Dr. Ricardo Azziz discusses the new DOE M&A rules and their impact on colleges

Good morning, everybody. Welcome back to another episode of This Week in College Viability. My name is Gary Stocker. Today's guest is Dr. Ricardo Aziz. And I guess I have to set this up as he actually wrote the book on college mergers and acquisitions, and we're going to use his expertise today. He has over 25 years of leadership experience as a principal with strategic partnerships in higher education. He led the merger that resulted in the Georgia Regents University, now Augusta University. And he served, Dr. Aziz served as the founding president and led the merger of the Georgia Health Sciences University. And he has written for, or his work has been cited in too many publications to list. I will list a couple of the books. He is co-author, actually wrote the book on mergers in higher education. A Proactive Strategy to a Better Future, and wrote Strategic Mergers in Higher Education, and that was published by the Johns Hopkins Press. And he also writes regular columns in Higher Ed Dive and other publications as well. He's the founder of the nonprofit Foundation for Research and Education Excellence, where he's also founder and director of the Center for Higher Education Mergers and Acquisitions. Our topic today is mergers and acquisitions in higher education, as you might imagine. And industry experts have in the past couple of years really expected a wave, Dr. Aziz, of college closures or mergers as institutions contend with declining enrollment and some financial pressures. But the Biden administration in the last couple of months set out some rules which might make this more difficult. And we're going to get Dr. Aziz's perspective on that. As we move forward with our podcast today. So, Dr. Aziz, the, the new DOE merger and acquisition rules require the organizations involved in any M&A to remain separate until the full merger or consolidation is approved. Is that good or bad?

Well, that's a, that's an excellent question, Gary. Um, you know, the, these rules have yet to be fully tested. I think it's important to know that we're actually in conversations with the department as well to try to better understand how they're going apply. But the rules basically tell us that it's going to be a two-step process. They're going to deal with the corporate merger first, ownership change, change in ownership. Uh, and that's going to have to be completed and fully approved by the department before they allow programmatic and location changes, what we would call organizational mergers, you know, where your programs are going to be, what satellite campuses you're going to have, these kinds of things. So it's a two-step process. Now both have to be fully completed before you move on. So you first have to have the complete approval of the ownership merger, and that requires the institutions to remain independent during that period of time, to have their own ID numbers and to basically manage their own Pell Grants, et cetera. From, from that point of view, that means really that, that those institutions that were planning a merge are going to have to wait a little longer, right? And we don't know how— what a little longer means. It could be 3 months, it could be 6 months, it could be a year. We don't really have yet testing of the system. So they need to wait a little bit longer, which means that if you have an institution that is financially very challenged, right, very challenged, that institution may not survive that period of time, right? If they say, well, we're going to run out of money by the end of our quarter and this is going to take, you know, half a year or more, that may be a problem. So is that good or bad? Well, it depends on who you're speaking to. Clearly, the department's philosophy, and we're intimating this, is that they want to make sure that mergers occur among financially viable institutions. And those that cannot sort of meet this new rule and remain independent for some period of time while the process is being surveyed may have to close. So it is a way of weeding out, if you would, the very weak institutions. The other thing I think these rules allow us to do is that they're a warning call to institutions, both for-profit and nonprofit, that, you know, just seeking a merger at the last minute to try to salvage an institution that is financially unstable is not a good strategy. And we've been about that for a long time, and of course I'm sure we'll have more time to talk about that, Gary.

So the department rules state, and I'm paraphrasing here, that they're doing this in large part to protect students. Now I'm gonna make the case that maybe the effort is more to protect colleges. Which do you think it is? Is the focus more on the students or on college?

Well, I actually don't know that it's actually directly to protect the students because obviously the students do not benefit from an increase and closures, right? And I do think the rules are going to have an ultimate effect of causing an increased closure. But to be fair, if the rules actually begin to caution higher education leaders and encourage them to begin to seek partners and merger partners sooner, that will actually benefit students. And so clearly, a financially unstable institution is not of benefit to students. So there is, we can argue both sides, but to be fair, in the end, having stronger institutions in the marketplace will be a benefit to students.

And before we delve deeper into the new DOE rules, I want to go back to your Georgia experience. Can you look back on what you went through with the Georgia public college mergers from what, about 10 years ago or so, and share the good and maybe the not so good lessons learned from that experience that could be applied today.

