In today’s difficult climate, we are seeing an increase in the interest and take up of partnerships and mergers, in particular in areas of public services where delivery is managed by (largely) autonomous organisations, such as education and healthcare. In these sectors, responsibility for the delivery of services and maintaining financial balance is dispersed across the UK through Trusts, Academies, Local Authority-backed providers and so on. This dispersed landscape means that providers often struggle to meet efficient levels of provision, for example, because demand is split between multiple providers in a local area, or because providers do not operate at the right volumes for economies of scale (e.g. for procurement or staffing).
In this article, we provide an overview of the emerging trends we are seeing for mergers and partnerships in education and healthcare, and share our view on how public services organisations can navigate this complex landscape.
What trends are happening now?
The trend for mergers and partnerships has had early and rapid momentum within Further Education. The Association of Colleges shows that there has been a significant increase in the number of college mergers since the 2015 election, with 63 college related mergers in this five-year period – over three times more than the 19 further education mergers between 2010 and 2014. This includes a wide range of mergers and collaborations, with an interesting trend towards university-college mergers recently, in addition to conversions of colleges to academies.
Using publicly available data, we have run some analysis to examine what is underpinning this trend. Since 2012, 100% of mergers in Further Education have included a dominant partner. Under these ‘Type B’ mergers, one corporation is maintained while partner corporations are dissolved upon transfer. We have found that a main catalyst for FE college mergers is overcoming financial difficulties. Between 2018 and April 2019, 9 FE college mergers have already taken place, 7 of which involved the dissolution of a college corporation which had received a financial notice or intervention from the FE Commissioner since 2018. This highlights the power that the FE Commissioner holds in servings its notices and interventions.
However, our analysis of the financial position of FE colleges pre and post-merger reveals that the impact of mergers on college finances is a subtle affair:
- Of the 29 FE college mergers in 2017, average income post-merger was ~£2M greater than the sum of the income of the colleges involved pre-merger.
- However, median income post-merger was ~£1.4M lower than in the year pre-merger.
This suggests a discrepancy between some colleges which emerge from mergers with significant financial gains, while others are victims of important losses. Similarly, this analysis revealed that while the mean increase in surplus/deficit in the year post-merger was ~£4M, the median increase was a mere £235,000.
This analysis suggests that rather than guaranteeing financial growth, mergers offer a different set of benefits for colleges involved. For instance, our analysis of the 11 FE mergers which occurred in 2016 reveals that colleges are half as reliant on income from borrowing post-merger (12.9% of income) as they were pre-merger (34.1%). Total tuition fees and education contracts also increased on average by ~40% two-years post-merger compared to the year-pre-merger, accompanied by a ~30% increase in student numbers.
In the Higher Education sector, it is a slightly different picture. There have been more mergers than you may realise, but this is a much less buoyant part of the HE economy than for FE. Highly cited examples in the sector include the successful mergers between Manchester University and the University of Manchester Institute of Science and Technology in 2004, or UCL Institute of Education which was formed by partnership and then merger in 2014. We expect the number of mergers being considered in HE to grow rapidly in coming years as a response to the pressures and uncertainties identified.
Figure 1: HE Mergers completed in UK since 2000
In the rest of Europe, mergers have been mainstream practice for the past 10 years, with more than 120 mergers listed in over 10 countries since 2000. Indeed, many UK institutions are smaller than their international competitors. Some successful case studies in Europe include:
- Creation of the Paris-Saclay ‘federal university’, including Ecole Polytechnique, the HEC business school and Université Paris-Sud. This partnership had the explicit aim of being in the top 10 global rankings.
- Germany’s Karlsruhe University and Karlsruhe research Centre merged into Karlsruhe Institute of Technology (KIT) and saw a 50% boost to research income between 2009 and 2013.
There are a number of emerging challenges affecting both Higher and Further Education, including declining student numbers, uncertainty in funding streams, and an overall decline in financial surpluses. These challenges are very much on the minds of leaders in the sector, and will begin to crystallise in coming years – we expect to see an increasing number of modern universities becoming financially unsustainable in the next 5-10 years. These trends suggest that there will continue to be a growth in the number of mergers, acquisitions and transactions within UK’s education sector.
