Is Your University Headed for a Merger (or Worse)?

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0:00:11.6 Speaker 1: Hello and welcome to Office Hours with EAB. Today’s discussion is about university consolidation and closures. It’s a dreary subject, but it’s becoming all too common as university leaders increasingly find themselves facing the stark reality that their institution may be on the brink of closing its doors for good. Our guests identify the kinds of institutions at greatest risk and offer advice to campus leaders on how to make an honest assessment of where their school is headed and take decisive action before the fate of that institution is sealed. So give these folks a listen and enjoy.

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0:00:53.9 Erin Preston: Hello and welcome to Office Hours with EAB. My name is Erin Preston, and I’m a managing director at EAB responsible for helping our partner institutions meet and exceed their enrollment goals, which, as many of you listening likely know, is not the simplest task today with the changing demographics and market forces that colleges are navigating. This afternoon, we’re going to talk about the options available to schools that, despite their best intentions, haven’t hit their enrollment targets for a while and aren’t likely to reverse their fortunes in the foreseeable future. This is a problem that’s facing a growing number of colleges and universities in the United States, whereas of this year, an average of one school per week is either closing its doors permanently or merging with another institution out of necessity. We’re going to talk about why that’s happening with increasing frequency, how to avoid that fate if possible, and how to recognize before it’s too late that your options are narrowing and may warrant steering a course that minimizes the casualties. One of the great things about my role is that I get to work with a lot of really smart people, and with me today to talk about this rather gloomy subject is a long time friend and colleague of mine who I’ve gotten to know really well over the years, Jon Wexler from Rensselaer Polytechnic Institute. Welcome to the podcast, Jon.

0:02:17.1 Dr. Jonathan Wexler: Thanks, Erin. Great to be here.

0:02:18.7 EP: Well, we’re thrilled to have you. And Jon, I know we’ve spent time talking about this subject in particular certainly over the years. Would you mind telling our listeners briefly about your role at RPI and about how you developed a professional interest in the subject of university mergers?

0:02:38.5 DW: Sure thing. My day job, I’m the Vice President for Enrollment Management at Rensselaer Polytechnic Institute, commonly referred to as RPI, where I oversee admissions and financial aid in what we call our summer pipeline programs, where I’ve been for just over nine years. What got me interested in the topic matter we’re gonna be discussing today is when I was doing my doctoral degree at the University of Pennsylvania and deciding what to do for a dissertation. I got curious looking at the landscape in particular for small private colleges. I graduated from one, I went to Goucher College in Towson, Maryland and I’m also on their board. And so I just got curious, and what I was finding, there wasn’t a lot of research. Most of the research had been more Europe and other international countries, but not a lot of research had been done on mergers, particularly smaller colleges. And so that got my curiosity going, and that was my subject matter where, for my dissertation, I looked at a successful merger between two small colleges in New England and an unsuccessful merger attempt between two small colleges in New England that took place around the same time.

0:03:47.4 EP: Great. That’s great, Jon. And could you take us through some of the macro factors that are challenging the survival of so many colleges and universities, and to what extent are institutions simply staring at the low ebb of cyclical trends that we expect will reverse themselves over the next few years?

0:04:06.8 DW: Sure. The first thing you look at is the population decline of students graduating from high school. This will be the first, probably from now to 2031 will be the first time since World War II, so 75 plus years, that there has been a decline in the number of available students that are graduating high school and thus have the ability to go to college. And so the industry of higher ed has never experienced this as it’s been built up… Since the ’40s, higher ed has been built up. So you have first time, a decline in population. You overlap that with, in the last five years of pandemic and then the FAFSA debacle, and so both of those have dried up the pipeline for potential students coming in. They’ve altered how students have to… If you look at COVID, obviously all schools suffered from that, but I don’t think any school suffered more than small privates.

0:05:01.4 DW: They lost their student body, and a lot of times, they have not seen it fully recover. And if they have seen it fully recover, they’ve had to increase the amount of financial aid to get to the same headcount to fill the resident halls. So I think those are some of the challenges. The other challenge is we’re in an era where big flagship state universities, I.e football schools, are really dominating the headlines. You see ’em every Saturday. They have become not just institutions where students go in the state, but they become more destination institutions. If you look at the University of Alabama as an example, now 60% of their students come from out of state. That number was 35% just 15 years ago. So within one high school generation, you’ve seen a whole different mindset of students and where they’re looking to go.