Well, I mean, I think the overall strategy undertaken by the University System of Georgia, which I was very supportive of, was correct. I mean, you know, you need to merge institutions to create efficiencies, synergies, and also to create more competitive institutions nationally, which I think they have really been able to do that. I think in general, and again, there may be some exceptions, but in general, the mergers really have resulted in stronger institutions that are more competitive for the state of Georgia, for the students that go to those institutions, and really for the taxpayer, which is really part of what the concept was. So, so I think overall it's been a positive thing. Now, to be fair, when we undertook these, and I was part of that first wave of mergers, and to be fair, I was the most complex, I was managing the most complex type of merger because it was a university with an academic health center and a liberal arts university. We had a tremendous amount of differences in culture and so on that we had to overcome. What we learned was lots of things because, frankly, we had very little guidance. We really, none of us knew what exactly we were doing. We had some guidance from the regulatory agencies who hadn't done this before. And so, to be fair, So, that was really the impetus for myself and other colleagues to begin to write the, as you said, the book on mergers and acquisitions in higher education, and as well as to become a scholar in the area because, frankly, you know, there was many mistakes that we really did that, you know, we could have avoided if we had had an experienced hand leading us.

So you and I have discussed previously the reality that we see anecdotally here in the last couple of years that too many financially challenged private colleges— excuse me— too many financially challenged private colleges wait too long before engaging in merger or consolidation discussions. If you were to stand before the boards of these private colleges, Dr. Aziz, What kind of guidance would you give them as they have their internal discussions about either the financial challenges they face or the possibility that they may not be able to continue to operate? How can you move these boards who are waiting too long, in our experience, to move quicker?

You know, it's actually a challenge that I face on a continuous basis. You know, I also do consulting in this area through SPH Consulting Group, and I'm often called to speak to boards and try to educate them around these issues. I think that in general, in any industry, if you have excess capacity and you have too many institutions and too many fragile, financially challenged institutions, you would think that they would consolidate, right? They would come together, they would merge, they would be acquired, and the marketplace would really allow us to create stronger, better-serving institutions, right? But it doesn't happen in higher ed as readily because we have another factor that industry itself doesn't have as much, right? Does have some, but not as much. And that is the issues around heritage and tradition and these kinds of factors. And so there's a tremendous drive for boards rather than to think, okay, what is the best thing for our students from a long-term viability point of view? What is the, what is the value of a merger to really think, okay, how do we keep this institution open so that it can continue to be the beacon for its alumni, which of course industry in general doesn't have. It has alumni, but it doesn't have alumni in the way we have it in higher education. And how do we preserve our traditions and heritage despite everything? So boards will do almost anything to keep their institutions alive and open. And the problem is the boards are are not understanding, and to be fair, are refusing to understand the massive challenges that are facing higher education today. And we can talk about those in a minute because I think it'll be important to fully understand why boards are not as willing to consider mergers and consolidations, despite the fact that it may help them preserve their heritage and tradition. In some form.

So I would like to think that I have some component of realism in what I believe. And I increasingly, because you know the data that I've created, the data that I look at, and Dr. Zizzi, I've become increasingly convinced, and agree or disagree with this, that the die has already been cast for many, many, many of these private colleges. We can talk about publics as a separate entity. But the die has already been cast for many of these privates and there's nothing they can do to continue to survive as a standalone private college. Agree, disagree, comment?

