Is Consolidation Coming?

Monday, March 21, 2022 - A perfect storm of economic factors are driving the narrative for mergers, acquisitions, and partnerships in higher education. John MacIntosh and Kasia Lundy, both advisors to colleges and universities, join Michael and Jeff to explain the landscape and what's next for the sector.

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Show Notes:

Unlocking the Power of Collaboration: How to Develop a Successful Collaborative Network in and around Higher Education

Mergers, Acquisitions & Higher Ed: Mergers and acquisitions are common in the corporate world but not so much in higher ed. With so much talk about colleges going out of business as we come out of the pandemic, Jeff and Michael explore the idea of mergers and acquisitions with Jeff Senese, the president of Saint Leo University, which recently acquired a college thousands of miles away and wants to build a national network of Catholic colleges.

Transcript:

Jeff Selingo:

Michael Bond ratings for colleges aren't scoured like the US News rankings are, but almost every day in my email inbox, I get updates on the financial outlook for colleges that are rated by the major bond rating agencies like Moody's. Let me tell you, the news lately hasn't been great for some colleges. It seems the federal stimulus dollars that might have papered over financial issues at some institutions are really coming to an end.

Michael Horn:

And that's why Jeff, there are so many discussions right now about what's next for a portion of the sector that is staring at the demographic cliff in the middle of this decade, and wondering if a better path forward is not one that they continue to take alone. On this episode of Future U, we'll be revisiting an issue that we explored last fall, mergers, acquisitions, and strategic partnerships.

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Jeff Selingo:

I'm Jeff Selingo.

Michael Horn:

And I'm Michael Horn.

Jeff Selingo:

Earlier this season, we covered the topic of mergers and acquisitions with Jeff Senese, the president of Saint Leo University in Florida. We'll add that episode to the show notes. Saint Leo, as you might recall, is a Roman Catholic institution, which had announced last summer, that it would merge with Marymount California University, another Roman Catholic liberal arts institution near Los Angeles. But since that episode of Future U aired, Saint Leo's accreditor, the Southern Association of Colleges and Schools Commission on Colleges or SACSCOC, rejected the merger plan. Saint Leo plans to resubmit its application, but it does highlight the incredible number of moving pieces spinning during the higher ed M&A process.

Michael Horn:

That's right, Jeff. Higher ed obviously is a regulated industry at the federal and state level, and there's also the quasi regulators of the accreditors. So it's not as easy to merge or acquire as it might be in parts of the corporate world. Then add on top of that, these are organizations with different missions, lots of varied constituencies from faculty to alumni, and it's a recipe for a very naughty problem. So to help us understand that complexity and perhaps how to work through it, we have two guests with us today who have worked with colleges and universities on partnerships as well as mergers and acquisitions.

Michael Horn:

Joining us is John MacIntosh, who is a partner at SeaChange Capital Partners. It provides nonprofits, including higher ed institutions with financial assistance and access to resources as they change how they do business. We also have Kasia Lundy, who is a principal in the Education practice at EY-Parthenon. In previous roles, she also served as chief of staff to three Harvard University presidents. Kasia and John, welcome to the show.

Kasia Lundy:

Great to be here.

John MacIntosh:

Thanks for having us.

Jeff Selingo:

So I'm curious from where each of you sit, what's your experience been recently in this space, whether it's partnerships, M&A, helping institutions figure out what's next for them? Can you talk a little bit about what you each have been doing. John, let's start with you.

John MacIntosh:

I think as you know, early last year, my nonprofit, SeaChange together with the ECMC Foundation, Ascendium Education Group, Kresge and Michael & Susan Dell launched the Transformational Partnerships Fund, which is, it's a philanthropic initiative design to help institutions that are exploring mergers, joint ventures, other forms of partnership, get that done, and to try to support them both by providing a safe space for discussions, a confidential space, a space without judgment or expectation, and also grants to defer the costs. So we've been out there for a year, really trying to help institutions that have decided to explore a partnership or thinking about it, get that done. That's how we come at this work.

Jeff Selingo:

Kasia.

