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Synthetic merger: A fine elective for higher ed

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Synthetic merger: A fine elective for higher ed The warning bell that we will witness increasing closures of four-year private colleges has been rung by Moody’s. The list of such closures, as well as consolidations, is getting long. This warning signals the need for heightened scrutiny of financial sustainability while there is still time for boards and management to correct the course.

Consolidations, mergers and affiliations are gaining attention within higher education. On the corporate front, merger activity has been robust for the past five years, enabling companies to take advantage of greater scale to lower costs, increase flexibility, drive innovation and maintain a competitive advantage. Universities can reap the same benefits as their corporate counterparts, as well as increase their differentiation in the marketplace and avoid closure. However, to achieve these benefits, colleges and universities must confront the core obstacle ─ preservation of identity and value.

To achieve merger benefits, colleges and universities must confront the core obstacle ─ preservation of identity and value. Loss of brand identity, sense of unique mission, academic independence and value of alumni degrees are some of the concerns for stakeholders — alumni, donors, students, tenured faculty and the board of trustees. The fear is not unfounded: In a typical merger, an institution can indeed lose control of its identity and cease to exist in its current form. Yet without a longer term focus on strategic direction, the outcome could be even worse when one considers the institutions that have permanently closed their doors.

But in many cases, some form of merger is potentially the only way for a college or university to perpetuate its mission, especially for tuition-dependent private institutions confronted with maintaining sufficient net tuition revenue. In the for-profit sector of higher education, mergers are not as rare, and they are becoming more common in the public sector in the face of enrollment challenges, higher operating costs, and the need to increase investment in technology to sustain distance-learning platforms.

We believe that a different type of merger option is especially attractive, allowing a university to participate in the tremendous opportunities of shared services while maintaining its identity and mission. There are positive aspects to seeking an “affiliation partner” to garner the benefits of a merger while maintaining institutional identity.

The path forward for many institutions may well be a synthetic merger.

A different type of merger offers attractive opportunities The synthetic merger model means that to the public, each institution retains its distinct identity, faculty, student population and unique cultural elements, along with its endowments and funding structures. Behind the scenes, the back-office and support operations are combined to the fullest extent possible, gaining sustainability through economies of scale to reduce costs, expand academic offerings and leverage the leading practices of each institution. These benefits are realized with no change to distinguished and familiar names, and at no loss of foundational and endowment support.

The participants remain outwardly separate even after their operational integration is complete.

An example of a synthetic merger on the corporate side is the consolidation of Air France and the Netherlands’ KLM airline. National brand identities are intact, yet behind the scenes, all systems and support services are fully integrated. The economies of scale are completely leveraged, even as the two distinct brands are maintained in the market.

General M&A principles apply While there are considerable differences between synthetic and typical mergers, the core M&A process remains the same.

Sound and thorough due diligence led by a thoughtful adviser will support the business case and provide foundational information for an integration plan.

Two Virginia institutions join forces to benefit all students George Mason University and Northern Virginia Community College are collaborating so that GMU students can enroll initially in NVCC and save money, and NVCC students can more easily transfer to GMU. Develop an integration plan with commonalities, separations and hybrids As in all transactions, the first 100 days post-closing represent the time when organizations are most receptive to change. The pre-closing period is all about building momentum — use that time to develop an effective integration plan that informs an integration model. This model guides the implementation phase, which begins at closing and kicks off the first 100 days.

Pre-closing to post-closing timelineIn the development of an integration plan, every functional component of the two institutions is analyzed. The going-in assumption is that certain functional areas (e.g., student billing) will be combined, while other areas will remain separate (e.g., awarding degrees and granting tenure). In addition, the approach for certain functions, such as fundraising, will be further analyzed during the implementation process as the trade-offs between synergies and unique strengths are assessed.

Common platforms – The commonality can align systems such as registration, websites, electronic blackboards and collaboration sites. While separate sites are maintained for each institution, commonality allows a single IT department to support both.

Myriad functions can be brought together into single departments with common support. These functions can include facilities, real estate, accounting, payroll processing, accounts payable, receivables, tax compliance, treasury, risk management, legal services and procurement. Common support can also extend to vendor contracts, such as food service, security and landscaping.

Hybrid sharing – This can be particularly appropriate in HR. Even if employees remain with separate institutions, processes should be compared to identify best practices. Each institution would hire faculty and grant tenure, but benefit plans could be common and salary bands for noneducator employees could be compared for possible matching.

Innovative joint curriculum – To bring reality to this interesting concept, a dedicated development team is essential. Subteams, such as logistics and cross-registration, can be added as needed. A curriculum initiative must be included as part of the overall integration plan — not independent of it — because the implementation horizon will likely extend beyond the planning phase.

An integration framework can guide you in planning and implementing a synthetic merger.
Integration framework for synthetic mergers
Optimal progression of perspectives Before the kickoff meeting:
“I understand where the value drivers are.”
After the kickoff meeting:
“I am ready for day 1.”
After executive approvals:
“I know what will change.”
After planning completed:
“I can see benefits flowing both to the bottom line and to our students/faculty/institution.”
Determine equitable cost-sharing A crucial element of successful integration is ensuring that costs are allocated to the appropriate institution. With institutions operating as separate entities but sharing functional support, choose a mechanism for allocating costs to each. Options include a fixed monthly allocation, a variable allocation based on factors such as student enrollment or the number of employees, and direct allocation (e.g., pass-through of third-party costs, such as legal fees). The allocation method should be representative of the underlying cost to provide the services and reasonably easy to calculate on a monthly basis.

Economies of scale should result in cost-savings. For example, developmental time saved in employee hours will add up as course catalogs and policy manuals are developed just once, with the only difference being the institutional identity. Combining vendor contracts such as security, food service and landscaping should also accrue savings due to greater purchasing leverage.

Leveraging savings to reinvest in new technologies Imagine an institution that was historically constrained by geographical location, say a downtown location in a major metropolitan area. Imagine that same institution now has students enrolled from places like the Philippines or other parts of the globe. Technology makes this possible and a number of institutions are rapidly moving in this direction. Yet there is a cost associated with this strategy; a synthetic merger might just create the necessary cost-savings for a combined institution to invest in this type of future. The synthetic merger could be the way to fund that future.

Contacts:

Ed KleinguetlEdward Kleinguetl
Partner, National Transaction Integration Team
T +1 832 476 3760


Matt UntermanMatt Unterman
Principal, Advisory Services
Not-for-Profit and Higher Education
T +1 212 542 9834