This is also a trend in the NHS, with a number of high-profile mergers recently completed, underway or planned, including University Hospitals Birmingham / Heart of England which was completed in 2018, or Luton and Dunstable FT / Bedford Hospital Trust, and Aintree University Hospital / Royal Liverpool who are both in the midst of planning. If we look at transactions completed in the recent past, we see that as with education transactions, many “mergers” function very much like private-sector “acquisitions”. Typically, these transactions involve a financially comfortable Foundation Trust combining forces with one or several others who have weak financials and are located nearby. This is not necessarily problematic, but an important lesson for those thinking about a future partnership model – a merger is a complex endeavour, and often best navigated through a model where there is a dominant partner.
More broadly, mergers in the not-for-profit sector have been found to deliver growth; Most mergers increase scale over and above the sum of the two organisations, and c. 50% are more financially profitable than the sum.  Most not-for-profit mergers are driven by financial distress, but mergers are more productive when at least one partner is coming from a position of financial strength. Research shows that organisations who are not in financial distress may struggle to explore opportunities for Mergers or Acquisitions due to cultural barriers such as communication of the benefits, or the role of trustees who have generally joined an organisation due to an affinity with its mission.
What are the benefits of a merger or partnership model?
One approach to summarise mergers is through the types of benefits that could be accrued ,as follows. This is helpful because it bounds the types of benefits that you may be looking for, and allows you to complete a strategic assessment of what the core drivers of this transaction may be, for example whether it is for financial sustainability, operational efficiencies, or better service quality.
Of course, the types of benefits that result from a merger will be defined by the nature of the organisations coming together. For example, in Higher Education, we see three broad types of mergers ongoing, each of which will have different drivers and benefits:
- Two institutions with complementary expertise coming together – This is perhaps the most beneficial type of transaction, and many of the examples referred to in this article fit in this camp (e.g. Institute of Education and UCL were both leading organisations who came together. This transaction wasn’t purely about financial incentives, and there was a strong value proposition for staff, students and the research community.,
- A stronger institution taking over another local institution who is struggling financially or reputationally – This is the most common type of collaboration we see both in education and healthcare.
- A private sector takeover of a public sector institution – This has some precedence in the HE sector, where the University of Law was bought by Montagu private equity in 2012 shortly after gaining its university title. It was then sold to Global University Systems in 2015. This seems to be a theme amongst law schools because BPP was sold to a consortium of three private equity firms in 2016.
How should you manage a public sector merger or partnership?
Critical to the argument for/against mergers and partnerships, is establishing whether competitive forces work, for example asking whether having separate providers who ‘compete’ for patients drives up quality, or whether quality is mainly a function of scale and efficiencies. Further, many of the benefits rely heavily on scale / volumes (e.g. increased numbers of patients result in higher quality, which facilitates innovation and savings as a result). Health economics provides a number of ways to estimate the volumes of a future providers in a merger scenario by estimating market share. For example, the CMA economics teams outline the GP referral analysis and Demand Estimation approaches, showing that in most cases, extrapolation of GP referral patterns provides a good estimation of market share.
This is a topic of much debate. Indeed, a recent CMA report finds that hospital mergers in concentrated areas can significantly increase rates of patient harm – noting this study is limited to falls, pressure ulcers, blood clots and urinary tract infections across eight separate hospital specialties. The NHS Long Term Plan has requested that the CMA would be removed from its role in overseeing NHS mergers and acquisitions – this is an interesting development. Regardless of who carries out the role, there is a need for somebody to ensure that health and care services are working well for patients, citizens and taxpayers, including balancing the key components of ‘good’ competition (e.g. price, quality, access).
Our approach to supporting a strategic transaction, such as a merger, acquisition or partnership model, follows 5 steps, as outlined below:
Our specialty is blending strategic support with an understanding of the user and citizen needs of our clients’ organisation – we are committed to ensuring all transactions we support work not only for the organisation, but also for the broader public purpose that they have been set up to meet.
If your organisation is considering a significant strategic transaction and would like to discuss options for support, please contact 2020 Delivery via Antonio Weiss on email@example.com.