0:05:53.1 EP: Jon, you just segued nicely into where I was hoping to take the conversation a little bit, which is, which types of institutions would you say are most at risk versus types of schools that seem to be in a stronger position. And certainly, you’ve outlined what we’ve seen in terms of trends in the marketplace and demand really growing exponentially over recent years toward larger public flagship type institutions. So let’s drill down to a scenario where a college or university realizes it’s in trouble. So your research up to this point and expertise and through various conversations would suggest more so falling within smaller private type institutions. Let’s drill down a college. Let’s say they’re in trouble. How often do boards or senior leaders, through the research you’ve done, take bold steps and act while there’s still a chance to reverse outcomes or their fortunes, and how many would you say realize it’s too late, they’re slipping under the waves, and then they just simply allow things to decline? I guess I wanna hear a little bit of your perspective on a result of inaction or ineffective action and how you think about that.

0:07:10.9 DW: Sure. I think how I looked at it was, smaller would be a thousand or less students, so a thousand or fewer students and probably a $50 million or less endowment. So not a large endowment. The bigger thing would be, are you an institution that used to be at 1700 and you’re now at a thousand in less than a decade? Because how are you budgeting accordingly? Are you still operating like you’re 1700 students when you’re really a thousand students? And that’s the new… And you haven’t set your budgets to the new norm. I think for boards, you gotta remember, they meet four times a year at best. This isn’t usually what their bailiwick is, and expertise. Many of ’em have been on it a while and they remember the days where they had trouble 10, 20 years ago and they got out of it.

0:08:01.6 DW: But the population’s different. The situations are different. And I think many times, they think hope is a strategy. And hope is not a strategy. And so I think at many… They don’t like to think about the downside of… I think they are now, now that they’re seeing, to your point which you brought up earlier about schools closing per week since the beginning of 2024 and probably accelerate if you’re reading some of the literature that’s out there based on when headcounts come in in the fall. So from that standpoint, I think they’re not preparing and many time they’re reacting instead of acting. And that’s a problem with small college boards. Could be a problem with any board, but really we’re not talking the Ivys or big time. There are about 120 schools or more with over a billion dollar endowment, but that’s out of World War 3000.

0:08:55.6 DW: So there’s a very small population that’s in a very good position, and everybody else, it’s arm to arm combat, hand to hand combat. So I think that schools need to sit back and see where they are and what indications are that things are gonna get better. Do you have new donors coming in? Is there new majors being created that tie into marketplace? From that standpoint, where would the potential be? And if the potential’s not there, what’s plan B and what’s plan C? Are you ready to act on those?

0:09:33.6 EP: Well, maybe that’s why we get along and why we’ve worked together for so long, because I would also agree hope is not a strategy as well. Jon, you have mentioned to me before, throughout putting together your dissertation, that you’ve spoken directly with college presidents and had various interviews. Any insights there along the same thread of inaction or that decision point as a president, how and when they would be willing to pull the trigger on making certain decisions? Any insights from those direct conversations?

0:10:15.0 DW: Yeah, I think… So I spoke to the presidents at all four schools, but I also spoke to numerous board members at each of the schools involved. And one of the things, especially for the merger that was not successful, is they waited too long. They waited too long. When they got into discussions, the school that needed to be acquired, the key to them is that they come in with the best balance sheet they possibly can have. And balance sheet means enrollment, but it also means debt level and how much was there. And in some cases, the mistake schools can make that are struggling is they decide to build ’cause they think the old saying that, “build it and they will come,” they redo it, they build a new dorm, they build a new building, academic building, and the reality is the enrollment doesn’t come quick enough or it doesn’t come at all.