Kasia Lundy:

At EY-Parthenon and the Education practice that I'm a part of, when we get involved, it could be on either side, if you will, so presidents of institutions that are smaller, for example, that are looking for larger homes or for partners with whom to merge, or presidents of larger institutions that are looking for either expansion geographically, otherwise may reach out and say to us, "Can you assist?" What we typically would do in those kinds of situations, especially if it's the institution, smaller institution looking for a larger home is start with the question of, "Where are you in the journey? Why do you think a partnership may be the right thing for you?"

Kasia Lundy:

Again, crucial point for us, because we try to elicit from those institutions why they're even considering this journey. And then a lot of the support that we provide is actually facilitating conversations either among board or leadership or between the two, sometimes involving faculty as well as to what is critically important to those institutions to preserve as they go through the process. Then from there, it is the support of the process itself. So whether that is outreach to partners or communications, another critical element that we should not underestimate.

Jeff Selingo:

So John, from an outsider's perspective, when we look at 4,000 plus institutions in the US and 40% of that market is under a thousand students and the demographic cliff is coming, it seems like higher ed is really ripe for some consolidation. But in the case of Saint Leo, for example, that we mentioned at the top of the show, there was this issue with accreditation, for example. So how much of the barrier to partner to acquire a college or to merge is the inertia of institutions and how much is it the regulators, whether that's the government or the accreditors?

John MacIntosh:

We've been, as you know, involved in higher ed partnerships for about a year as a grant maker, but it continues work we've done for 14 years. I would say to your point, higher education's very complicated just because there are so many constituents, you have the current students, you have the alums, you have the trustees, you have faculty, you have the local community, you have various levels of regulation, not just the accreditor.

John MacIntosh:

I wouldn't point the finger at one in particular, but more just to say there are multiple constituents involved. People feel very emotional about their schools, and quite reasonably different groups are going to see particular partnerships in different ways. I think that's what makes it complicated rather than being able to call out, it's all about trustees who are sleeping or it's all about alumni who don't see reality. I think it's just more that there's a lot of different voices in the mix.

Jeff Selingo:

I noticed that you used the word partnership there, John, rather than like mergers and acquisitions, it seems like a partnership is something less than a consolidation though, in this industry. Isn't it?

John MacIntosh:

Look, I think what happens in these discussions is people pick a word like partnership or collaboration, and then all they do is talk about mergers, and all they think about is takeovers. I think we need to reflate the concept because, to my mind, there are a number of institutions who recognize that over the next decade, they're going to have to find a new path forward, that the forces that they are facing demographic technological market political mean that going it alone is probably not the right answer, but there's lots of different things they can do.

John MacIntosh:

And so to me, it can be everything from a merger of equals, whatever that is, to a well-planned head- held-high teach-out, to sharing your back office, as they are doing in New Mexico. I don't think it's helpful to collapse this. It's more, "Do we recognize that going it alone is the wrong answer for our mission or students?" And if so, what is it that we need? And it could be a range of things depending on the situation that the school faces.

Michael Horn:

Kasia, I'm curious to bring you in here and get your framing on the same point. Are you as positive about partnerships or do you see the real opportunity here being in M&A specifically?

Kasia Lundy:

I think M&A is important to put there on the spectrum, but I would agree with John, it's important to start the conversation more broadly, because I think you can bring more people into the conversation that way. Inevitably, I think when you get down to it and start evaluating the different forms of partnership, if that's a shared services thing, or if that's an academic joint collaboration thing, or if it's a full on M&A.

Kasia Lundy:

I think there is so much work involved with all of those that in the end, the juice has to be worth the squeeze. And it's very interesting as these conversations evolve, you may start in one place and end up on the other end of the spectrum in a mergers and acquisitions place. But I do think politically and to bring stakeholders on board, it is important to start broadly.

Michael Horn:

So Kasia I just want to dig into that a little bit more. Do you see this progression in the conversations like our partnerships and sharing back office operations a first step in the M&A conversation, or does M&A conversation need to cut right to the chase from the very beginning in order to think about the multiple hurdles to a full scale merger or acquisition? How do these conversations progress and what are their contours?

