A Merger Can Help Drive Sustainable Growth in Higher Education
Higher education institutions, facing heightened scrutiny from the US Department of Education, are grappling with considerable uncertainties related to funding, oversight, and long-term viability.
Institutions that are financially vulnerable and heavily reliant on tuition revenue could be especially impacted by potential changes. As a result, boards are considering mergers or acquisitions as a strategic approach to address challenges.
There are, however, many considerations for organizations to assess prior to pursuing a merger or acquisition to help make informed decisions.
Factors Impacting Education Institutions
Dropping enrollment trends place additional strain on educational institutions. From 2010 to 2021, undergraduate enrollment fell by 15%.
Demographic Factors
Declining birth rates are contributing to a significant drop in enrollment trends. US birth rates have decreased by 20% since 2007. This reduction in the number of potential students heightens competition for tuition revenue.
Other Factors
The COVID-19 pandemic coincided with 42% of the decline in enrollment. A Gates Foundation study indicates concerns about shifts in the education marketplace also affect potential students’ decisions.
The shrinking student population could not only affect future enrollment projections and the overall value of institutions but may also serve as a key motivator for pursuing such mergers.
Balancing Strategy with Valuations
Merger considerations are often driven by attractive valuations. While these opportunities may seem beneficial, they can become costly in the long-term if the merging candidate is not a strategic fit.
It is crucial for boards to assess their overall strategy and mission before pursuing mergers, acquisitions, or divestitures.
Assessing Readiness for Transformative Deals
Boards should determine whether their organization is prepared for large, transformative deals—often defined as acquisitions comprising 30% or more of the acquiring entity. Alternatively, they may opt for smaller, targeted mergers that align with specific organizational goals, such as geographical expansion or curriculum enhancement.
Opportunistic acquisitions, though financially appealing, can be detrimental if they fail to support long-term objectives.
Key Considerations for a Successful Merger
To ensure a merger aligns with strategic objectives, boards should evaluate:
- Competitive Advantages. What unique strengths or market position does the target organization offer?
- Capabilities and Synergies. How does the acquisition enhance existing capabilities or fill operational gaps?
- Cultural and Strategic Fit. Will the integration of the new entity support long-term goals and organizational culture?
- Financial and Operational Sustainability. Does the transaction create long-term value, or will it strain resources?
- Success Metrics. How will success be measured post-merger? What key performance indicators (KPI) should be established?
By focusing on competitive advantages, organizational capabilities, and long-term objectives, boards can make informed decisions that drive sustainable growth and financial stability.
We’re Here to Help
For more information about planning a strategic merger for your higher education institution, contact your Moss Adams professional.