Joining Forces: Why Universities Merge

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Monday, January 3, 2022
Mark Thomas
Associate Dean and Director of International Graduate Programs, Grenoble Ecole de Management
David R. King
Higdon Professor of Management, College of Management, Florida State University
Photo by iStock/Vergeles_Andrey
In a post-COVID world, universities turn to mergers as a way to thrive and stay agile.

The future of higher education (HE) is almost certain to include an increasing number of mergers and acquisitions (M&As). Two driving causes are demographic changes and the aftermath of the COVID-19 crisis. The millennial demographic wave is becoming a drought, and the pandemic has led to increased acceptance of online education. Both trends reflect the fact that more American corporations are providing online college education benefits to employees as a way to attract workers.

It is unlikely that schools with falling enrollments will be saved by their governments. A 2016 white paper on HE commissioned by the British government clearly stated that “government should not be in the business of rescuing failing institutions,” even if these institutions are facing “possible closure.”

With no rescue in sight, it is no surprise that more higher education institutions (HEIs) have been turning to M&As. The two of us conduct research on mergers and acquisitions, and we have seen that the trend is especially prevalent in the U.S. However, the U.K., France, China, and many other countries across the world have also witnessed significant merger activity and joint ventures.

It is a solution that many academic leaders resist. As one business school dean told us while we were researching this topic, “Let’s not kid ourselves, most [business schools and universities] would prefer to survive independently. If there’s a glimmer of light at the end of the tunnel, that’s what they’re going to bet on.” Despite this natural wish to go it alone, many HEIs simply won’t have that option.

Why Universities Turn to Mergers

Organizations in all industries have different motives for pursuing mergers, and HEIs are no exception. Financial turmoil is the first driver, causing a struggling university to look for a rich savior. In 2014, Arizona State University acquired Thunderbird School of Global Management because Thunderbird was experiencing financial problems. Other recent examples are Saint Leo University’s merger with Marymount California University and Sierra Nevada University’s integration into the University of Nevada Reno.

The second driver is a university consolidation plan imposed by the government of a state or country. One illustration is Pennsylvania’s recent announcement of the merger of six of its universities into two.

The third driver is a university’s proactive decision to pursue students in other markets. For instance, some universities have launched joint ventures with schools in China so they can serve students who are unable or unwilling to study overseas due to COVID-19. Others have expanded into online education. The latter trend began before the pandemic when several U.S. public universities made high-profile acquisitions of online universities, such as when Purdue University took over Kaplan University in 2018.

The Importance of Stakeholders

The various reasons for mergers can have unequal types of impact on different stakeholders—who frequently are unaware that a merger is underway. Public firms often conduct their pre-merger negotiations in secrecy to avoid share price speculation that can complicate the valuation of any future deal.

However, universities have found that leaving stakeholders out of M&A discussions can create problems. No one likes to be the victim of a fait accompli, and this is particularly true for HE employees, who often accept lower salaries precisely so they can have more freedom and autonomy. If stakeholders are not included in M&A discussions, they sometimes are unwilling to accept a new organizational structure. For example, Purdue University faculty voted against the acquisition of Kaplan University, in part because they were not informed about it beforehand. Other stakeholders—including accrediting bodies—had to be satisfied before that merger could go through.

If stakeholders are not included in M&A discussions, they sometimes are unwilling to accept a new organizational structure.

Therefore, many administrators at public universities who are considering M&As have found it can be a positive thing to engage in dialogue with stakeholders, although discussions still have to be managed carefully so that there are no negative consequences. There tend to be many formal and informal links between universities and business schools—often through research collaborations or international networks—and word can spread very quickly. Untenured faculty might opt to leave an institution if they think a merger will require them to teach different students in different formats. A high rate of turnover can erase any of the benefits a school might have hoped to realize from the acquisition.

In addition, potential students tend to weigh front-end costs, such as tuition, against the promise of long-term benefits, such as better careers founded upon the reputations of their alma maters. Any whiff of financial difficulty will have an immediate impact on applications and, therefore, revenues. Because universities have relatively few variable costs, a drop in applications can quickly lead to financial losses.

Other stakeholder groups have powerful influence on HEIs, and their voices need to be heard before M&As can be completed. That is particularly true in the U.S., where, according to Statista, nearly 79 percent of spending on HE comes from private sources such as alumni and other donors. As a case in point, before Thunderbird merged with Arizona State, there was a prior agreement for it to be acquired by Laureate Education—until alumni intervened and the deal was called off.

In the U.K., there is a similar ratio of private support for universities. However, in Scandinavian countries, nearly 100 percent of HE investment is channeled through the public sector, so that universities are funded almost exclusively by national taxpayers. These stakeholders feel they should be considered on important matters such as M&As. As one Scandinavian president put it, “Everyone in my town seems to think that they should have a say in how the university is managed.”

Pursuing a Successful Merger

Given the recognized challenges, we make several observations about how academic leaders can improve mergers within higher education.

First, HEIs need to recognize that consolidation is happening. This is important, as first movers will be able to choose better partners; those who delay might find themselves forced to ally with lower-quality institutions. Three types of collaborations are possible:

  • Local. As one example, in 2020, three Connecticut colleges acquired parts of the University of Bridgeport to enable students from several universities to study together. Similarly, both Arizona State University and Thunderbird are located in Phoenix.
  • International. Universities all around the world have established presences in China. They frequently have one of two goals: to retain revenue from international students or to satisfy the demand of domestic students to have international experiences.
  • Online. As mentioned, in 2018 Purdue University acquired Kaplan. More recently, the University of Arizona acquired online for-profit Ashford University and the University of Arkansas took over Grantham University.
Administrators need to manage the integration closely. They must create implementation teams, plan acculturation activities, and track progress.

Second, HEI administrators pursuing M&As need to consider including stakeholders in the process. Unless mergers are supported by powerful organizations such as accrediting bodies and influential individuals such as faculty and alumni, the integration will not be successful. While administrators might need to keep some details secret, they at least should share the motives for the merger with their employees. National, state, and local governments are also important stakeholders, especially for public universities—even though decreased funding from these governments might have precipitated the merger in the first place.

Third, administrators need to manage the integration closely. They must create implementation teams, plan acculturation activities, and track progress. One consistent reason for the failure of mergers is cultural conflict. Administrators can mitigate this risk by evaluating in advance how a potential partner has handled a previous strategic challenge. If the partner’s decision matches what the senior leaders would have chosen for their own organization, then it is likely that differences can be managed. If the partner’s decision was significantly dissimilar, then it is likely that the underlying values and processes of the organizations are incompatible.

Finally, administrators must manage the speed of the integration process. Common wisdom suggests that every aspect of the merged businesses should be changed as quickly as possible, with many leaders citing the 100-day rule. However, emerging research suggests that this approach might be too simplistic. Valuable resources within the two structures might not become apparent until long after 100 days have passed. In fact, the best higher education mergers adopt a hybrid strategy of accelerating and decelerating the speed of integration as circumstances dictate. Judging the most appropriate moments to change the speed of integration becomes one of the key success factors in this process.

Seeing the Potential

Higher education mergers and takeovers are almost certain to increase in the next decade. If business schools ignore the potential of HE mergers, hoping that conditions will improve, they might find themselves with fewer good options if they are forced to seek out partners.

The most successful mergers will be the ones that are managed by universities that have adequately prepared their overriding strategies. These schools will have sufficient agility to adapt their post-merger integration processes and meet any challenges that arise.
Authors
Mark Thomas
Associate Dean and Director of International Graduate Programs, Grenoble Ecole de Management
David R. King
Higdon Professor of Management, College of Management, Florida State University
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