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Lessons from business: three things universities can learn about mergers from the private sector

  • 5 June 2020
  • By Nigel Driffield, Diana Beech & Koen Heimeriks

This blog was kindly contributed by a trio from the University of Warwick: Professor Nigel Driffield, Professor of International Business at Warwick Business School and Deputy Pro-Vice Chancellor for Regional Engagement, Dr Diana Beech , Head of Government Affairs and former Policy Advisor to the last three UK Universities and Science Ministers, and Professor Koen Heimeriks, Professor of Strategy at Warwick Business School and previous faculty at Copenhagen Business School, Rotterdam School of Management.

There has been a lot of discussion and attention paid recently to the prospect of a spate of mergers within UK higher education. It is assumed mergers will come about either as a result of cost-cutting measures, or simply as some institutions become financially unviable – something which could become all the more likely in the wake of the Covid-19 outbreak. After all, in April, the Office for Budget Responsibility issued the warning that the UK education sector could be hit hardest by the Coronavirus pandemic, with the impact likely to be felt heavily by universities. Modelling by London Economics for the University and College Union also found the crisis could leave almost three-quarters of UK universities in a critical financial position.

From a business perspective, however, mergers in higher education make little sense. When mergers or acquisitions (M&A) occur in the private sector for purely cost-cutting reasons, then they are typically achieved through rationalisation and the reduction of aggregate capacity, as has happened in the steel industry on a number of occasions over the years. A secondary reason mergers occur – and one which is typically more appealing in theory rather than in practice – is when there are hitherto unrealised economies of scale that mergers allow to be captured.

When put in these terms, it is possible to see the instinctive appeal of a merger in a higher education setting, as the merged entity only needs one Vice-Chancellor, one Registry, and so on. Yet, while there will be some savings to be had, as there will only be one central administration function – notwithstanding the fact that the Vice-Chancellor of the new institution will probably get a pay rise due to the increased complexity of the new role – it will inevitably need more people.

Close-up Of King Chess Pieces On Wooden Blocks With Mergers And Acquisitions

The second lesson we can take from the private sector relates to what is typically referred to as the ‘market for corporate control’. The essential premise here is that the value of a firm drops because the people currently running the business are making bad decisions. As such, a change of ownership is required in order to put the business back on its feet.

Typically, the mechanism by which this type of acquisition occurs in the private sector is the use of Q ratios. The basic premise behind Q ratios is that when the value of a company’s equity falls below the value of its assets, then it makes business sense for someone else to buy the equity, even if all they do is to break up the company and reap the profit. The analogy to this in the context of higher education is not perhaps merger, but a change of management, particularly if the government believes that a different management team can be brought in instead. Given the current climate, private providers are probably already circling certain institutions and lobbying the government to be allowed to take them over.

Nevertheless, one of the most commonly asked questions in both consultancy and business research is whether a change of ownership or management does indeed lead to improved performance. Much of the focus will often be on acquisition by foreign firms, and the extent to which their apparently superior knowledge, management or access to capital leads to performance gain. There are some notable examples of this, despite the current crisis. No one would argue, for instance, that Tata’s acquisition of Jaguar Land Rover has not been a good thing for the company, or indeed that Fenway Sports Group purchasing Liverpool Football Club did not lead to an improvement in performance. Yet, for every one of those success stories, there are very obvious mistakes like the Google and Motorola case too.

This brings us on to the third insight from the private sector, which is that M&As are often driven by the desire to acquire or better exploit intellectual property (IP). This is most commonly expressed in terms of the desire to acquire technology, such as seen during the acquisition of ARM Holdings by Softbank, but it is particularly prevalent where the acquiring firm is from an emerging or developing country. A key motivation here is the desire to acquire a well-known brand.

One could argue that, in the past, it is precisely this issue that has been a sticking point in higher education mergers, where clearly (at least) one brand is likely to disappear. So, if we are to assume this is to be the case in the future, too, we need to be asking who would such brands be of interest to, and whether the answer is potentially foreign providers, or the private sector, or whether institutions further down the rankings may see this as an opportunity to ‘trade up’, especially if they are in a better financial position.

Also, whereas private companies acquire to innovate and generate growth in new areas of business, this is less attractive for public service and in an education context. Innovation in education comes about through novel research, pedagogic methods and superior support for both. Innovation in all domains, except perhaps the third, is stirred through resourcefulness instead of scale. As we know from innovative companies such as 3M, such opportunities surface from nurturing the right structure, systems and culture. Merging higher education institutions will therefore likely offer cost benefit, but not innovation.

What do these insights from business offer us?

Overall, given the financial problems that the UK higher education sector is likely to face over the coming months, we need to ask if mergers are really the appropriate solution. If the underlying financial position of an institution is not sound, then a merger is definitely not the answer. In other cases, where potential changes of ownership or management are more likely to be cosmetic – to justify, for example, a financial bailout or a write-off of previous ‘debt’, rather than something that will change the underlying financial situation of an institution – then it is still unlikely that a merger can significantly improve financial performance on its own. The only exception to this rule would be if the acquiring institution changed the business model somehow, such as by moving away from research to a teaching-based model of provision. While that may offer a perceived silver lining, it hardly supports the UK’s ability to lead worldwide in higher education in the decade to come. All in all, mergers are not the magic bullet they may appear to be, and we should tread cautiously into any post-pandemic future where the pressure may be high to cutback, downsize or rescale.

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  1. Rex Knight says:

    I agree with the conclusions of this piece, mergers may happen in the wake of the pandemic but institutions need to be very clear about the rationale for them. Two factors the article does not mention are\;
    1 If the staff in two universities are major collaborators or potential collaborators then merger can remove the inevitable institutional obstacles to collaboration.
    2 For smaller institutions or institutions with a very broad portfolio there can be an argument based on critical mass. Offering a really first rate student experience depends amongst other things on having a big enough team of staff to cover the discipline, and the same applies in research

  2. albert wright says:

    An unusual subject for research and a valuable and stimulating contribution.

    Recent mergers in the FE sector over the last 5 years have had mixed results and have generally resulted from financial failure at one or both FE Colleges.

    Private sector consolidation by way of M & A has been a major feature of the Apprentice and Skills Provider sector with mixed results. I am not sure if there have been takeovers within the private and FE College sectors although there may have been “partnerships” with 6th Form Colleges arising from Area Reviews.

    I would imagine the legal status of Universities as independent, charitable institutions would be a major challenge for a private company seeking a merger or acquisition – has their been such a move?

    Consolidation in the Charity section has always been problematic too.

  3. Jan says:

    Another reason for mergers is in a static or shrinking market to increase your share of the market. I think this may well be relevant to the HE/FE sector as foreign student numbers are likely to be reduced and I suspect UK student numbers too. Mergers will offer an opportunity to keep numbers at a level to make smaller courses viable.

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