The consultants McKinsey produced a report on mergers some time ago that concluded they invariably disappoint the acquiring organisation and produce negative, or poorer, returns than envisaged. It went further by concluding that the shareholders of the weaker company often did well as they received a premium in anticipation of even greater returns to be achieved later. Too often, people are overoptimistic in calculating the benefits and economies.
The area review process was designed to deliver stronger, larger, financially sustainable colleges. Yet, as a sector, we seem to have very little hard data on the effectiveness of mergers, or even the effectiveness of large colleges.
The recent departure of so many leaders of large colleges suggests they are as vulnerable as others. We also have little literature or research on how best to effect a merger in our sector. This should be a concern given how rapidly the sector has changed in recent years.
Why so little research?
Despite there being fewer colleges, I have seen data that shows their average size has also declined because college income is falling faster than sector consolidation. When we helped set up the 157 Group (now Collab) a decade or so ago, a large college was one with turnover of £30 million, about three times the size of a small college. Now, some colleges are nearly 20 times the size of a small college. We learned from the banking crisis the dangers of creating things “too big to fail”, yet we seem to think education is different. Why are we so sure?
Over the years, Bedford College has acquired: a land-based college (Shuttleworth) via funding transfer; a private training company after it went into administration; university technical college provision via transfer of funding; and formally merged with another college, Tresham, in 2017. All four of the institutions that joined us had serious quality issues, but all four have been quickly and successfully integrated.
Four key principles
In the absence of much help from any research, we decided to follow a set of four principles derived from business practice.
- Only merge for a reason that can be summed up in a sentence. The question “Why merge? must be easy to answer. Shuttleworth gave us a complete local offer by bringing us land-based expertise. Bedford Training Group took out our main competitor locally in engineering. Tresham was a sleeping giant overlapping part of our patch and ripe for expansion in the way we had expanded in Bedfordshire with major efficiency gains as a result.
- Define what merger means and do it very quickly. Many people in the sector advise you to make very few changes in the first year of merger. We take the opposite view and merge fast. Shuttleworth took two weeks to merge systems, policies and contracts of employment. With Tresham, we set six tests: a single governing body (immediately); a single executive (immediately); increased management capacity at Tresham, turning a combined loss of £1.6 million to a surplus of £1 million in our first year; moving to a single system for finance and data within a term; quickly improving the inherited inadequate apprenticeship provision and the quality of teaching and learning; and securing funding to redevelop provision in Wellingborough. We were able to declare ourselves merged on that basis after eight months.
- Don’t neglect your roots. It is a fair bet that, in any merger, leaders will spend a lot of time talking and listening to the junior merger partner explaining all the changes to be made and their impact on those staff. But even if a merger maintains “the Bedford way” it will still mean some change for the lead college and less-visible leadership. I badly underestimated that with our Tresham merger. Even minor change at Bedford was seen as a big deal, and the lower visibility led to claims of: “You’ve gone off us now you’ve got an exciting new partner!”
- Accept a merger is for life, not just for Christmas. We believe a fast pace is important, but be clear which things won’t be done straightaway – in the first year, especially. For example, we moved to a single finance and data system immediately but not a single HR system.
Only time will tell if these were good decisions and, even if mergers prove successful, it may not be down to taking these decisions, hence why we need more research. Without it, we could all be making catastrophic errors with taxpayers’ money.
So far, 2018 has not been a happy one for the sector. Before we continue to rush headlong into more consolidation, let’s resolve to reflect on the mergers to date, and learn from our good and bad calls. Then, perhaps we can look forward to a Happy New Year.
Ian Pryce is principal of Bedford College