For those institutions eyeing a future transaction, conducting strategic and operational due diligence is a critical – and yet often overlooked – step.
The past decade was already difficult for colleges and universities given financial challenges resulting in a changing higher education environment encompassing enrollment declines, increased need for financial aid, aging campuses, and new investments in teaching and learning. Add in the challenges posed by the pandemic and the continuing effects of how it has changed overall demand for college degrees and it’s no wonder why many institutions are facing significant risk of failure and closure.
All this said, while there has been considerable discussion of the institutions that are not doing well, there has been much less focus on those colleges and universities who saw around the corner the changing demographics, market demand, competitive environment and methods of teaching and learning . Many of these thriving institutions developed robust capacity in marketing and strategic enrollment management, experiential competency, technology-based learning models and innovative programs thus making it possible for them to not only survive the pandemic, but in many cases thrive as a result. Also, likely contributing to their ultimate success is their flexibility, diversification of programs and student types, as well as financial reserves.
As is the case with many other industries over the course of history where some entities were able to successfully adapt to a changing environment and others were unable to adapt, market consolidation of colleges and universities through partnerships, mergers and acquisitions has increased significantly over the past two years. These adaptations hold considerable value and/or provide a lifeline for the institutions involved; however, there is also considerable risk of failure of the integration.
Strategic and operational due diligence
While legal due diligence is common place for partnerships, mergers and acquisitions in higher education, strategic and operational due diligence is also a critical step often overlooked. Strategic and operational due diligence provides significant value through the assessment of the strategic and financial “fit” of the integration as well as identification of key considerations related to many of the unique elements of an academic institution. This diligence can surface key issues that could turn into very difficult situations for the acquiring college or university, erasing much or all of any value that could come from the resources, time and effort allocated to the integration.
Some of the areas in which acquiring institutions should conduct due diligence include: finance and operations, compliance and regulatory, reputation, technology systems and data and enrollment management. Each of these areas holds a plethora of pitfalls for the acquiring organization and, in most cases, discussions related to these topics happen after the transaction has occurred – when it is too late or painful to turn back. Knowing that the beautiful campus that was just acquired as a satellite campus has been under-maintained for the past decade, that there are issues with accreditation of certain programs, that the reputation of the partner/merged/acquired institution is not as good as thought , that the data systems are not secure and data not protected or not following FERPA and/or that interest in the programs being acquired is even less than originally thought are extremely valuable conditions to learn before executing a transaction.
While it is impossible to identify and mitigate every possible risk factor associated with a partnership, merger or acquisition, many can be identified and mitigated as part of strategic and operational due diligence effort. And with this information, those colleges and universities that did see around the corner, acted on the changing landscape and, as a result, are now doing well in this new environment can move forward strategically and deliberately to partner, merge or acquire as they position their institutions for the next shift in the ever-changing and exciting higher education environment.
Joshua Burgher is a Principal at PKF O’Connor Davies, one of the nation’s largest accounting, tax and advisory firms, where he specializes in consultation and advisory services. Before joining the Firm, Joshua served as a COO, CFO, VP, Senior Vice Dean and faculty member at Columbia University, Georgetown University and Golden Gate University. Joseph Russell is a Partner with the Firm and its Higher Education Industry Leader. Jonathan Moore is the Firm’s Partner-in-Charge of Advisory Services.
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