Kasia Lundy:

Look, you're getting the bias of one consultant, but I would say the M&A has to be on the table at the very beginning. It should be part of the dialogue, and it should be part of the ongoing dialogue between boards and leadership and other stakeholders. I do think that then it creates a situation where people will go, "Oh my gosh, how can we go to merger right away? Let's explore some of these other options." But Michael, I would say it's important to have it there in the open.

Jeff Selingo:

So a question for both of you, we've been hearing about mergers and acquisitions, of course, for quite some time in higher ed, but yet we really haven't seen a lot of this consolidation or even closures on any scale, it really hasn't been happening. But of course now we've had this huge disruption over the past two years called the pandemic. I'm just curious, will COVID finally be the fuel that drives more mergers and acquisitions or partnerships, whatever words we might want to use here? Kasia, let me start with you on that question.

Kasia Lundy:

I think you probably know, but we've been tracking these numbers over time. And so when I look at the number of mergers and closures that have occurred in the last 20 years, it actually comes close to, I think, somewhere roughly around 500. So, going back to what you were mentioning, there's over 4,000 institutions here, that already is starting to sound like a fairly meaningful percentage when you hit that 10% threshold. But we have seen an uptick in the years heading into COVID, interestingly. What used to be in the single to low double digits was in the twenties to, I think, thirties during the years heading into COVID.

Kasia Lundy:

So I do think you will see more of this, but actually the question I would love to put out there is, are you going to see more mergers or are you going to see more closures? One reflection I have after working in this M&A space and higher education for the last five years is that, institutions often wait too long. And so, in fact, a lot of those closures you could probably see as failed attempts to consider mergers or partnerships earlier.

Jeff Selingo:

It's a good question, I think, John. Right? These institutions maybe COVID was kind of the death knell for some of these institutions and they probably should have done something beforehand. But where do you feel like COVID is going to appear in terms of mergers, acquisitions, partnerships? Is it going to accelerate it or not?

John MacIntosh:

I don't spend a lot of time thinking about these questions, to be honest, because to me, where we sit, the question is more, are there institutions who, if they proactively make wise choices, if they can do that, that will be materially better for students, and particularly students of color or students from low-income background who have been told, "Work hard, go to college, it's the best ticket to a good life, economically and in a fuller sense of that word."

John MacIntosh:

And so to me, it's undoubtedly the case that over the next decade, there are going to be dozens or maybe hundreds, but it doesn't matter of institution where there's something to play for, that if they make wise proactive choices, that will be materially better for their students than if they don't. And we set the fund up to try to help at least a handful of those institutions make those wiser choices. And whether we look back, whether it was a wave or not, whether it was mostly closures or mergers or teach-outs. Like to me, that's not an interesting question from where I sit to be completely honest.

Michael Horn:

No, and I think that's helpful, John, right, to have that perspective in the conversation, because it also though suggests that staying on your own might not be the right answer for students either. This isn't just an institutional, I guess, viability question. It's also, what's the best outcome for students question.

John MacIntosh:

If I can just comment on that, and I think the Massachusetts attorney general has made this clear. People forget that at least in the nonprofit context, in addition to their duty of care and loyalty, they have a duty of obedience to the mission that at least in theory, the trustee's obligation is with respect to the mission of the institution, not the continuation of the institution in any particular form or at all. The key is, to me, because this is so difficult is just try to put mission and students first in your mind and not temporize and delay acknowledging forces that I think inevitably will overwhelm the status quo if you're not careful.

John MacIntosh:

The other thing I'd say just to take Kasia's point is, I think there's also a danger of saying there's nothing worth doing except a merger. We should wait to do anything until everybody agrees we have to do something. Right? Because it's too late. And I think that there are things we are seeing where they stand on their own, but they may also be a courtship period or a stepping stone to something more fundamental if as and when that becomes the right answer.

