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Private nonprofit colleges and universities are consolidating at a growing rate, driven by shifting demographics, rising costs and increased competition from nontraditional education paths. In this article, Capital Markets & Corporate partner Neil Lefkowitz explores what’s behind the trend, how these mergers differ from typical M&A transactions and the new models emerging to help institutions stay viable.
Tell us about your practice and the types of capital markets and corporate matters you generally handle.
My practice focuses on mergers, acquisitions and change-in-control transactions, with a particular emphasis on colleges and universities. I also have significant experience representing workforce development companies, education service companies and K-12 institutions in transactions outside the ordinary course of business. My practice is built around navigating the unique complexities of the education sector and helping institutions thrive through strategic transactions.Is there significant consolidation in U.S. higher education? If so, what is causing this consolidation among private nonprofit colleges and universities?
Yes, more than 40 private nonprofit colleges and universities merged or closed in 2024. The factors driving this consolidation include a decrease in the number of Americans between 18 and 22 years old; population losses in the Upper Midwest, New England, New York and the Mid-Atlantic; viable alternatives to higher education for acquiring skills; low unemployment rates; increased costs due to inflation; and diminished public confidence in colleges and universities.How are mergers and acquisitions of private nonprofit colleges and universities different from mergers and acquisitions typically handled by Loeb?
The focus on consideration—its type, amount and timing—and the risk allocations generally found in mergers and acquisitions are typically not present. Instead, merging private nonprofit institutions seek to protect stakeholders (students, faculty, staff and alumni); preserve mission and academic programs; ensure representation on the board of trustees of the institution surviving the merger; provide for the proper distribution of endowments; and achieve deal certainty.Why is deal certainty – the likelihood that a transaction will be completed – a significant factor in mergers of private nonprofit colleges and universities?
Completion of higher education mergers are subject to a larger number of closing conditions than mergers in other sectors, including approval by each of the U.S. Department of Education; the state department of education; institutional and sometimes programmatic accrediting bodies; state attorneys general and trustees of tax-exempt bond issues.
How about mergers and acquisitions of for-profit colleges and universities?
There have been relatively few mergers and acquisitions of for-profit colleges in the past three years. There is limited debt financing available to complete these transactions, and it is generally expensive. Owners of more than 25% of the stock in for-profit colleges and universities must cosign these institutions’ program participation agreements with the U.S. Department of Education, which involves undertaking significant liability.Looking ahead, what new vehicles do you expect in mergers and acquisitions of private nonprofit colleges and universities?
People are beginning to organize private university systems as supporting organizations under the tax-exempt provisions of the Internal Revenue Code. These systems will become the sole member of the private nonprofit college or university and will therefore elect members of each university’s board of trustees. The private university system will provide services to its member institutions, achieve economies of scale and offer different services than the institutions previously received. The private university systems will also be able to lower their members’ financing costs, as tax-exempt bond rates are typically lower for organizations with diverse revenue sources and higher total revenues.
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