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Challenging Environment Faced By Private Higher Education System Finance Essay

1.0 Introduction

In a competitive business environment, mergers and acquisitions can be identified as a financial tool which is applicable to increase the long term profitability for improving the business operations. Merger is the situation where the company will merge or join with the target company. In most cases, the target company is smaller or weaker or in a middle of instability company to the main company. Sometimes there is the possibility of reverse taking over process where the target company is bigger than the current company. Hence, in the process of acquisitions the current company will purchase either the share or assets of the target firm.

An acquisition on the other hand is the process of gaining or attainment from the merging process either in a hostile or smooth way. Hence, in situations of a hostile takeover, the company needs to determine the shareholders right to avoid any unnecessary issues. There are several types of mergers and acquisitions such as horizontal, vertical, conglomerate and many more depends on the companies’ policies.

In Malaysia, the concept of mergers and acquisitions in higher education institutions mainly refers to private colleges is not widely implemented. However, in recent situation the need for merger and acquisitions among the private colleges in Malaysia is arise due to the certain circumstances such as small colleges fail to recruit targeted number of students and face difficulties to sustain in this education business. Certain private colleges in Malaysia are in a very small setting and facing the probabilities of closing down issues. Even, from the private college statistics it is shown that the numbers of private colleges has been reduced in the past ten years.

Therefore, by merging it can provide better services and strategically will be able to organized college in terms of its management and also finance matter. Private colleges by adopting or implementing this concept can help them to sustain as a provider rather than vanish from the industry. Nevertheless, the successfulness of mergers and acquisitions is also depends on the newly combine college sizes, financial strength and their top management. Therefore, the management of the particular college can avoid from closing down its operations forever. It is understood that by closing down the particular private colleges, it will jeopardise the students future since the certificate which was obtained for the past 3 years will not be valid for the career purposes.

2.0 Problem Background

Oh ( 2009), in the “The Star” news paper raise the concern on the challenging environment faced by private higher education system which force the industry to be more innovative and creative. Referring to the report, based on the Ninth Malaysia Plan there is a suggestion for the private higher education institutions especially private colleges to merge in order to be more competitive and practical. In addition National Association Private Education Institution (NAPEI) agreed that by merging it can manage and took over the interest of students and college operators.

The rapid growth of the Private higher education institutions were as stated in the following tables:-

Private Higher Education Institutions

2000

2005

June

2007

31 December

2009

Up to 6 January

2011

University

2

11

17

20

43

University –college

0

11

15

20

26

Branch campus

3

5

4

5

5

Colleges

632

532

485

393

393

Total

637

559

521

438

467

Table 1: Statistic of Private Higher Education Institutions

(Source: Ministry of Higher Education, 2011)

The number of students enrol in the Private higher education institutions were as stated in the following tables:-

Statistic of Students Enrolment of Private Higher Education Institutions for the year of 2004 - 2008

YEAR

PROGRAM

Education Level

TOTAL

CERT

DIPLOMA

BAC.

DEGREE

MASTER

DEGREE

PHD

2008

Arts

42,788

80,388

89,522

5,185

594

399,852

Science &

Technology

8,800

71,159

38,331

2,593

516

Technical &

Vocational

9,029

26,226

23,738

762

221

TOTAL

60,617

177,773

151,591

8,540

1,331

2007

Arts

60,629

68,528

87,055

2,753

329

365,800

Science &

Technology

9,110

51,780

36,297

999

298

Technical &

Vocational

5,321

24,395

17,347

620

339

TOTAL

75,060

144,703

140,699

4,372

966

2006

Arts

56,099

61,270

75,012

4,377

496

323,787

Science &

Technology

7,825

39,065

36,390

1,367

166

Technical &

Vocational

4,518

23,602

12,669

733

198

TOTAL

68,442

123,937

124,071

6,477

860

2005

Arts

41,532

50,157

61,724

3,173

360

258,825

Science &

Technology

5,802

31,712

29,252

1,075

108

Technical &

Vocational

3,338

19,442

10,419

601

130

TOTAL

50,672

101,311

101,395

4,849

598

2004

Arts

57,533

68,868

59,643

1,733

66

322,891

Science &

Technology

13,046

36,741

30,790

982

16

Technical &

Vocational

13,633

24,656

14,892

266

26

TOTAL

84,212

130,265

105,325

2,981

108

Table 2: Statistic of Students Enrolment of Private Higher Education Institutions for the year of 2004 - 2008

(Source: Ministry of Higher Education, 2011)

As per the data shown in the above table 1, the continuous growth of private higher education institutions especially private college are clearly explain the requirements for effective competitive strategy to compete each other in this same industry environment. According to the data, there are 393 private colleges, 43 private universities, 26 private university colleges and 5 foreign branch universities in whole Malaysia in the year of 2011(Ministry of Higher Education, 2011). However, the number of private colleges based on the above statistics represent that there is a continuous decline for the past ten years. Therefore, the performance of the Malaysian private higher education institutions being an issue for the last ten years and become critical for the past few years due to the problems such as poor student enrolment and closing down of educational institutions.

