID-19 and forestalled the inevitable reckoning must now confront the need to partner with a more financially-viable institution.
Generally, the #1 reason for a university considering a sell-side merger is financial pressures brought on by burdensome debt. Declining enrollment and expenses outpacing revenues also add to the above.
If you are faced with this situation, it is crucial not to delay action; once an institution is in a significant decline that it cannot reverse, finding a suitable partner becomes significantly more challenging. Early identification of negative financial trends and prompt exploration of potential strategic partnerships can mitigate these risks effectively and enable the institution to survive in some form or fashion.
Thorough preparation is essential for a successful partnership when a university decides to sell. This includes:
- Conducting a comprehensive financial audit to evaluate assets, liabilities, revenue streams, and overall financial stability, providing a clear picture to potential buyers.
This can (should) be done by your CFO or auditor, but many institutions bring in an outside firm that specializes in financial consulting to do a deep dive into the financial health of their institution.
- Evaluating the strength of academic programs, faculty qualifications, and institutional reputation is equally important, as it highlights both strengths and areas for improvement.
Some institutions attempt to do this using provost office resources, but smart institutions bring in an outside firm that specializes in academic affairs or academic realignment to do an objective deep dive into the academic health of their institution.
- Finally, understanding the institution’s cultural readiness for change and assessing alignment with potential buyers is also vital, ensuring a smoother transition and enhancing merger success.
Inorganic Growth through Buy-Side Mergers
Institutions that would like to pursue inorganic growth through buy-side mergers can capitalize on acquiring struggling institutions to boost student enrollment, enrich program offerings, capitalize on faculty and research expertise, and streamline operations for cost efficiency.
But caveat emptor (let the buyer beware): How far “gone” is the potential acquiree, i.e., how much debt are they carrying, how much in deferred maintenance must they take on with the buildings and facilities, and is the number of students and new programs that the acquiring institution will gain worth the outlay of capital? These are all important considerations when selecting a potential acquisition partner.
Considerations for Buy-Side Institutions
When considering a university buy-side merger, the acquiring institution must carefully evaluate strategic alignment, financial stability, and cultural compatibility to ensure a successful and beneficial partnership that enhances academic programs and strengthens institutional resilience.
An institution pursuing an acquisition should clearly define its strategic goals, whether it be to add new academic programs, increase student enrollment, expand geographic reach, or enhance research capabilities. Like an institution’s mission statement, this purpose should guide the evaluation process, ensuring alignment with long-term objectives. Beyond academic considerations, buyers must assess the target institution’s physical and technological infrastructure.
Ultimately, successful acquisitions hinge on strategic alignment, financial stability, cultural compatibility, and regulatory compliance. These factors collectively determine the feasibility and success of the merger.
Evaluating Strategic Alignment Between Institutions
There are multiple factors that go into strategic alignment; they include:
- Mission and Vision: The alignment of missions and visions between institutions is paramount. Acquirers should ensure that the core values, goals, and long-term visions of both institutions are compatible. This alignment helps create a unified direction and purpose post-merger, facilitating a smoother integration process.
- Complementary Strengths: Look for academic programs and resources that complement and enhance the acquiring institution’s offerings. Identifying strengths in areas where the buyer may be lacking can provide significant strategic advantages. For instance, if the acquiring institution is a research-intensive institution. Acquiring a teaching-focused university can strengthen its teaching capabilities.
- Financial Processes and Stability: Assessing the financial processes and health of the target institution is crucial. Buyers should conduct a thorough financial audit to understand the target’s assets, liabilities, revenue streams, and potential financial risks. Fully understanding an institution’s financial picture helps prevent unexpected liabilities and potential trust issues and supports a sustainable merger.
- Cultural Compatibility: One of the most overlooked factors in evaluating strategic alignment is cultural compatibility. Institutional cultures, including administrative practices, faculty values, and student experiences, are essential. A cultural mismatch can lead to significant challenges and disruptions. Therefore, understanding and addressing cultural differences early in the merger process is vital.
Preparing for Post-Merger Integration
Once the “deal” is done (or at least agreed upon), what is arguably the most difficult phase of any acquisition is the post-merger integration.
Many institutions and their consulting partners have a “cookbook,” a step-by-step process for integration. Anyone who tells you that an integration follows a neat checklist hasn’t been through an integration!
Preparing an institution for a merger is not a simple task. It requires meticulous attention to detail and a thorough understanding of the institution’s operations. Universities should consider leveraging the expertise of partners and consultants who specialize in mergers and acquisitions in the higher education sector. These professionals can provide valuable guidance and support, ensuring that the institution is well-prepared and positioned for a successful sale.
Regardless of the circumstance, timing is everything; institutions with significant debt must act swiftly to avoid burdening potential buyers with excessive liabilities. Preparing for a sale involves understanding financial health, ensuring quality, and considering cultural compatibility to facilitate a successful merger.
Documentation and Due Diligence
Gathering all necessary documents and conducting due diligence are essential steps in a merger, with a focus on compiling comprehensive financial records. Accurate financial documentation is required for informing potential buyers’ decisions.
It’s also important to ensure that all accreditation reports and related documentation are current and readily available, demonstrating the institution’s adherence to required standards and quality. Clear and well-documented strategic plans outlining the institution’s goals, objectives, and future direction provide potential buyers with insights into growth potential and strategic initiatives, enhancing understanding and decision-making during the merger process.
Accreditation and Regulatory Compliance
Accreditation status reflects the quality and credibility of the institution. Acquirers must review accreditation reports and verify compliance with all relevant requirements to avoid legal and operational complications. Understanding what is there and if / how it can be remedied is important. particularly given the Department of Education’s more recent changes. In short, university mergers and acquisitions are now even more difficult.
7 Key Stages in the University Merger Process
Navigating the university merger process involves seven defining stages that demand careful planning and execution. For institutions considering this path, understanding these steps is essential for a successful transition.
There are multiple steps that institutions have taken to ensure success in their merger, these include:
- Establishing a merger team that includes representatives from both institutions and external experts to oversee the integration of the two institutions
- Setting clear goals for the transaction, like expanding academic programs or enhancing research capabilities
- Negotiating key terms such as governance and finances
- Securing legal and regulatory approvals
- Developing a detailed transition plan for operations and administration
- Maintaining transparent communication with stakeholders
- Continuously monitoring progress to ensure alignment with goals and community trust
We provide a primer on merging institutions in previous articles:
- Merging Higher Education Institutions Part 1: A Smart Strategy? | Transformation, myths, and barriers
- Merging Higher Ed Institutions Part 2: A Smart Strategy? What would make a merger a smart strategy?
Final Thoughts
University mergers are complex and require strategic alignment, meticulous planning, and artful alignment processes. However, if properly managed, they can yield a highly beneficial process for both parties.
Will these headwinds subside? Yes, but it will require a change in the higher education model to ensure that more higher ed institutions are successful.
Encouragingly, successful mergers, like the consolidation within PASSHE, showcase the potential for enhanced academic offerings, financial sustainability, and long-term growth. For those considering a merger, the key is to start the conversation early, conduct thorough due diligence, and seek strategic partnerships that complement and enhance their strengths.
If your institution is beginning to evaluate its options, it may be time to assess readiness, examine long-term risks, and explore whether a strategic alliance or merger could support your mission. We’re available to support that process with the perspective, structure, and discretion it requires—including support for post-merger integration when the time comes.