Well, I think, Gary, the data you put together, I think it's excellent. I think you should be congratulated on it. I really find it always super interesting and of great value. So I just don't mean to give you a plug there, but I really think it's something you should be congratulated on. And I think in general terms, you're right. The die is cast. And so let me just tell you a little bit of why some of this is bigger than a lot of these institutions are recognizing. You know, higher education in the United States really started in many ways, but it started in two major separate arenas, right? It started out as a cottage industry, literally a cottage industry in cottages, right? In homes and so on and so forth, individually around the 1700s, early 1800s. Where, you know, everybody who wanted to create a school of education on some sort of education would do that, right? Churches, communities, individuals, these kind of things. And so we have a large number of schools today that were created during that period of time, right? Smaller schools, schools that dispersed, private institutions, as you said. Then there was obviously the government started investing in schools, created the land-grant institutions and a series of other institutions that are publicly funded. Those tend to be somewhat different, as you said. But now it's time for reckoning of these two kind of big arenas, these cottage industry of private schools, some of which have grown tremendously, some of which have not, and these public institutions who are in many ways a significant burden on the taxpayer as well. Now, there are 2 or 3 facts that actually I think is important for boards to recognize. One, there's pretty massive excess capacity, educational capacity in higher education today in the United States. Now, you may not sense that if you're trying to get into Harvard or any other high-ranking school. You may say, well, I applied, I couldn't get in, et cetera, et cetera. There must not be enough slots in higher education in the United States, but we're only talking about the top 100 or 150 schools. There are 4,300 or more degree-granting institutions in our country, right? So what about the rest, right? What about the other 4,200 schools out there? So there's massive excess capacity, very likely somewhere between 2 and 5 million extra undergraduate slots. That's part of what we, you know, our research is ongoing That's one thing that institutions have to face. In the end, it's possible that you could say, well, every single institution under 5,000 students could disappear from the country tomorrow, and you would still have the capacity to educate the US population, perhaps not in the places that you'd like them to be. It's not saying that that's what's going to happen. It's saying that we need to understand the impact of excess capacity in higher education today. The other thing is that we haven't even reached fully the enrollment shock, right? We've decreased, the last decade has seen a decrease in enrollment for almost every single sector of higher education, except for the very large schools, the schools that are greater than 30,000 students. And we have yet to face the full impact of the enrollment cliff. So that's the second major factor that I think we need to understand. We've been losing students. It's very clear that we have and is only going to get worse. The only ones that are winning in this war for students seem to be the larger schools. There are exceptions, no doubt about it, but in general terms, it's the very large school. The third factor that I think is important as we keep in mind here is that there is an inability, right? There's going to be an increasing increasing inability of students and their families to pay for the cost of education. I mean, you know, educational debt has reached astronomical levels, and it is the second most common cause of personal bankruptcy, which is amazing for a country as rich as the United States that that is what we are imposing on students and their families for those who seek higher education, which this country benefits from. So those are big, 3 big factors. There are others, of course, that are driving this, but that's something boards need to understand. They need to face the facts and they need to start looking for options in order to preserve their mission, their heritage, and their tradition, perhaps not as a standalone institution, but perhaps as part of another larger institution.

And that's kind of the follow-up that I wanted to do next. And I've written about this, talked about this. And let's move away from the DOE rules specifically for a second and look at private colleges and just private colleges who are financially sound. Define that any way that you want. Can you foresee scenarios where these financially sound private colleges look to engage in their own merger and consolidation activity looking ahead to the next wave of higher education where scale might be even more important than it is today, and all of a sudden we have 5 or 10 or 15 really strong privates find a way to consolidate their services regionally or even nationally?

I know I think in the long run, over the next 50 years or so, we're going to see a consolidation of schools and higher education. You know, I don't see any major difference or change. You know, the birth rate in the United States isn't going to go magically up, and we're gonna have to face the fact that we have too many schools for the number of students that we have. And this is not an issue that is just being faced by us, but obviously Western Europe is facing the same thing, large parts of Asia are facing the same thing, and so on and so forth. So this is not unusual, if you would. Okay. But, but, but, but I think it's important to understand how, and I'm always amazed at the ability of schools to hang on and remain open despite pretty massive changes in enrollment. I mean, there are lots of schools now that have lost 50% of their student enrollment and yet remain sort of existing. You know, sometimes we pejoratively call those schools zombie institutions, institutions who really are dying or are dead and don't really know it, right? I mean, these are schools who don't have the resources to provide all the service to the students, do not have the resources to expand their online education because there is cost, do not have the ability to actually create an attractive campus, do not have the ability to even maintain their own, you know, capital structures. You know, they have a lot of deferred maintenance. And yet they continue to exist because there are alumni and there are boards who say we must exist, you know, we cannot actually disappear. The problem is they are providing a lessening service to students and they're also not seeing the reality in the future.

And when— let's So let's go back to the DOE rules for a second. Let's assume that these DOE rules, the Department of Education rules on mergers and acquisitions, they increase the rate of closures that we see. And again, focus is mostly on private colleges. I doubt few, if any, public colleges ever close. They may merge, they may cut back on majors and programs and faculty and staff, but they're not going to close. But if they're at some point You talked about there's an excess capacity of 2 to 5 million seats in the United States. But at some point, if enough colleges close, and the data suggests about 50% of students in a college that close go somewhere else, do we not start to approach more of a market equilibrium for supply and demand? And all of a sudden, the pressure, the financial pressure on colleges on tuition discounting decreases and all of a sudden we have more stability because the supply of student more closely, supply of colleges more closely matches the demand from students.

