Mergers: the answer to an increasingly competitive FE marketplace?

The introduction of the Education Act in November 2011 heralded a new era for further education (FE) institutions, as far-reaching new powers were provided to colleges to help them more effectively deliver services tailored to the needs of their learners and wider stakeholders. Significantly, one of these new freedoms is the right for colleges to dissolve and adopt new legal forms, allowing them to more easily engage in new strategic partnerships – such as mergers – with local partners. With this in mind, Katharine Mellor, partner in the education team at business law firm, DWF, looks at the growing prevalence of mergers in the FE sector, and provides advice to colleges considering the option.

A changing marketplace

Since coming into power, the Government has introduced a variety of policy and funding reforms in the FE sector as part of its ambition to create a more transparent, ‘learner-centric’ experience for students. As they seek to stay attractive and competitive in the increasingly open marketplace that these reforms have created, colleges are increasingly looking towards mergers as a way to strengthen their market position.

What’s more, the introduction of the Education Act 2011- which has provided significant new powers for colleges to adopt new legal forms – has simultaneously made the merger process much easier to initiate, ensuring the option is more viable and attractive than at any time in the past.

Getting the strategy right

The potential benefits of a merger are often evident. By creating a larger organisation with greater financial resources and a wider service offering, a newly formed college should, theoretically, be able to attract a wider pool of students across a larger area.

However, a merger is not simply a strategy for success in itself. Indeed, if a merger is initiated purely as a method to overcome current financial or performance issues, it may simply add strain to already overstretched resources. Rather, the strategic objectives of a merger should be clearly focused on identifying and delivering better outcomes for the stakeholders of all institutions involved in the proposal.

A look into the future

Fundamentally, every merger is a unique scenario, affected by a specific set of circumstances, issues and local dynamics. It is therefore important that all parties involved in a proposed unification thoroughly consider both the upsides and downsides of a specific merger before proceeding with the move.

For a smaller college – which finds itself subject to a potential acquisition by a larger partner – there is likely to be a considerable loss of autonomy and job losses, as the college is rationalised into the new joint body. While the ‘target’ colleges often benefit from gaining access to the wider resources and networks of a larger partner following a merger, the loss of identity and potential jettisoning of some of its services could well outweigh the benefits.

Equally, for a larger institution considering the incorporation of a smaller organisation, it is of critical importance to look into exactly why the targeted college is actually on the market. If it is because it requires a bailout, for example, then there may be wider structural issues that mean the college is simply too big a risk to be involved with.

Due diligence

Both parties therefore need to consider exactly what they are taking on board by combining with another organisation. In particular, a larger, ‘acquiring’ college will need to carry out a great deal of due diligence on its potential partner. The finances of the target organisation, as well all of its contractual commitments and liabilities, need to be comprehensively reviewed and analysed to ensure any unexpected costs are understood and accounted for at an early stage.

The practical requirements involved in bringing the two organisations in line will also need to be contemplated. If IT systems are incompatible, for example, significant investment will be necessary to ensure the two entities can communicate effectively. It will also be crucial to consider the real estate leases that the target college holds, as well as the terms and conditions that are attached to them, as all property will need to be either transferred to the new entity, or disposed of, as appropriate.

Of course there will also be a range of statutory matters to consider, such as TUPE and the transfer of pension arrangements.

A costly business?

Undoubtedly, this can be an expensive process. As well as the initial physical investment costs and related legal and accountancy fees, mergers also take up significant resources in terms of those personnel necessary to arrange and oversee the project.

Of course, there are also emotional costs to consider. With a great deal of upheaval and the potential loss of a college’s distinct identity, learners and members of staff could well be resistant to the merger.

To assess whether the proposal will be cost-effective, and also whether it is in the best interest of stakeholders over the long-term, it is useful to develop a formalised business plan for the post-merger entity at the planning stage, to allow for a rigorous cost-benefit analysis of the project. Expert support during the due diligence and vision setting stages will also help to ascertain whether there is a clear and viable business case for the merger.

Alternatives

In many cases, there may well be an alternative option that provides many of the same benefits of a merger, without the same costs and disruption. For example, it may be useful to also consider the following options before engaging in a formal merger:

• Collaborations – offering courses across two separate colleges and sharing resources and expertise
• Federations – setting up an umbrella organisation that allows a collection of colleges to work together to benefit from economies of scale in areas such as payroll
• Shared services and outsourcing – selling back office support systems, such as administration services, to develop new income streams

 To merge or not to merge

While the introduction of the Education Act has made mergers easier to engage in, the physical and emotional costs involved in such proposals mean that they are not a panacea to all issues that FE institutions face. Given the challenges associated with mergers – both for smaller ‘target’ parties and larger ‘acquiring’ institutions – it is advisable to also consider the range of alternative partnership working options that could potentially deliver the desired efficiencies and benefits.

If, following a consideration of the alternatives, a merger remains the most attractive option, it is essential to seek expert advice and support. Each and every merger is unique and the exact circumstances will need to be carefully assessed and planned for accordingly, in order to ensure that the resulting merged entity is a success in the long-term.

Katherine Mellor is a partner at DWF, the business law firm