Mergers have become the lifeline for many institutions in the face of financial upheavals that often come as a shock to campus leaders. Such transactions have grown in complexity, too. However, leaders can increase their institution’s lifespan and streamline the acquisition process by following these steps.
Over the past several years, we’ve witnessed a dramatic shift in higher education that’s led to a number of financial pressures, like enrollment, for instance. Fewer folks are attending college nowadays, and institutions are suffering as a result. As anticipated, we’re seeing higher rates of consolidations to keep colleges afloat during troubling times.
In September 2023, Fitch Ratings, a credit rating and analysis company, predicted a steady stream of closures, mergers and restructured operations for higher ed institutions “in the face of continued challenges,” the analysis reads. At the time, they cautioned schools to proactively make decisions on what departments and programs they believe best align with their organizational and strategic goals.
Fast forward to today, we see that the company’s predictions were true. In fact, mergers have become the lifeline for many institutions in the face of financial burden.
Last summer, New Jersey’s Bloomfield College became part of Montclair State University, which resulted in lower tuition fees and expanded opportunities for Bloomfield students. The partnership was later deemed a success story, serving as a model for other institutions in the state as to what a successful merger looks like.
Leaders at Cleveland State University have for months been looking at absorbing the financially struggling Notre Dame College, Signal Cleveland reports. Since the pandemic, enrollment declines have significantly altered the financial projections of institutions like Cleveland’s Notre Dame College.
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Cleveland State President Laura Bloomberg said the Bloomfield-Montclair absorption might serve as a roadmap for “what works, what doesn’t, when do you do it, when don’t you” as she continues negotiations with Notre Dame, Signal Cleveland reports.
Consolidating is no easy task, though. Folks like Michael Gold, a corporate attorney who has spent years handling acquisitions and mergers in the higher ed space, offer sound advice for leaders who might anticipate experiencing such a transition in their college’s future.
Identifying warning signs
Mergers and acquisitions often follow a similar pattern as of late, Gold explains. It starts with an institution confronting a financial crisis that creates uncertainty about surviving independently.
“It’s become more and more prevalent,” he says.
In Gold’s experience, he says it’s not uncommon for a school to be blindsided by its financial situation. The most obvious contributing factor is declining enrollment nationwide, he says. Additionally, college expenditures have gotten increasingly complex.
“They’re facing higher interest rates and rising labor costs,” he explains. “Because of higher ed labor and faculty demands, it’s gotten harder to adjust their cost structure over time. Costs are going up and revenues are going down.”
Assessing endowments, Gold advises, can help leaders avoid financial shocks.
“A lot of the schools that have this problem have smaller endowments just by reason,” he says. “One thing that I think should be part of every school’s planning, worst case scenario, is cash flow. How much runway do we have? How many semesters can we go realistically looking at enrollment rates? I think these are things many schools do focus on, but I think it’s really important for a broad of trustees to have a constant focus on this, especially in this environment.”
Understanding regulation
In September 2022 and February 2023, the U.S. Department of Education published guidance for colleges and universities that are considering various types of transactions, including mergers. At the time, department officials wrote that these changes were made with student outcomes at the forefront.
“Students, taxpayers and the department will benefit from increased transparency around a proposed transaction, providing more time for the department to conduct oversight and ensure the transaction is properly conducted and does not result in an interruption of Title IV, HEA funds,” they wrote.
One major change the department made surrounds the timing of its reviews. Previously, mergers were considered single-step transactions. Now, officials will begin reviews only after an accreditor has signed off and until the department officially approves it. Otherwise, the college remains an independent institution.
“It does make the process of planning a soft landing for institutions that find themselves in trouble challenging,” says Gold. “They need to be planning in advance. They need to understand that a merger process, most practitioners will tell you, is a two-year process from when the two schools decide they want to merge.”