You know, we'd like to see that. I mean, that's the natural evolution of any industry, right? And you're absolutely right. That is sort of what would theoretically, and I'm going to say theoretically or hypothetically, you know, happen. The problem is that, you know, higher education is not like any other industry. It's a very unique industry in itself. We may reach that sort of new equilibrium perhaps, you know, 50 years from now, but it's going to be very rough going between now and then for all the reasons that I've spoken about. I think colleges are viewed more than as more than an industry. Of course, we view them as the loci for our communities, the loci for our memories, the places we grew up in, the institutions that provide economic employment to our smaller communities. So the school, higher education, is much more than just an industry that provides education, which I think is fantastic. I think it's the kind of thing that that I admire. I mean, I've seen so many small schools that are just absolutely beautiful, just gorgeous places that, you know, truly, you know, are to be admired. The problem is there is a reality, as you say, and it's a reality that most boards are unwilling to focus on because they have been hired to, and their presidents have been hired to, preserve the status quo. Preserve that institution. Most boards, in my experience, do not look farther beyond about maybe the end of the fiscal year, which may be 6 or 8 months in advance. And perhaps, you know, they will look at the next year when they reach budget season, and that's about it. They don't really project or try to extrapolate the findings and the trends of their institution 10 years into the future. They also don't tend to look backward very much. You know, most of the time when people look at trends in enrollment, they'll say, well, this year we lost 1% of students. Last year we went, you know, this year we're now up 1%. They don't actually look at the trends of 10 years. And when you look at trends of 10 years, yeah, you may have blips of 1% up and down, but at the end of the day, it's been a cumulative loss. So, in the end, I do think that we might see that market consolidation that you're envisioning, but it will be a struggle between now and then.

And to get back to the new DOE rules, when this first came out, I think you and I spoke in that timeframe, I posted right away that from my perspective, the new DOE rules, and I think the headline from my post was, "So what?" I don't think they're going to have— they're going to change. I don't think they're going to change the market pressures on these colleges. And I still believe that because the market is what the market is. All markets adjust. I think you and I have a conversation 5 years from now, we're going to look back and say, you know what, it was June of 2023 where we saw the actual trend take place. We're going to look back and say, hey, that's when the real rate of closures increased, something like that. But I didn't see in the rules anything that specifically addressed a cash purchase. If a— Dr. Z, if a non-education company wants to acquire for cash its own set of college or colleges to create its own vertical set of talent for its own needs, how might that work, or would it even work?

You know, to be fair, I'm not sure that it matters the money you bring to the table. I mean, the Department of Education is still going to have to approve a change in ownership for any institution that is certified by the Department of Education in this country, right? And whether it's being purchased by another school, by private equity, by an educational company, and whether it's being paid in you know, in bonds or being paid in cash or whatever it is, that, that, uh, I don't think will alter the issues around the DOE, the, I'm sorry, the Department of Education's, uh, involvement in the process. So I don't know that that makes any difference from that point of view. And so I think that whatever impact it will have on this will continue to do that. I think it's important to understand that the Department of Education's reasons for— again, unspoken reasons for pursuing this, this new process of a two-step merger— it really is mostly targeted at for-profits, right? It's mostly targeted for profits because they want to ensure that the finances are not opaque and that the finances are clear and that students are being served appropriately and so on. The problem is, of course, that it actually also impacts all of the nonprofits, right, that, that would like to merge as well. But, but so I don't think that whether it's a cash deal and whether it's private equity, whether it's a, it's a for-profit institution versus nonprofit will make any difference in, in this setting.

Is the scenario I described reasonable? Could large organizations see value in essentially buying their own college to create their own talent supply down the road?

Well, absolutely. I mean, I think, you know, it behooves any industry. I mean, it behooves the Googles of the world and the Amazons of the world, et cetera, et cetera, if they value, you know, individuals and employees with higher education to create their own institutions, to partner with existing existing institutions. Absolutely. I think it's the wave of the future as we think that education is, in many ways, a doorway to better employment. Now, obviously, you and I all agree that higher education and education in general is much more than just providing you an opportunity to work, right? I mean, it creates a number of benefits for civil society. So, but, but again, I do agree that that is a strategy that needs to be explored, particularly by industry who has very clear ideas of the kind of people they would like to employ, kind of talent, I should say.

Yeah. And you mentioned some of the big technology companies, and I know you and I both have some involvement in the healthcare industry. I even see an opportunity for healthcare organizations to create their own supply of not just nurses, but medical laboratory scientists and pharmacists and physical therapists, because now that training is scattered across the country. Who knows the variety of quality and consistency those folks get? And I think even an industry like healthcare would benefit from having their own talent pipeline that starts with colleges and even before college, possibly.

I absolutely agree. And to be fair, you mentioned it, many institutions of healthcare systems and healthcare and medical centers have already been doing that for a long time, right? Many of them have established their own schools of nursing. Many of them have established their own schools around certain technologies that they would like, OT, respiratory, x-ray, et cetera, et cetera. So actually the higher, the academic health side of higher education, as well as healthcare in general, has had a long track record of actually doing just that. Other industries, I think, are catching up.

