November 4, 2024

Most mergers fail.  This was one of the key points that my corporate law professor at Oxford University made in my favorite course, Mergers & Acquisitions. Why? Well, for several reasons, but often because the motivations are poor: one of the marriage partners (sometimes both) has run out of vision, they have come to the end of a product life cycle, they have failed to recreate themselves with a recent initiative, or their leadership has seen significant turnover. The reality, therefore, is that a merger rarely creates extra long-term value, perhaps at best a short-term market consolidation. They may save face and squeeze some crumbs of value left, but they almost never create meaningful value. I had seen this in spades when I worked in the M&A advisory departments of Barclays and Schroders (now Citibank), one of the blue-blooded advisory firms that dominated the UK scene. I brought this lens to the independent school merger in 2006 (one that saw positive outcomes) that I led as CFO, High School Principal, and AHOS: it created one of the largest non-profit schools in Los Angeles, Sierra Canyon School, now with an enrollment of over 1,000 students.

When I first heard about the proposed merger of the Enrollment Management Association (“EMA”) and ERB, two organizations whose personnel, products, and services I have known for many years, I saw the same elements that my Oxford Professors and those who taught me my craft at Barclays and Schroders had warned of. So, let’s look at what is happening here:

1. Are their products and services mature and at the end of the life cycle?
   
   The core revenue stream of EMA is an admissions test (the SSAT, in competition with its merger partner’s test, the ISEE) to be used by families looking to enter independent schools. At the end of the 2019 EMA’s financial year, revenue from testing services was $15.9m, and by 2023 (the latest available public data), it had fallen to $12.9m. By contrast, according to the latest data, ERB’s testing revenue (albeit broader than the ISEE) has stayed pretty flat over the period. This has all the hallmarks of a business (certainly the SSAT and maybe both) operating at the end of a product life cycle. Standardized tests have been falling in use by schools as DEI concerns have risen regarding their potential for bias and lack of equity. With many schools unable to fill all their seats and accepting anybody who can pay, the need for any test is eliminated. The idea of an “enrollment management organization” makes sense as a concept only if more people want to get in than there is room. That is why you would manage enrollment with a test. If there are not enough students, you don’t need a test designed to keep them out but a net to catch them and haul them in. More importantly, declining standardized admission testing also portends that the standards-based social efficiency curriculum, embedded firmly in all independent schools, is at the end of its life cycle. The difference in revenue between EMA and ERB and the more significant decline at EMA suggests that the SSAT may be the weaker product. That makes sense with EMA’s attempts to rebrand itself eight years ago, away from being a testing provider to becoming a broader enrollment management organization.

2. Does EMA show a rapidly deteriorating financial situation?
   
   In 2019, EMA had net assets of $22m, but by 2023, it had declined precipitously to $9.5m. This is a fall of 57%. In 2022, it lost $5.0 million (revenue less expenses); in 2023, it lost $1.4 million, and the balance sheet looks very shaky. Put all this together, and typically, something like this would have led to the departure of a CEO. Instead, as we discuss below, it looks like it’s the rest of the staff that have been rushing for the exits. The main culprits in the declining financial performance seem to be declining testing revenue and an unsupportable cost base, even in the medium term at EMA. EMA’s last publicly filed financials show it generated program revenue of $16.8 million with salary costs of $8.9 million. By comparison, ERB generated $18.6 million of program service revenue with salary costs of $5.6m, which is much greater operational leverage. This is not a merger of financial equals. If anything, it looks like a marriage of dire necessity on the part of the EMA.

3. Has there been leadership turnover?
   
   Many EMA staff across all its operations have attended OESIS conferences in LA, Boston, and even Beijing. One thing that is clear to us is there has been a significant turnover in senior staff at EMA over the last eight years: I recognize no senior staff hired eight years ago or even four years back. A close look at Form 990 Schedule J of EMA’s key employees over the last eight years shows this merry-go-round in senior employees.  Hard questions need to be asked in merger discussions: why has this senior staff turnover taken place while salary levels have risen? Staff turnover typically reflects a lack of buy-in to a vision set by the CEO or the Board. Connected as we have been to the staff also at the ERB, we have seen much greater stability in senior management at ERB. They know their core business and seem to value it. If we have two competing and maturing products with little differentiation in the marketplace, the likely staff elimination costs at the weaker product (likely the SSAT) need to be factored into the calculus of the overall synergy of the combined entity. Is it easier to let the SSAT disappear naturally as EMA’s financial position deteriorates? 

