Colleges and Universities Explore Merger Opportunities as Industry Consolidates

Colleges and universities throughout the country are facing a perfect financial storm as they struggle to deal with the continuing pressures of COVID-19, challenges in federal and state funding, and a diminishing pool of student applicants. For many of these schools, proactively exploring affiliation or merger options before their circumstances become unsustainable will best position them to thrive in the future. This advisory provides insight into the merger or affiliation process for institutions of higher education that may be faced with the need to explore such a transaction.

Identifying Merger Opportunities in Higher Education

Making the decision to explore an affiliation or merger can be a particularly difficult one for a college or university’s governing board as many such boards are unaccustomed to focusing externally to evaluate a school’s strategic options. The assistance of an external consultant can be invaluable as they can help a board to better understand a school’s competitive strengths and weaknesses, and identify realistic options for potential affiliation or merger partners. The process should commence while a school remains sustainable as this will help provide a degree of leverage to negotiate a favorable transaction. Once the field of prospective partners is narrowed, an experienced consultant can assist the board by confidentially contacting and eliciting levels of interest from the identified schools.

For those colleges and universities that identify a prospective affiliation or merger partner, the schools typically engage in discussions focused on their respective goals and objectives to ensure their mutual strategic fit. If the schools are sufficiently aligned and have compatible missions and philosophies, experienced legal counsel should be brought into the process to negotiate a non-binding letter of intent setting forth the basic legal framework and key commitments that will serve as a foundation for the schools’ affiliation or merger transaction. At Buchanan, our attorneys have overseen higher education transactions and know the intricacies and best practices when it comes to negotiating letters of intent and ensuring compliance with a board’s fiduciary duties as strategic options are evaluated.

The signing of a letter of intent is typically accompanied by a public announcement of the schools’ plans to affiliate or merge. Such an announcement requires careful planning and coordination to ensure appropriate and consistent messaging to the schools’ diverse constituencies which include current and prospective students and their families, faculty members, staff, alumni, donors, former board members, regulatory and accreditation agencies, lenders and bondholders, vendors, local politicians, and the media.

Beginning with the negotiation of the letter of intent, the affiliating or merging schools should work closely with their transaction legal counsel to guide them through the deal process. Central to this process will be extensive due diligence where pursuant to confidentiality constraints each school evaluates the operations and finances of the other to identify any road blocks or key considerations that need to be resolved before proceeding with the transaction. The due diligence process is critical to inform the parties as to each hurdle that must be overcome and approval that must be obtained before a transaction can be completed. During due diligence the parties may also begin the lengthy process of seeking required approvals from regulatory and accreditation agencies. This approval process will continue through the transaction’s closing.

Securing the Required Regulatory and Accreditation Approvals

Assuming that all obstacles encountered in due diligence are resolved and the schools’ governing boards approve the requisite authorizing resolutions, the schools may sign a binding definitive agreement which, subject to the satisfaction or waiver of all conditions precedent to closing, will legally obligate them to proceed with the affiliation or merger. The signing of the definitive agreement initiates a more comprehensive effort to obtain all necessary federal and state regulatory approvals, as well as those required from accreditation agencies specific to the schools. Among the more prominent federal, state and accreditation agency approvals that must be obtained are the following:

U.S. Department of Education: Schools that participate in Title IV, Higher Education Act federal student aid programs must obtain U.S. Department of Education, Office of Federal Student Aid approval of change in ownership transactions that result in a change of control. Schools may submit an E-App marked “pre-acquisition review” (in either abbreviated or comprehensive form) in accordance with Department procedures before a change of ownership transaction takes place or, alternatively, the schools may close a transaction without such a review provided that they comply with their program participation agreements and timely submit a materially complete application consistent with federal regulations after the closing of the transaction.
State Department of Education: State statutes and regulations must be carefully reviewed to determine the state-specific requirements that must be followed. Depending on the state(s) involved, a public notice and hearing requirement may apply. If one of the schools will be ceasing its independent existence (e.g. via a merger), specific program teach-out and operations close-out procedures will need to be followed. Evidence of State Department of Education approval may be required before documents finalizing the transaction can be filed with the Department of State.
Accreditation Agency: Central to the transaction process is the need to obtain approval from the involved schools’ accrediting agencies. Each of these accrediting agencies (e.g. Middle States Commission on Higher Education and Southern Association of College and Schools Commission on Colleges) is required by federal regulation to maintain policies ensuring that any substantive change of an accredited school, such as a change in the form of control or ownership or the acquisition of another institution, will not adversely affect the capacity of the schools involved to continue meeting the agency’s standards. Schools desiring to engage in a substantive change transaction must file a formal application with its recognized accrediting agency in accordance with both federal guidelines and the policies of the accreditation agency.
U.S. Federal Trade Commission: Depending on the nature and size of the deal, the parties may need to make filings under the Hart-Scott-Rodino Act that will facilitate a review by the Federal Trade Commission of the competitive effects of the transaction.
State Attorney General and/or Court Approval: Depending on the laws of the state(s) involved, a transaction involving not-for-profit colleges or universities may be subject to review by the State Office of Attorney General or require a court order. Such a review and/or court approval will typically be required when there are significant endowments or donor restricted funds involved.

In addition to those approvals noted above, a transaction between higher education institutions may require additional third-party approvals from bond trustees (or bondholders), lenders, and counterparties to contracts, leases and licenses that may contain change of control provisions. Due diligence is critical to identifying all such additional approvals that will need to be obtained in a given transaction.

Ensuring a Smooth Transition with Integration Planning

The early success of an affiliation or merger will depend on the level of integration planning that is accomplished to ensure a smooth transition. Depending on the issue, different levels of integration planning should occur through the closing of the transaction, yet the process should commence concurrent with due diligence and be overseen by an integration planning oversight committee comprised of key leadership from both schools. This committee should oversee and interact with the different integration planning work streams comprised of subject matter experts from each school. Among those work streams that should begin their work early in the transaction process are those related to: academic affairs and curriculum structure; student body messaging focused on recruitment and retention; faculty retention and integration; technology solutions integration; and plans for future use of facilities. Other work streams, including those relating to human resources and compensation/employee benefits integration, should not begin their planning until later in the transaction process. In addition to the issues impacting students, particular focus should be placed on changes impacting faculty planning and how concerns related to tenure are to be addressed. Likewise, if a significant reduction in staff is anticipated, care should be taken to ensure compliance with all federal, state and local laws pertaining to layoffs and reductions in force.

Once all required approvals and consents are obtained and other conditions to closing are resolved, the schools may close their affiliation or merger transaction and begin to implement their integration plans. Even after the transaction is completed, significant work will remain as the U.S. Department of Education approval process will need to be completed which takes a number of post-closing months. This process commences with the submission of certain documents that are required by regulation to be filed within 10 business days after the closing. Care must also be taken to ensure that all other post-closing legal requirements are addressed (e.g. by timely filing any necessary Form I-17 petitions with the U.S. Department of Homeland Security relative to any eligible nonimmigrant academic or vocational students impacted by the transaction).

The challenges facing today’s colleges and universities are not specific to particular schools but are impacting the higher education industry as a whole. Schools can anticipate that a successful transaction process may take as long as 18-24 months to complete which makes it critical that schools commence reviewing affiliation or merger options while a school remains sustainable. Those governing boards whose schools are significantly impacted should consider a proactive approach to evaluating the school’s circumstances to ensure they are not left behind as the industry’s consolidation moves forward.

Learn more about how Buchanan attorneys, led by Dale Webber, represented University of the Sciences in Philadelphia as transaction counsel in its merger with Saint Joseph’s University which closed on June 1, 2022.