Interesting. And then the final question I have, and then I'll turn it over to you for any follow-up comments, is John Nichols was a professor at St. Joseph's College in Rensselaer, Indiana, and they closed, you and I both know, back in 2017. And his 2022 book, Requiem for a College, included references to how St. Joseph's relied on the state's attorney— this is Indiana— the Indiana state's attorney to determine if the college's endowment could be used to pay the faculty any remaining compensation they were due from their contracts. And the reason I set that question up is because we know that private colleges all have endowments. Some are puny, Some are substantial. But are there scenarios, since we know the states' attorneys general typically have legal and regulatory control over endowments, do you see scenarios where colleges either have already started or start to work with these state attorneys general offices to gain more flexibility on how endowments might be used or could be used? To save financially challenged private colleges?

Well, I think that, you know, many colleges already work within the legal framework of a state, including the attorney general's office. So, I mean, the short answer is yes, but the longer answer is that they have actually been doing that already. Many colleges that I am very familiar with have already been seeking legal dispensation from, you know, redirecting, you know, the use of funds from donors who, you know, are long past and whose donations were given in a different time. So the priorities have changed, right? And so that happens on a continuous basis in colleges and universities and their endowments. So that's there already. I think what was unique in St. Joe's was the fact that You know, there was financial exigency, right? I mean, this massive challenge, financial challenge, was really what allowed the Attorney General to weigh in and say, all right, the school is closing. There are faculty that need to be paid. These are funds that belong to the institution. It wasn't the donor's intent to pay for faculty salaries, but they are an asset that belongs to this institution who must pay its debtors, right? So that's sort of what that point is. And do I think schools are going to be doing that? Absolutely. I think that that's going to be a continuing issue. The use of endowments of schools that are failing, whatever remaining endowments are, to pay off debtors is something that actually is pretty clear. I mean, in the end, with very few exceptions, the endowments belong to the school. Now they have restricted use, but in the end, if they are, you know, for bankruptcy, then those endowments become free game.

So a follow-up to that, could colleges considering acquiring a financially challenged college find a way to leverage those endowment assets as part of their agreement to take over or acquire or merge with another college.

Absolutely. And I see this a fair amount. Remember that many endowments, much of the endowments are actually in the form of real estate property, homes, these kind of things. And you can envision that those are actually easier to even think about leveraging, right? You can leverage, you can get mortgages, you can actually sell them if you have to, these kind of things, right? So I think, you know, schools are becoming very imaginative around how they can use their assets to, you know, maintain and sustain their mission and heritage into the future. And so I see this. It's not uncommon, and I think, you know, it's been happening and it will continue to happen. Happen as well.

So finally, put on your Ricardo Aziz predictor's hat and let's just address the private college market. Give us your view on what happens in the next 12 months and the next 2 to 4 years.

Well, I think in the next 12 months we're going to continue to see college boards and executive leaders becoming increasingly aware of of the coming challenges, right? COVID money is drying up, right? That actually delayed people's decision-making. The enrollment cliff is coming. There doesn't seem to be any great rescue coming in. And the big schools, 30,000 and above, are continuing to grow through ranking, through branding, and so on. I mean, it's the issue of the dominant becoming increasingly more dominant, right? So I think we're gonna be seeing a lot more schools and their boards looking for partnerships, looking to figure out ways to remain viable, sustainable, and relevant, and do so perhaps through partnerships, maybe through mergers. Unfortunately, prediction tells me that there's going to still be a lot more closures than mergers because frankly, institutions and their leaders tend to think that mergers are an option of last resort. And unfortunately, very often when you become the last resort and you wait for the last minute, you have no assets, no branding, no enrollment really to speak and nothing to really bring to the table, and you become a real estate deal. So I think we're still going to be seeing a lot more closures than mergers despite everything. The longer-term 5-year trend, I think we're going to see a whittling down of lots of institutions. You know, in the last 10 years, we've lost as many institutions as we lost in the previous 40 years, right? So there is an acceleration of closures and transference of institutions, whether into merger or more likely into closure. And that's going to continue to happen over the next 5 years. And in 5 years, we'll hopefully have a tighter higher education landscape, although I'm not quite sure that I would place bets on that yet.

Dr. Aziz, always a pleasure to get your guidance and hear your perspective on these things. It is a fascinating time. And a sad time. And I know I have empathy for the colleges and their students, faculty, and staff that are closing. I will continue, but the market is what the market is. Your perspective is always appreciated. We're grateful. Today's guest has been Dr. Ricardo Aziz. This has been another episode of This Week in College Viability. My name is Gary Stocker. We'll talk next time.