0:11:09.5 DW: Now, you’ve compounded your problem ’cause now you put more debt on your books and now you’ve created a scenario where you’re less attractive than you actually were prior to that, because schools don’t wanna take on more debt. It’s a killer. And the types of schools you’re looking to merge with, while they’re doing well, they may not have unlimited resources to take on a merger. And they can handle a lot of things, but nobody wants to take on debt. And so what I’ve looked at is the more debt you take on, the less attractive you are to your counterparts. So if you’re in a position where your institution… And you’re at or you’re leading an institution, an institution that may not be doing very well, before you do anything else that would add more debt to your books, really think about, what is the long-term play? And if there’s any thought that you might need or want a merger partner, would this really be an attractive? Not only the facility, which may not be needed with the partner you’re merging with, but the level of financial obligation you’re taking on and doing.

0:12:23.0 EP: Jon, you mentioned a couple statistics, data points that are likely highly important throughout this type of exploratory process or considering current positioning versus what types of options exist depending on the financial status. You mentioned enrollment, of course, level of debt. Through your work, what other data should college presidents be really honing in on early to get a good sense of their overall position?

0:12:55.5 DW: So in my data, in doing my research, I created what I have called the merger runway index and MRI, in which schools, particularly the ones we’ve been talking about, need to take a look at their total assets minus their total liabilities over a 12-month period and see if that’s changing greatly. Then when doing that, and this is all public information, so you can also look at your counterparts, your peers, your aspirants, best of breeds in the industry and see where they sit. And I think if you see any movement there on a downward trajectory, you need to worry, you need to take a step back. Now, may be one quarter or one year, but if you see a two or three-year pattern, that’s not a pattern, that’s a trend, and that’s the new normal.

0:13:43.5 DW: And are you recalibrating, and can you? Can you become smaller? Is it doable with the contracts and obligations you’ve taken on? If you’ve just built a new residence hall and you’ve taken on a lot of debt, there’s not a lot of flexibility you have without the growth of enrollment to fill the rooms to pay off the justification of the residence. So I think what schools need to look at is not only where they sit, but using information data that’s out there, IPEDS and others. And IPEDS can be a little late in the data, but much of it is you can gain earlier and take a look… Well, let me just take a step back there. So in the data from IPEDS, it takes about a year, but the patterns are there [0:14:28.9] ____ see where schools in the direction, especially coming out of COVID. It’s really important not to look at the years of COVID because the two things people have to realize is, yeah, they were down, but they were also getting a tremendous infusion of cash from the federal government.

0:14:42.3 DW: So those aren’t really true numbers. You really have to look at basically FY23, ’24 and beyond to see where you are sitting from that standpoint, and then begin having the hard conversations with your board. Obviously, you don’t want these things to get out in the public because it can impact fundraising, enrollment, and there’s the overall morale on campus. Erin, I was curious, we’ve talked about the balance sheets and the conversations that people are having with their CFOs and others. What areas are you seeing in your data, your team is seeing, that could advise schools on how to handle these situations?

0:15:23.3 EP: Yeah. Well, I’d say one of the fun and challenging aspects of my job is helping colleges and universities understand their potential to change market share or drive growth in market share. And one of the most fascinating things for me is if on the surface you look at demographics, you very plainly can just see mathematically where, across the country, certain markets are more challenged than others, which types of institutions may be more naturally positioned to see decreases in potential enrollment activity, just sheerly based on the numbers. But it’s always so interesting. You can take a school that resides in an area where population’s growing, let’s just say Florida for instance, who is seeing a deficit in their enrollment outcomes. And so you look at that and say, well, that doesn’t align necessarily with demographics.

0:16:25.1 EP: Whereas on the flip side, you can take a college that resides in Iowa, in the Midwest, in a more challenged market, and they have enrollment growing. And so in those instances, in my experience and expertise, and I’ve been with EAB and doing this type of capacity for the last 15 years, it has so much more to do with market share. And so a lot of the data and things that I’m looking at have to do, what type of recruiting strategies are in place? Are there smart, efficient recruiting strategies? How early are you getting to students? How often are you in front of parents? Are you in the right markets? And so a lot of the work I do is helping institutions devise strategies to do that efficiently and effectively and really ensure that the application demand exists to support their goals.

