UB Op-ed: What’s behind institutional closings?

By: | Issue: March, 2019
February 26, 2019

Thirty years ago, some of us predicted that mutual growth mergers would become a prominent megatrend in the higher education industry.

Instead, we witnessed a broad range of institutions that faced impending liquidation. Some of these fragile colleges were pressured to merge with somewhat stronger institutions which, in some cases, ironically, ended up closing after they lost their way—i.e., distinctive market niche.

Shotgun wedding

In 1987, a Wisconsin-based national conference of higher education thought-leaders reflected on so-called “bankruptcy bailout mergers”—a kind of shotgun wedding made in Heaven. These hostile takeover acquisitions typically involve larger, stronger merging institutions possessed of economic leverage to strip assets from the merged colleges and forever extinguish their unique heritage, mission and legacy.

Just a few years ago, Moody’s Investors Services predicated that closures of small private colleges would increase exponentially. It is not surprising that industry investment insiders still have a negative outlook for the higher education sector. When recent closures like Green Mountain, Mount Ida and Newbury are announced, we can’t help but wonder if there were any additional steps that could have been taken to save these venerable institutions?

By way of recent example, Mount Ida originally transitioned from a small Women’s Junior College into a more robust, co-ed, and baccalaureate institution—with fully developed schools within the larger College. Back in those days, the Mount Ida College model was fueled by the ingenuity and synergy of mutual growth mergers—first, with Chamberlayne Junior College; second, with New England College of Funeral Service; and later with the Coyne Electrical and Technical School.

Through all these mergers, Mount Ida succeeded in preserving the merged institution’s mission, program, and brand—while creating in its place a dedicated campus infrastructure, retaining most of its experienced faculty. Rather than stripping its precious assets, Mount Ida celebrated the merged institution’s venerable heritage, mission, educational purpose and values.

Sadly, many larger, more well endowed institutions are somewhat risk-averse, while those with few resources are compelled to operate by their wits and live on the edge every day—reimagining programs, partners, places, and student populations.

Where did we go wrong?

Well for starters, we ignored the handwriting on the wall. It did not take rocket science to figure out that we were increasing tuition at twice the rate of the cost of living; becoming increasingly dependent on the pernicious tuition financial aid discount model; and engaging in a battle of campus amenities to fuel craven competition in already-saturated markets. Further and significantly, we ignored the rise of student and family tuition payback burden, endowment and debt service to operating budget ratio, and denial of deferred maintenance. We were slow to get ahead of the regulatory and educational consumer compliance curve; and fell behind in fully funding sick care, health insurance and retirement benefits.

Worse yet, some segments of higher learning failed to test relevance and marketability (high demand career programs). Indeed, small colleges should be reviewing 15 percent to 20 percent of their academic programs each year—not waiting until it is too late to respond to shifts in enrollment preferences, career and workforce development, and student demographics.

Going forward, how can we avert closure; and what are the pitfalls and barriers to successful mergers, consolidations, and joint ventures?

  1. Be careful to consider the impact of permanent structural marriages which change control and governance in a major way. Ask: Can your partnership goals only be met by merger? What about less drastic alternatives such as Consolidation? Joint ventures? Program collaborations? Shared services?
  2. Focus on the core reasons, selection criteria, and synergies for partnering. Think through the metrics, benchmarks, and milestones for measuring partnership success.
  3. Ask: What is the risk? Return on investment? and return on learning for our students after the dust settles? How does this transaction directly benefit student academic and career success?
  4. Ask: what are the net assets that the partner brings to the table in terms of liquidity, unrestricted endowment, and unencumbered real estate?
  5. Do your due diligence and insist on mutual transparency. Which partner brings stronger creditworthiness and composite rating to the transaction?
  6. Ask: Which President is at the dawn of their tenure and which one at the dusk of their presidential career? Like it or not, personal retirement plans matter.
  7. Ask: Which institution is perceived as having a more prominent academic reputation in rankings, ratings, and indices of choice? Like beauty, academic prominence is typically in the eyes of the beholder—and in the eyes of best value rankings and ratings.
  8. Ask: Which personalities and players will best be connected for purposes of accomplishing the transactional goals and objectives? Personal chemistry often overtakes substance.
  9. Ask: What baggage (toxic residuals) does the partner bring to the table that may not be apparent in preliminary due diligence ? (i.e. pending litigation or scandalous, defamatory matters, etc.) Ask the tough questions up front.
  10. Ask: Whose campus will be preserved and whose campus will be liquidated?
    Real estate, real estate, real estate. Location, location, location.

And there are scores of other questions for another day.

So, what have I learned from the most recent, unfortunate demise of small, fragile, tuition dependent, resource-challenged colleges? With this concluding question in mind, I offer the following:

Strategic partnership best practices

  • Develop buy-in from service users, faculty, staff, and students
  • Begin with “low hanging fruit” —IT, data, library—and keep it simple
  • Memorialize shared services in memorandum of understanding
  • Empower staff and incentivize vendors to collaborate
  • Advocate for collective procurement
  • Develop cooperative RFQs and RFPs
  • Be proactive on advanced collaborative and academic program planning
  • Create a control process to ensure quality service
  • Network enabled systems
  • Correlate academic calendar and publications
  • Carefully plan and consolidate underperforming programs and staffing to achieve economies of scale, efficiencies in operation and non-duplication
  • Develop proof of concept test for new partnerships
  • Be cognizant of campus culture clash and resistance to change benchmark shared services, metrics, and milestones upfront
  • Co-source outplacement for displaced staff

These several best practices are simply starting points for building strong, sustainable, mutual growth strategic partnerships and net-profitable joint ventures.
So, the next time colleagues hyperventilate at the sound of impending doom (Mergers and Acquisition), think mutually profitable partnerships without tears.

James E. Samels is president and CEO of The Education Alliance and senior partner in the law firm of Samels Associates.