How to merge

In a 34-year career with the Association of Governing Boards of Universities and Colleges (AGB), Richard T. (Tom) Ingram worked with several institutions that contemplated or implemented new partnerships. President emeritus of AGB since 2006, Ingram continues to lead workshops and consultations with presidents and boards on best governance practices — including the complex topic of consolidation. In the conversation below, he shares insights about when, why, and how to forge a more perfect union. 

 

Q What is the first step that two schools should take when they are exploring the possibility of a merger or a substantial strategic alliance?

The key is what transpires before anyone learns that such a venture is being considered — that is, in the quiet phase of the process. I’m convinced that success depends on what the chief executives do — or don’t do but should, or should do but don’t — before they engage anyone else. It’s especially important that they have a high regard for and trust in one other, that they believe they can make something difficult happen, and that they can anticipate the questions that their boards and faculty members will ask.

I can’t emphasize enough that success or failure is in direct proportion to the quality of the relationship between the two chief executives. 

 

During these early private conversations — there may be several — the two presidents don’t make binding decisions, and they shouldn’t commit a lot to paper. The major challenge is to articulate a shared vision of the desirability of a merger and explain the benefits to both institutions. It’s this joint vision, carefully communicated, that should make a compelling case to the inevitable skeptics on the two boards and on the campuses. This vision includes a general discussion of the macro financial aspects of the proposed venture, of course, but should avoid getting into the weeds on fiduciary matters at this stage. 

 

Avoid the temptation to be concerned right away with governance and related issues (such as composition of the new governing board and the like). Those are among the easy issues to resolve. Deal with the much bigger and more difficult matters first.

 

If the conversations between the chief executives are successful, who are the first persons that the presidents invite into the process?

The board chairs are next, and those discussions are best done independently. If those first conversations go well, then the parties should move to a joint meeting — the two chairs and the two chief executives. I’ve found that even skeptical board chairs feel an obligation to take a merger proposal seriously and will react more positively if the two executives have done their homework, are widely respected, and are known to trust and respect each other. 

 

A big part of the joint conversation will be to determine how to proceed from there: How and when should they open the conversation with their boards? What documents do they need to prepare? How do they distinguish between the desirability and the feasibility of a merger? 

 

Read In Trust's previous articles on this topic for more guidance:

"Due diligence" - Summer 2010

"Forging partnerships" - Summer 2009

Note: You must have an In Trust online account to access. 

Fast forward to the separate meetings of the full boards. How do the chief executives present their vision?

A Obviously, both institutions need to get something from the proposed transaction. The reality is that when two enterprises look at the possibility of merging, one is often larger and financially stronger than the other. But the case that the executives must believe and share is how both institutions will benefit. 

 

One of the most important motivational points they can make is to say, “Look, what we’re proposing is more likely to fail than to succeed. We don’t kid ourselves that this is going to be easy. A lot of solid due diligence has to be done. Our hope is that you’ll keep open minds about what we jointly believe will be a difficult but enormously beneficial decision. Let’s see if we can defy the odds of failing.” 

 

Once the two boards are engaged, and there is agreement to study the proposal, the clock is running on the quiet phase. A joint press release and various other internal communications strategies should be launched very soon thereafter. 

 

Inevitably, board members at the financially stronger institution will ask what it will gain from merging with a weaker, perhaps more debt-ridden institution. How do merger proponents respond?
 

A The emphasis should be on potential synergies that would result. What new opportunities and capacity for mutual growth will result? The enterprise that’s on the weaker side of the financial ledger likely has other attributes to bring to the transaction — perhaps a solid academic reputation, valuable real estate, a top-quality program that the financially stronger institution can sustain and expand, or a first-class faculty. These and many other possible synergies can level the playing field. 

 

The conversation starts with the big picture — the inspirational and visionary aspects of the merger. The details are dealt with during the due diligence phase. What’s exciting in the meantime is the feeling that, “Hey, we have a potentially great idea, so let’s explore it!” The details and due diligence can wait. It’s all about the story, the passion.

 

With each private meeting, the number of persons who learn about the possible merger increases. How long should these conversations remain confidential?
 

As long as possible, but confidentiality begins eroding once both boards have agreed to study a possible strategic relationship and certainly once staffs and faculty leaders are first told about the proposal. If the boards agree to consider the possibility of a merger, they need to have a media release ready for immediate distribution. 

 

What is the role of the two boards during the exploration period?
 

A Typically, each board assigns a lot of responsibility to an ad hoc committee made up of key trustees, the school’s chief financial officer, and possibly the provost or dean. The president and board chair serve as ex officio members. 

 

One of the group’s early decisions is to identify an outside consultant to conduct the due diligence process, especially on the financial side. Each institution should have its own consultant. I don’t think it works for both institutions to put their marbles in the same basket by hiring a single person or firm. When the research is done, both presidents should have access to the due diligence findings conducted by the other institution and have the opportunity to ask questions that arise from their respective studies. Written answers to specific questions become part of the deliberations. 

 

What are the likely deal breakers? What would conclude the discussions?

A Boards, generally, are at their best dealing with financial matters, and they tend to be risk averse by nature. The data may and often do provide a convincing argument not to proceed. Feasibility studies will explore the debt load of both institutions and the short- and long-term implications for the balance sheets. 

 

Beyond financial matters, many existential questions will have to be addressed: Will the stronger institution be made weaker? Will the smaller institution lose its heritage and identity? What about commitments regarding the use of restricted endowments? 

 

Remember: the correlation is very high between the amount of time that passes after completion of due process and likelihood of failure. The more you delay, the more likely you are to fail.

 

How does the process conclude?

A  It comes full circle, back to a private meeting of the chief executives. The ad hoc committees make recommendations to their respective boards behind closed doors. Each board debates the findings and makes a decision. The protocol is that the presidents meet with each other and share their boards’ decisions. At this point they determine if they have more work to do or if the deliberations are over. 

 

The good news is that even if consolidation doesn’t happen, a powerful collaboration can result, because the two institutions have discovered new opportunities for substantial and mutually beneficial cooperation. At the very least, participating trustees will assuredly know more about the strengths and vulnerabilities of the institution than they would otherwise know.  

 


This interview was edited for length and clarity by Holly G. Miller. 

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Article from: Autumn 2016

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