John MacIntosh:

So I think that if the reason you won't talk about merger is because it's the M word and you know you have to do it but you're scared, that's a bad reason, but I think it's perfectly fine to say, "Look, Jeff college and Michael college might well be good merger partners in the future, and there may be a set of facts where we should do that, but let's build trust by combining our such and such programs or sharing our back office because that'll stand on its own, but it may be a stepping stone to something else."

Michael Horn:

I want to zoom out just a little bit, Kasia, against that backdrop that John just named, there are all these pressures on institutions right now and they're not just COVID. Right? So, just help level set us. So the specific drivers that you're seeing push us that may result in more M&A activity and the context you're seeing it in. You mentioned the 500 institutions that have closed or merged over the last decade or so. It's interesting because a lot of people will push back and say, "Well, this is cyclical." Right? We see this all the time in higher ed of birth and rebirth and death and so forth. How do you think about the present moment in which we're living and the drivers that are acting and maybe driving institutions toward M&A?

Kasia Lundy:

And those drivers have been around even pre COVID. Right? COVID probably just accelerated some of the very drivers that we saw before, but enrollment pressures were there before, too many institutions potentially for too few students that is certainly much more visible among the 18 to 24 year-olds. Right? Which is why everyone these days is trying to turn to the working adults as a silver bullet and thinking maybe that's where we can get our enrollment, maybe that's where we reconfigure our programming revenue pressures of all sorts.

Kasia Lundy:

So, I wouldn't say that the public has turned, maybe that's too strong of a term on higher education, but certainly the public is more skeptical of the value that higher education provides. So there's incredible pressure on pricing as well. The discounting continues, and the lucky few, the top 20, 25, who don't need to worry about ... There's always going to be the elite institutions and they're going to do just fine. But for the remaining institutions, enrollment pressures, pricing pressures, public perception pressures, I think all of that is contributing. And frankly, cost infrastructures.

Kasia Lundy:

Like when you think about how the costs were compiled and compiled over time, it is all hugely incremental. Right? It's almost like looking at the cost of inflation, building on top of that structure. If you were to build an institution today or a higher education system, you would probably build it very differently with a different cost structure. So just all of that comes to a head, I think.

Jeff Selingo:

John, can we talk a little bit about what's left behind after partnerships or consolidations? Many colleges and universities are now the factories of the 21st century. They're the largest employers in their town. They're central to the cultural and economic viability of their towns. Many of the colleges struggling right now, of course, are also serving the neediest students or students who historically have been underrepresented in higher ed.

Jeff Selingo:

So if the institution's partner becomes shells of themselves in a merger, what is really left for these communities and for these potential students? It seems in this case that M&A and higher ed is a bit different than in the corporate world where companies have to deliver shareholder investor value. But here it's really institutions having to deliver value to their customers, their students, but also their communities.

John MacIntosh:

I think that's absolutely right. Again, I think it's hard to generalize. Look at Martin Methodist, and I'm not joking when I say, I think it's far more important that Martin Methodist survived than Harvard. If Harvard disappeared tomorrow as a thought exercise, I'm quite sure the students will find another place. And the kids who would've gone to Harvard will go to Yale. If you look at where Martin Methodist is, not simply the kids there right now, but future students. If they weren't at Martin Methodist, many of them wouldn't be anywhere.

John MacIntosh:

So I think there, you can say at some level there's a loss of independence, at another level, I think they're calling it Tennessee Southern, the fact that the institution continues to be there, to your point, is extremely important. Not only as a local economic and culture actor, but for the students. I think in others like in Vermont, yes, if the institution's no longer physically there, it's devastating. I think there's a term in chess where you have to move, no moves good, but you're not allowed to pass. There are institutions where there's no great answer, but at least if you get on it, you can give the local community more time, you can give the students if you're teaching them out more resource that it's not good, but it doesn't get any better if you wait.

John MacIntosh:

I think it's different than the corporate setting, and I totally agree that the people who are a little glib and say, "Look, half the schools are under a thousand. They only enroll 5% of the students. The 18th century or 19th century want their colleges back. What's the big deal?" That's not a human perspective, and we need to try to be more sympathetic in helping these institutions make choices which are going to be in many cases, still very difficult. I agree with you completely. A corporate analogy is not the right one, but we can't prop schools up forever, because I think history, technology, demographics, all the things that Kasia mentioned are against some of these schools, and hope is not a strategy.