0:17:14.1 EP: Now, certainly market share and the market forces at large obviously play a role in terms of institutions, if they were to run, Jon, your MRI, your merger runway index. The understanding of potential to drive a different type of market share obviously plays a role in that. I would say there are likely, and I imagine you would know some institutions who are better positioned even if their outcomes aren’t strong at present, to change that outcome, versus others who are not. So I’d say that’s where I’m spending a lot of my time and how it intersects with some of the work that you’ve done. Jon, so okay, you ran your MRI, your merger runway index, you did that for four different scenarios, is that right?

0:18:02.7 DW: I did. The main one I focused on was the merger that wasn’t successful and then looked at best of breed in the industry. And you could see the reason I published it is that there was a… You could tell that at certain times, by taking on more debt, they then shrunk their runway. They had less runway to navigate through and case… Or, they decided, “Oh, we’re gonna fill the resident hall so we’re gonna give away more financial aid.” And interestingly, when one institution did that, while they brought in more enrollment, they were in the same… The overall net tuition revenue was exactly the same within a few thousand of what it was prior to that, because they’d given away too much institutional aid. And the theory was, we’ll bring the aid in for a few classes, then we’ll pull back. That is very hard to do, especially when you don’t have a big brand, because you see a lot of these institutions are highly leveraged with Pell students which have limited income, and so they’re really not able to pay… They’ll go to the publics before they will pay a little bit more in tuition to go to the private institutions.

0:19:13.1 EP: So walk me through, then, an ideal merger scenario. What I just heard, a big theme or takeaway from your research is around the timeline and offering enough of a runway to inflect or create a more positive type of outcome. So in thinking about what an ideal merger scenario, if there even is such a thing versus an outright college closure, does it really just have everything to do with timeline? What other steps can university…

0:19:44.7 DW: No, I think the first thing you can take a look at, and it can vary, different schools take different approaches, but the one is obviously proximity, meaning how close are you to another institution? That can play a role. And the other is what majors do the two institutions have? So if the bigger institution is able to acquire a smaller institution or do a merger as they say, and they’re gaining new academic majors, that’s a plus. If they basically have the same curriculum, that can make it hard to justify the merger because you necessarily won’t grow enrollment and you won’t grow diversification in your academic curriculum. But if you can acquire a university or a college… A university or college requires a place that they are able to expand their portfolio. That’s a positive.

0:20:38.3 DW: Also, one of the institutions that’s being acquired has online capabilities that the other one may not, platforms. That is a very highly valuable commodity. So that if the larger institution has curriculum and content that’s ready to put on these platforms, then they could utilize what they’re acquiring to have an immediate impact on enrollment. The other is, if you’re acquiring an institution and the proximity is not too far away, where students can go easily maybe via shuttle or even walking between the campuses, then you’re acquiring new resident halls and new athletic facilities and new recreational facilities and new classrooms that if the institution that’s in the catbird seat is looking to expand, but they may be landlocked from where they are, it allows them to grow without necessarily having to purchase or build and take on more… What we talked earlier, more debt from that standpoint.

0:21:38.1 DW: And the final thing is, what is the value of what they’re taking on? Someone can be taking on a institution where the land is very valuable. You’re seeing this right now with the Art Institute of Philadelphia. Many people are looking at that ’cause they have now announced they’re closing, but their land is valued at over $200 million in downtown Philadelphia. That is a valuable commodity. One can make the argument, if a little better planning had been in place, there is no reason they should have closed, that somebody in a large market like Philadelphia should have been an acquirer of that institute because the value in the land itself would’ve justified any takeover.

0:22:18.8 EP: Yeah. Yep. Great point. Jon, I’m gonna put you on a spot here as we get close to wrapping. What would you say was the most surprising thing that you learned through your conversations or research about all of this? You’ve obviously outlined…

0:22:32.5 DW: Yeah, I think there were a number of things. I interviewed 25 people and none of ’em brought up, unless it could be used for growth, the academic programs. Meaning people want to think, “Oh the academics, what’s gonna happen?” When you’re getting down to the basics of this, the acquisition is about the immediate impact to the bottom line. The other thing is all these institutions, the understanding from board members’ concept of the academic calendar. We start in September, not much takes place in the summer, faculty around nine months. So putting these type of things together is not easy. And it’s much shorter and much harder than they all envisioned doing, and it’s one reason they failed.

