Higher Education Mergers for Financial Sustainability

With recent structural changes at the U.S. Department of Education and reductions in certain federal funding streams, higher education institutions face a challenging financial landscape. Many industry observers view Harvard, which has experienced some of the largest funding reductions to date, as an indicator of potential trends for other private colleges.

While the Harvard’s of the world can probably get by — at least temporarily — on their unrestricted reserves, most private institutions do not have that luxury. Public and proprietary (for-profit) institutions face a similar financial dilemma due to disruptions in federal funding and a dwindling pool of traditionally college-aged potential applicants.

Across all types of higher education institutions, leaders are asking a critical question: Do we have a viable operating model?

In this alarming atmosphere, it’s important to understand that shutting down operations is not the only option. Well-executed, strategic mergers and acquisitions (M&A) can offer viable solutions to the intense financial pressures on higher education institutions.

Facing Financial Facts

Government funding makes up a huge portion of the total revenue for most colleges and universities, both directly and indirectly. In addition to research grants, there’s the vast amount of financial aid that schools and students depend on to finance higher education. From Pell grants to federally funded work-study programs, Uncle Sam pays more tuition and fees than anyone else these days. To gauge the total impact of federal funding, it’s essential to measure how much institutional revenue comes from student loans that have to be repaid, too. Technically speaking, this money comes from students, but it’s ultimately a form of government aid just like federal need-based grants and work-study opportunities.

All schools offer discounts in the form of scholarships, institution-based financial aid, tuition waivers, and other mechanisms to reduce costs for certain students. It’s a prime method of appealing to attractive candidates in a competitive marketplace — especially amid declining enrollment trends as the pool of potential applicants continues to shrink.

But for every discount, the institution must make up the difference from other sources. That usually means more contributions at a private institution. Proprietary institutions, limited to a maximum of 90% of total revenue from governmental funding sources, must ensure they have enough additional revenue from students and other sources to meet the 10% funding gap.

The Role of M&A

M&A can offer a viable solution in many cases, allowing the institution to continue operations, albeit in a slightly different form or under different branding. Purists may balk at the idea of change, pointing out the storied history and unique attributes of the original school. Many private institutions are located in small cities and towns, proudly boasting of a long history that’s closely intertwined with the identity and character of the community. They often represent the largest employer in the area as well, creating massive incentive to continue operating as they always have. But the financial reality may make that impossible. When survival is at stake, it’s essential to explore all the options.

M&A activity is increasing across the entire higher education sector, including public, private, and proprietary institutions. States are reviewing their public higher education systems with an eye for efficiency, consolidating some schools and shutting down those with overlapping programs or geographies.

Accreditation is another force driving consolidation in the education marketplace. Without proper accreditation, institutions cannot access federal funding. Reputational damage and loss of aid availability combine to send students fleeing when accreditation is at risk. A strategic merger can sometimes offer relief to schools that are likely to lose their accredited status for financial reasons or due to difficulty with the demanding accreditation process. Joining forces with a partner organization on strong footing with the accreditor may bring financial, logistical, and educational resources to ease the process.

Key M&A Considerations

When M&A is on the table, leaders need to think through all the implications. Consider these factors as you search for a strategic fit.

• Strategic fit — Successful mergers are challenging; you only want to pursue a workable combination that can lead to a stronger institution. The number one concern is finding an entity that works in the same space, with a like-minded mission, belief system, and approach.
• Value drivers — Find institutions with the characteristics you seek using success metrics that matter to you (and your donors), from financial data to student retention and educational attainment ratios.
• Offerings — M&A targets should amplify the benefits you already provide by bringing a solid reputation along with programs that can help you attract new students and prepare them well for life.
• Balance — Mergers must allow the institution to appeal to a sustainable mix of paying students and those who require financial aid.

Be Ready for Coming Changes

Change is on the syllabus, whether you signed up for it or not. Working with a partner who understands your industry and has the right contacts to help you manage disruptive change is crucial. Contact your CRI advisor to help your higher education institution prepare for what’s on the horizon.