Kasia Lundy:

If I can go to another thing that you mentioned, the comparison to corporate, because I do think there's something important there. In the corporate world, to your point, there is shareholder value and there's a bottom line, and you know how to assess whether a combination makes sense.

Kasia Lundy:

In this setting, in the higher education setting, we've seen these conversations fall apart because everybody wants to do good. We all have our distinct missions. We do care about student outcomes as John was pointing out, but I think the definition of what that good looks like is so different across the institutions, that sometimes it literally falls apart on those student outcomes, on pedagogy, things like that. So it requires a certain level of finesse, I feel like, from leadership to be able to navigate through those complicated mission oriented environments.

Michael Horn:

Kasia, I think that's actually a great segue into the last question as we wrap up, that I want to ask both of you, which is, we mentioned at the top that we had Jeff Senese in the fall. And he talked about the presidents of other institutions that he's been talking with about becoming part of a network of institutions, and whether it's a network or an outright acquisition, I'm just curious, your advice, both of you, to presidents on either side of the deal when you start these conversations. Because I think the notion of a network getting into all these sticky questions that you just both have brought up. And so, Kasia, why don't you go first and then John follow.

Kasia Lundy:

My advice to presidents of these institutions would be going back to some of the things we were talking about, keep it as a lever that you may have to eventually look at or pull, but that means have honest conversations about it with your board. For it to succeed, I think it has to have a strategic rationale, so it can't just be a numbers game. So if there are other transactions or other mergers that have been successful, and we could certainly point to a few where they were led precisely by those outcomes and strategy, as opposed to just by the numbers, definitely reach out to those folks and learn more.

Kasia Lundy:

But to me, the transaction or the partnership, let's not call it a transaction because it truly isn't, but the partnership has to be motivated by more than just numbers. So it's on you, the president, the leader to look outside your organization and see who could be a good fit with you, either from a program perspective, culture, values, whatever that is.

John MacIntosh:

I'd say two things. I think that, look at TCS, and this is not an advertisement for Michael, being open to different structures. Look at Goodwin, University of Bridgeport, not as a legal matter and acquisition, but there's a pilot program there that allows for different type of governance. So I think that there are lots of reasons to think creatively about different structures, network structures that can get the organization's what they need while perhaps preserving what they don't want to give up.

John MacIntosh:

And to your original question, Jeff, I hope that there aren't problems around successor liability or stable patrimony or accreditors or whatever, that get in the way of those things. If the right thing is to create, I'm just making this up, a Franciscan TCS. The reason not to do that is not, "Oh my God, a Franciscan TCS? That's weird." I think that those of us who care about higher education should try to do what we can to let the institutions explore creatively different ways they might work together and not force them into, it's a teach-out, it's a merger or you can't do it.

Michael Horn:

Kasia, John, both insightful comments, appreciate you being on Future U and we'll be right back after the short break.

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Michael Horn:

Welcome back to Future U of a nuanced conversation with John and Kasia. Look, M&A and colleges closing, that's a topic we've covered a lot on the show, Jeff. So, I don't want to retread all of our thoughts on it, but I suspect Jeff that you must have loved John's comments that when institutions enter into strategic conversations with one another, they shouldn't just jump to an M&A conclusion, but that there could be a range of partnership possibilities that are in the best interests of institutions and students. I feel like you've been singing that tune for a while and frankly pushing me on it. So I'm curious if you have thoughts on what both said around this.

Jeff Selingo:

Yes, Michael, I think there's a set of approaches from partnership on one side through deeper partnerships and mergers and finally acquisitions on the other side, because I think there's really a difference, of course, between a merger of essentially equals and then a takeover in an acquisition. So I think even though we talk about M&A and higher education, those are two very different things.