0:23:24.0 DW: An example being that if you’re in an institution that is considering… Or in a merger, you have to think about when you’re gonna execute that merger. Case in point, you don’t wanna go much beyond December if you can, because you have to issue acceptance letters. And if you have acceptance letters out and students think they’re enrolling, and then you announce a merger in the late spring, early summer, that may not be the institution the students thought they were going to. And in particular, if you’re thinking you’re gonna need to close, it’s even a bigger disaster. So from that standpoint, because the other thing that people don’t talk about is the expense in doing a merger. It’s tremendously expensive between outside counsel, PR firms. And then once you take on the merger, you have to decide how you’re gonna brand the new institution. And the reason I try… We use the word “mergers,” but someone’s always gotta be the big dog and someone’s always larger than the other, and someone’s gonna be in charge. And so it’s not a true merger. And in higher ed…

0:24:33.1 EP: And you’d say that was the case for all of the various…

0:24:39.2 DW: No, that was the case for the ones that failed. The merger that failed is, the school that was definitely in the stronger position said they regretted not laying on the table from day one, “This isn’t a merger, this is an acquisition, we’re gonna be running things.”

0:24:53.7 EP: Interesting.

0:24:53.7 DW: They said, “We tried to be nice because we wanted everybody to feel good and didn’t wanna get morale too down,” but… It goes, “But midway through, we realized that… ” This one guy said, “These guys really thought we were equal, and there was no way in… ”

0:25:05.9 EP: And then it resulted in not an ideal outcome. Right.

0:25:09.7 DW: And it resulted in, unable to get the deal done because the positionality that they all were in was not… Everybody around that table from the two institutions had a different understanding of the position they were sitting in midway through. And it was a surprise.

0:25:27.7 EP: Well, clearly a tremendous amount of factors and considerations. Jon, you’ve been extremely generous with your time today. And so my final question here before I let you go, would you mind sharing your top pieces of advice for university leaders or others who may be listening to our podcast about how to get their financial house in order, how to plan for what comes next when the very foundation of that house starts to crumble? What would be your top advice as we close out here?

0:25:58.6 DW: I would say in the landscape we’re sitting in right now, be very conservative with your expectations on all fronts. And if you exceed them, great. But don’t over promise and underperform. And take into account all the factors. You can have a headcount, but what is the discount rate? How much financial aid are you giving away? And start budgeting for smaller incoming classes and start budgeting for the new norm. You know you’re gonna have a smaller population. The student is in the driver’s seat when selecting the schools. We know the discount rates continue to go up, so there’s no point in setting up expectations that you’re gonna grow tremendously and there’s gonna be more revenue and then we can do these things. Why not on the other side, say… Especially when you’re a small private institution, you have to look at what is your advantage.

0:26:56.4 DW: And we talked earlier about the advantages of a big public university, football and all that, but there’s also a lot of downside; the personalization, the unique experience of the student. Many students like being in a setting where they know their professors and they know their fellow classmates. So, maximize that. Take into account how that can be a benefit, not a unique… How it can be a benefit against the competition. You can position it that way, but I do also think that has to lead to outcomes, that this environment produces better outcomes for students. They’re able to get more interaction with the career service office, they’re able to talk with their faculty about what would be a good internship or maybe a good place to go to graduate school, those type of things that lead for better outcomes.

0:27:46.4 DW: And you can’t run from outcomes ’cause they’re transparent, you’re gonna see ’em, so you have to embrace them. But I think within that, understand that over the next few years, nobody’s gonna be flushed with cash. The federal government’s not coming with another payment program for institutions and there’s never that big donor that everybody thinks they’re gonna get. So from that standpoint, make your expectations realistic and explain that to the community, and be upfront and embrace it. Embrace what the challenges are and be determined that with the environment that you’re producing, students wanna come there and will have positive outcomes both while they’re there and when they graduate.

0:28:39.7 EP: Fantastic. Well, I appreciate those words of wisdom and facts to wrap us up there, Jon. Thank you again so much for your time. Really, really appreciated it, Jon. I hope we’ll get some listeners here, but thank you.

0:28:52.8 DW: Thank you too.

0:28:53.8 EP: Thanks again.

0:28:54.9 DW: Thank you.

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