Avoiding the Trap of Too Little Too Late

The challenges facing higher education are well understood: a demographic cliff of traditional-aged applicants, a declining proportion of full-pay families, and a growing skepticism of the value of (ever-more) expensive post-secondary degrees with resulting student consumerism. Add to this rapidly rising technological complexity, deferred maintenance on deteriorating physical assets, escalating administrative costs associated with student services and supports, and a burgeoning array of college substitutes, and the challenges are clear. The combination of lower tuition revenue and higher costs points toward an inevitable sector consolidation. And while many college administrators will readily acknowledge this point in the abstract, few will consider that it might apply to them.

The denial is so pronounced that there seem to be as many recent examples of institutions waiting too long to merge as there are examples of successful mergers. Too little, too late has become too common in higher education and yet the number of failures continues to grow. In July, Inside HigherEd reported the story of the well-respected San Francisco Art Institute’s (SFAI) inability to secure a deal with the University of San Francisco (USF). Despite a signed letter of intent and five months of due diligence, USF announced to SFAI and the world that the deal was “not feasible due to financial and other considerations” – code for the sad reality that SFAI’s liabilities had become too extensive and expensive for the USF trustees to responsibly absorb.

But while times are tough for higher education (and art programs in particular), this closure was not inevitable. In fact, USF signaled its intent to begin the process of seeking accreditation for fine arts degrees once the deal was pronounced dead – itself a time-consuming and expensive process, if not as expensive as absorbing SFAI’s liabilities. USF could have provided economies of scale that might have allowed SFAI’s impressive legacy to continue. Instead, the deal collapsed because SFAI waited too long to seek a merger partner. They waited until their problems were too extensive and too expensive to compensate for the benefits their offerings could bring to another institution.

As professionals engaged in supporting institutions through transitions like this, these avoidable failures are difficult to watch. The IHE story ended with a poignant postscript describing SFAI’s scrambled efforts to preserve a Diego Rivera fresco painted on the walls of its leased campus building. Even more disheartening in these situations are the experiences of students trying to salvage their credits and maintain their momentum towards completing a degree at another institution, or the alumni whose degrees instantly lose cache on their resumes.

But the inexorable reality of the market forces described above are going to drive more consolidation and rationalization whether institutions are prepared for it or not. An increasing number of institutions are going to close their doors, and the act of merging with another institution – once anomalous and rare – is going to become as common as it is in any other sector. Below are 10 points for institutions to consider in contemplating a merger process that can help ensure the effort is successful.

Making the Decision

1. Take a Market View

Acting early enough to orchestrate an effective merger requires having a broad, externally-focused perspective. While administrators and boards may be keenly aware of their performance relative to budget, they often lack a data-based perspective on their relative, competitive position. All school leaders can identify programs that are growing or contracting and are more or less profitable, but often cannot tell whether they are gaining or losing market share. Relative performance is a critical input to assessing long-term institutional health. Stated another way, if leadership can see a program is growing, but cannot see the market growing at a faster rate, it can lead to poor strategic decisions.

2. Speak Plainly

The higher education sector often avoids speaking plainly about the business of keeping an institution afloat financially. Unadulterated discussion of markets, market share, consumers, or competition can cause dismay among various constituencies. Unfortunately, the culture that eschews plain talk of commerce often permits conflicted administrators to squint at problems and enables trustees to avoid unpleasant realities altogether.

3. Do Not Wait Until the Decision Is Obvious

The decision to act is difficult and often painful, but a merger is only possible when the balance sheet is still reasonably healthy and the benefit of coming together with another institution is mutual. There will always be voices that believe the decision is premature. But if the need to merge is obvious, chances are good the decision is being made too late to be effective.

Moving Forward

4. Act with Conviction

It is natural for boards to prize option value and the decision to “see what’s out there,” feels easier than the decision to seek affiliation with conviction. However, prospective partners will invariably ascertain whether there is real support from the board, and anything less than clear assurance will prevent them from engaging in earnest. It will also make approval more difficult when you do find a viable partner. For this reason, it is important for all trustees to affirmatively recognize the need for affiliation and align on the rationale and decision-making criteria before any active outreach begins.

5. Seek Expert Help

By the time they reach their position, most college presidents have a strong network and a good understanding of comparable and competitive institutions. For this reason, they often regard affiliation as a matter of making a phone call to a colleague. But this approach underestimates the value of expertise and experience in identifying, approaching, and negotiating with a partner, as well as the challenges and time commitment required to successfully navigate an affiliation process.

6. Market Your Strengths

The process of approaching a prospective partner is effectively a sales process designed to find the best long-term match. Understanding your differentiated strengths and how they benefit another institution is key to a successful outcome. These attributes may or may not be the ones your school typically holds up to outside parties. Understanding and appreciating your strengths and articulating those persuasively is an essential element of a successful process.

7. Search Strategically, But Widely

The avenues for partnership can be complex. The logic behind any single combination can be varied and the list of rationale is long. Market consolidation, program extension, degree extension, geographic expansion, entry into non-credit offerings, or augmenting specific capabilities or technologies could all lead to distinct types of partnerships. It is important to approach specific prospects with a thesis. It is equally important to have multiple theses for a range of institution types.

Choosing a Partner

8. Let Go of Preconceptions

Understanding priorities is necessary and helpful to understanding which types of institutions could work as a partner and which may not. Although, assuming you know this in advance of outreach is a mistake. Large, bureaucratic, state institutions can be remarkably nimble. A traditionally conservative institution may have a new, expansive mandate from its board. A for-profit institution may have patient capital and values well-aligned with your mission. You do not know until you ask.

9. Understand Your Priorities

In the commercial world, transactions are focused on the clarifying point of price. Among not-for-profit institutions (where consideration is more nuanced and includes both economic and non-economic factors), it is important for boards to have a clearly articulated and prioritized list of both mission-oriented and economic goals. These may include legacy, continuity of mission, academic autonomy, staff and faculty employment, the preservation of an endowment, or a myriad of other factors. Understanding which of these is paramount and which are secondary is critical to a successful outcome.

10. Act Carefully, But Urgently

Finalizing a mutually beneficial partnership is enormously time-consuming. The steps include:

• Identifying clear goals
• Preparing materials to share with others
• Identifying suitable candidates
• Spending time with prospective partners to find strong leadership alignment
• Negotiating critical terms
• Conducting diligence
• Navigating and nurturing accreditor approvals
• And laying the groundwork for post-merger integration

At each stage, internal constituents must be consulted, and board members brought along. Yet, as important as it is to be deliberate and thoughtful as the deal comes together, urgency is required throughout as time also provides opportunities for decisions to be second-guessed and prospective partners to be distracted by shifting priorities or even new potential partners.

Obviously, any merger between established institutions is more nuanced and complex than a list of “10 Easy Steps.” Institutions contending with the potentially existential issues (like flat or down enrollment, a lack of scale or expertise across marketing or technology functions, or challenging regional demographics) can utilize this list to provoke a conversation that can better structure the merger process. This can make all the difference in preserving the mission and impact of the institution.