Jeff Selingo:

I think part of the problem as Kasia and John alluded to is that many of these conversations start way too late. Unlike in the corporate world where M&A is seen as unlocking value for investors or building scale, in higher ed, it's seen either as a sign of aggression by the acquiring entity or weakness by the institution that needs help.

Jeff Selingo:

So at its core, Michael, I think this all goes back to your work. It's about what problem is an institution trying to solve? And over the past few decades, we've seen back office sharing by institution and we've labeled that partnerships in higher ed and called it a day. And then in the last decade plus, we've seen an increase in P3s or public-private partnerships, and everything from student housing to online education. But I think the daunting set of external challenges facing higher ed right now call for something to the right of that continuum I was talking about earlier.

Jeff Selingo:

So it's not just a simple partnership like a back office operation or even a P3. I think this is much deeper in terms of partnerships or a better word is probably alliances or networks of institutions. That to me would be just to the left of M&A, that's really kind of that step short of true M&A as John described it. Now, I wouldn't call it a partnership however, because that hearkens me back to the back office operations or P3s which I don't think are going to solve the problems facing most institutions.

Jeff Selingo:

A few years back, I was an investigator on a paper with a nonprofit higher ed consultancy that was funded by Lumina, and we're going to put that paper in the show notes. And we defined this idea of what we called higher education-focused networks. So again, deeper than partnerships. We defined these as collaborative groups that, one, tackle a prominent social problem or challenge in the field by working together. Two, adapting the group's strategies and structures over time in response to what was happening in the environment. And three, generating a sustained flow of activities. So I think those three things show you that these are not associations or agreements between institutions to share back office operations, because they are constantly moving.

Jeff Selingo:

What might be examples of some of these higher education focused networks? We have some current examples, for example, Achieving the Dream, which is a network of community colleges with a mission of driving student success. We have the American Talent Initiative, which is a coalition of public and private four year institutions that have pledged to expand opportunities for access and success. Of course, we have the University Innovation Alliance, which we talk about often, which is this alliance of 11 public research universities, again, focused on student success. And we even have local examples of this. So think about UpSkill Houston, which is a regional partnership among business, industry, education to really increase awareness of high growth career paths.

Jeff Selingo:

Now, you might hear those examples and say, "Great, but how do they keep the lights on when institution is struggling?" And again, I think that's why many of these conversations start too late. My take is that if you figure out for example, how to increase retention or improve career services or upskilled learners, like any of these networks, I just mentioned, have done, your institution is not only going to survive, it's probably going to thrive. But you can't enter into these networks if you don't have something of value to offer.

Jeff Selingo:

Michael, that's why I did think that John's points about recognizing clearly the fiduciary duty is to the mission of the university and not the sustainability of the institution per se. That was a really important one that I suspect many trustees don't fully grapple with.

Michael Horn:

That's why I appreciated John's point so much to anchor on what's best for student in this conversation, not simply things, and he didn't say this, but I will, don't just focus on things like my prediction with Clay Christensen. Right? That a lot of schools will be consolidating. But I'll also note on that end, a couple of things that I thought were important as well. First, Kasia clearly made the point that you wouldn't build a new college today the way colleges have accumulated over the years. Right? Especially this set of fixed costs that, as she said, really have compounded over time.

Michael Horn:

It's not just that you have lots of buildings for example, or duplicative programs, but all those things have ongoing costs to them. Buildings have maintenance, for example. We know what happens if you defer that maintenance as many schools do, the bill still comes due at some point. Then you look at a place like Minerva University, where I serve on the board and they've really avoided that fixed cost business model by relying on third party physical assets from the round the world to create their global campus.

Michael Horn:

And I'm certainly not saying that Minerva is the answer, as a new institution, Jeff, it certainly has a lot of questions still to answer, but I'm just noting that there is this reality that both John and Kasia observed, that at some point institutions have to grapple with their sustainability, and many college closures might indeed be better stated as that they were failed mergers. Right? That these conversations should have happened much earlier before it got to that warning point.