4. Does the merger create surplus value?
   
   One of the striking things about the merger announcement is that the vision for the combined entity is to be set by a new CEO, not by the current Board or management, who seem instead to be rapidly jumping ship in a blaze of spurious career glory. In the corporate world, this would be unthinkable, but in the fairytale land of non-profit governance, a gaslighting approach to selling the merger seems to be well underway. It seems pretty obvious to anyone what will happen here. There is little point in having two products for independent school admissions (maybe not even one): most schools lack waitlists, and teachers hardly use the test to place students, preferring their own versions instead. The one with the larger market share typically (unless better intellectual property exists, which is not the case here) will prevail, eliminating the duplicative marketing, operational, and development costs of the second one. What would be left are the enrollment management tools and resources that EMA has built over the last eight years, which can be delivered online without large conferences and massive association infrastructure. We are then back to an organization that would look exactly like EMA (1 testing product and enrollment management tools). Does 1+1 then = 2 or even 3 as we are being gaslighted to believe?  It looks more like 1+1 =1. This gaslighting may not matter so much in the non-profit world with no shareholders, but the real question is how these two organizations’ missions have been melded into something better. 

The More Obvious Alternative to a Merger

It is unclear whether this was a board-driven merger on the part of EMA, whether it was a CEO-driven one, whether the CEO search had come to a dead end, or whether these routes were concurrent with an organization that looks to be in deep trouble. Significant questions remain in limbo. Does the merged entity have the interest, resources, and vision to develop a data-science-driven CRM-type enrollment management tool that schools and parents could use to replace the aging tools of EMA? With EMA’s apparent move away from testing (look at the 2027 Strategic Plan), what would be the core business of the merged entity?

Would it not be more straightforward to close down the SSAT (since it is the test that looks least strategically core to any organization) and give away the enrollment tools and data to NAIS, AISAP (the Association of Independent School Admissions Professionals), or even one of EMA’s technology integration/research partners like Mission & Data? ERB would avoid the inevitable redundancy costs, and someone with expertise in the area (and able to develop a vision and stabilize a team) would get the enrollment management piece. But that would mean a public dissolution, mass firings at EMA, and entering into administration, which would be a little embarrassing. Another unnecessary non-profit that failed to find sustainability could be laid to rest without gaslighting us all on the new powerhouse to emerge (without a CEO or a current vision or products with growing demand). 

Conclusion: Marketing is More Complex Than What Parents Want. 

There are many reasons for this mess, but at its core, it is the same issue for all independent school associations, which all face a bleak future. EMA never found a differentiated angle in its role as an advisor on enrollment: schools need something different to market that the customer base does not yet realize it needs and an actual path to get there in the curriculum. These are two heavy lifts after decades of trying easy solutions. That would drive enrollment and demand. Schools need enrollment, not enrollment management.

The 35+ associations, in the meantime, are leeching off the budgets of 1500 independent schools to the tune of around $100 million per annum with no real vision for getting to a sustainable future for their client base.  They lurch from one high-level school strategy around financial aid, marketing, or cultural capital (DEI). The core social efficiency curriculum was not to be touched (because it is what parents want now). I am holding my breath for a headline like “EMA and NAIS Announce Reparations for Legacy Admit Injustice” as the next grand strategy!

As my recent book, Meaning Loss, demonstrates, we now have schools that are poorly aligned on curriculum and have a loss of expertise.   Failed solutions, like mastery (MTC), which embed the current standards-based curriculum, represent the limits of association and consortium vision. When marketers and non-education professionals hold the reins, this is typically the limit of their ability. Now, with threats from all sides, including AI likely to impact white-collar and professional jobs, falling buy-in on divisive multiculturalism, low student engagement plus rising mental health issues, and diminished value propositions of selective Colleges, it’s time to ask the questions at the center of every election: 

“What is the future? Are we better off with our associations’ collective wisdom on helping us craft it, and what is it costing us?”

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You may also be interested in reading more articles written by Sanje Ratnavale for Intrepid Ed News.