Michael Horn:

I think that point is an important one because we see that this consolidation number of 500 institutions over two decades that actually had tripled in the years prior to the pandemic. So that's before the cause of COVID and the real demographic cliff that basically says 12% of institutions closing in two decades before this all set in, our prediction that at least 25% will close over two decades dating to 2013, it just doesn't feel that off to me still, and I'm personally not sure why the media doesn't pick up on the fact that I don't think this is going to be a cataclysmic failure of hundreds of institutions at once or something, for it still to be a reality that these institutions are grappling with this unsustainability, and we just are seeing this consolidation occur and I think increase, Jeff.

Jeff Selingo:

And I think we are going to see some closures, mergers and acquisitions. There's no doubt about it. I don't want to guess a number here. I think you pointing out cautious point around the idea you wouldn't build a college like this today says to me that there was all these colleges built this way that shouldn't be, and you have to unwind that, and I think that you either unwind that by merging or acquiring other colleges, stronger players acquiring weaker players, or you're going to have to unwind it in a way that I think people don't want to go to, and that's really starting with governance.

Jeff Selingo:

Because we have constructed the colleges the way we have largely because of shared governance. I don't want to dive too deeply into shared governance because we could do an entire episode on it, but we can't really tackle the issues that we need to tackle in higher ed right now and at institutions without trying to figure out who makes these decision and how you make them.

Michael Horn:

Jeff, I think it's a good point. It actually touches on two other points. I'll just note and flag for audience, you may have just outed ourselves in what a future higher ed 101 episode ought to be. But you asked the question that we've both made the point in this podcast that certain institutions just mean a lot to their local communities. You used the analogy that they are the factory of that town. Right? In sort of modern parlance, keeping it afloat, and that can't be overlooked. And John clearly rocked that point.

Michael Horn:

But I also think it suggests that maybe the colleges aren't that different from the factories in that the central question, I think, at some point has to be, who pays to keep it afloat if it's indeed delivering a valuable service? Right? Like just employing lots and lots of people with few students in no notable research isn't an answer, I think, but if it's doing something valuable, training a small but important number of people for certain roles in the community say on top of being a cultural and employment center and the like, who pays for that, Jeff?

Michael Horn:

I don't think it's fair to ask the students to float all of those costs for things that are outside their education. So, will it be the town, the city, the regional community, the county, the state, alums, like who will pay for that, Jeff, to make sure that we maintain that?

Jeff Selingo:

So, Michael, I think there are multiple takes to that stool, of course, in terms of who pays. Until the 1980s, there was this unspoken agreement, a partnership between government institutions and families about who paid for higher education. And now of course, much of the burden for paying for college has fallen to students, which is why we have the student debt we have today. States have pulled out, and as Rick Levin said on a recent episode of Future U, mostly because of healthcare costs, institutions themselves have tried to discount tuition, but they can't keep up with their own rising costs and the stagnant incomes of families coming to college. So they just have to keep putting out more discounting in order to attract students.

Jeff Selingo:

So, I feel like we really need a new compact about who pays, and I think it starts with a question, who benefits? There's a contingent of authors and policy makers and politicians out there who think the public at large is the one who benefits from higher ed and thus higher ed should be free. Now, I tend to be a realist when it comes to policy, and free college is a non-starter for me on that front. Now, clearly institutions in their town benefit that town. As you say, we shouldn't be asking students to prop up essentially the institution on their own backs. That's like asking the workers to continue to take pay cuts just to keep a factory open in town.

Jeff Selingo:

So, I don't think it should be the students that prop up an institution just because we need that institution not to go out of business because it's the only thing going in that town. If we think an institution is critical to a region, then states really should start to think of it as economic development and give incentives to it just like they would to a company to locate a factory in a town. Also, who benefits from a regional college, whether it's a public or private institution? It's the local employers as well. So if they want skilled workers, they need to pay up as well as the state itself.

Jeff Selingo:

In many cities, we have these things called Special Business District that pay for extra services. So what if we took that idea around higher education and have special university districts or special university regions where employers pay a special assessment to support their local institutions. Now it's a two-way street, as long as those institutions are helping to fulfill the workforce needs as well.

Michael Horn:

Yeah. It's a really important point, Jeff, and it also points to the fact that like states and employers, they can do the calculation. Right? Like what's the transition cost of letting the school in a particular community go under, what happens to all of the Wood B graduates, the employees and so forth? That has cost to it too, in many ways, probably more strategic for them to make those investments directly.

Michael Horn:

One more thing, I guess, around this that you've raised to me in conversation, off the podcast, Jeff, you've made the point that another reason this consolidation and merger and acquisition conversation is so different in colleges is that really nowhere else do we have alumni of a product or service petitioning to keep institutions afloat when they hit the point of insolvency like we do in higher ed. These alumni, they feel like keeping the institution alive at all costs is what really matters, perhaps in opposition to John's point about where the fiduciary duty does in fact lie, and my retort to you has been the conventional one, I think. Right?

Michael Horn:

Well, Jeff, of course, alumni have a vested interest in having a good brand on their resume, having their community intact. We like to belong to tribes after all as human beings and we want to preserve the college tribe. It's emotional. In some number of cases, alumni are still actually customers perhaps because they give money even if higher ed is perhaps not as particularly transparent as they could be about that relationship or maybe dependency in certain cases. But I think that struck you as an unsatisfactory answer about why do we have this dynamic where alumni are so emotional about keeping their college afloat. So, I'm curious your thoughts.

Jeff Selingo:

Well, first of all, Michael, I think more alumni complain about how their alma mater has changed than actually probably give money to it. If you look at the average alumni giving rate reported to US News and world report, it's only 11%. At the same time, I don't think we want to get into a situation that only those that give have a say in what their alma maters do. So I think the time has come for another new compact in higher education. And this is around alumni that allows institutions more flexibility in pursuing partnerships and maybe even mergers and acquisitions if it comes to that.

Jeff Selingo:

Think about it, Michael, the decades before social media, colleges played a critical role in keeping students in touch with old friends or forgotten peers. Satisfied graduates might describe the value of their connections with friends or professors or mentors. And they credit their college for helping them to keep those networks alive through alumni events or campus meetups. But now we know alumni no longer need to rely on universities to help them maintain their networks, which can be done almost automatically through Facebook and LinkedIn. But that doesn't mean there isn't a role for colleges to play in developing their alumni. Instead, I think institutions have a new responsibility to create networking opportunities among students, faculty members, and administrators throughout their lives.

Jeff Selingo:

And that might involve bringing faculty members and alumni together to cooperate on new projects or fostering intergenerational connections where older alumni play an active role in supporting current students or new graduates. There's really new ways of thinking about, how can we network alumni together that can't be easily done through LinkedIn, for example? I think if institutions are seen by their alumni as building their future, rather than only preserving these past memories of life on campus, I think alumni would be more willing to support the idea of sustaining the institution, even if that means it might need to merge to survive.

Jeff Selingo:

Now I could be wrong, but I think that too much of alumni in development in higher education is built on nostalgia in order to generate dollars rather than the possibilities for the future as alumni, when they think about the various stages of their own life. So really it's built on this past rather than this future. I think if we start to focus on that, I think we're going to start to see alumni maybe get more behind the idea of these deeper partnerships or maybe even perhaps mergers and acquisitions.

Jeff Selingo:

With that, we've come to the end of another episode of Future U, really a lot of thanks to John MacIntosh from SeaChange Capital Partners, and Kasia Lundy from EY-Parthenon for joining us. And once again, thanks to all of you for listening, we'll see you next time on Future U.

Show notes:

Unlocking the Power of Collaboration: How to Develop a Successful Collaborative Network in and around Higher Education

Mergers, Acquisitions & Higher Ed: Mergers and acquisitions are common in the corporate world but not so much in higher ed. With so much talk about colleges going out of business as we come out of the pandemic, Jeff and Michael explore the idea of mergers and acquisitions with Jeff Senese, the president of Saint Leo University, which recently acquired a college thousands of miles away and wants to build a national network of Catholic colleges.

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