Apart from that, based on the table 2 it is clearly shows that the number of students enrol in the private higher education institution. Therefore, the private colleges have to compete not only among the colleges but also with the other private higher education institutions for the student’s recruitment.

Moreover, even Higher Education Minister, Datuk Seri Mohamed Khaled Nordin highlighted that any private higher education institution which are facing difficulties to sustain in the business should merge with established institution to avoid closing down of the colleges (Bernama, 2008). Although it sound harsh, but in terms of student’s benefit it is practical to be merge rather than closing down of the institutions.

Nevertheless, it is a complicated situation in the process of merger since the successfulness of the merging and the ultimate goal normally is not that clear (Etschmaier, 2010). In addition, according to Schoenberg (2006), mergers and acquisitions is been introduced to identify the ultimate goal of the organizations growth, objective of diversification, financial saving strategy and also for the purpose of business synergies. The researcher added that, the indicator of merger successfulness and failure is through its financial performance for instance whether the revenue is increase or decrease, cost increase or decrease, growth in their productivity and also their stockholders value.

Based on Etschmaier (2010) point of view, any colleges that facing financial difficulties may choose to merger with bigger colleges as it could be an alternative rather than closing down the business. It is understood that the small college which merge with big colleges might lose its own identity but still can remain in the business.

However, Schoenberg (2006) highlights that in a current situation, the classification of mergers successfulness is quit complicated if there is no proper agreement. Therefore a thorough analysis is needed as well as the studies on whether the outcomes or merger meet the objective or not also need to be analysis. As cited in Etschmaier (2010), the researcher noted that more than 50% of the companies once merger are end up with failure mainly on the financial measures. However, there are cases where one stakeholder may fail but it will contribute the benefit to other stakeholders. Eventually, these are the risk that the private colleges must go through in order to remain the this highly competitive education business industry.

On the other hand, the objective for merging by exiting college is at least by adopting this merging the college might be become more efficient, offer more competent courses, improvised academic quality, enhance the reputation, increased students enrolment and also student’s retentions. However, Jaschik (2008) as cited in Etschmaier (2010) explains that the higher education specifically colleges will received pressure of merging when there is an increase of competition and due to limited availability of financial aid.

Referring to Martin & Samels (1994), in a higher education the merging process from the business point of view is enthused by the aims to develop a wide strategic vision and mission. Besides, in order to place the colleges more competently and strongly in a higher education market the process of mergers and acquisitions in required. Therefore, in Malaysia the small private colleges those who are struggling to sustain in this education business might used this opportunities to achieve their goals.

3.0 Literature Review

Literature review in this section will focus on the mergers and acquisitions and also on the private higher education’s institutions in Malaysia. The discussion on the literature review based on the concepts which was discussed in the problems background.

3.1 Mergers and Acquisition

According to Etschmaier (2010), mergers and acquisitions is a process of taking over a problematic company by well established company and is the most common procedure in a partnership arrangement between two different and separated parties. Epstein (2005) added that by taking over the weaken company, the possibility to restructure and survival in the business is high. As cited in Botha (2001), merger is defined as the combination of two companies into one company or the combination of more than two companies by maintaining the identity of the bigger company.

The researcher added that, the acquisitions on the other hand defines as the target firm will be an acquisition of the acquiring business firm once a process of merger is settled. Even, Mohibullah (2011) added that since past twenty years mergers and acquisitions has become the new tools to improve the financial performance, to overcome the competitors and to improvised the products and service portfolios.

Basically, financial performance of merged colleges is the important aspect to be considered. However, according to Schoenberg (2006), financial accounting and market data will represent short term performance instead of long term since in a longer term there are other variables present which influence the profitability. Hanby et al., (2009) pointed out that many companies are in quest of rapid growth and to increase the company’s value there are adopting merger and acquisition as a common strategy.

Since this paper is focusing on private college mergers and acquisitions, hence the types of merging is considered is as horizontal. Hanby et al., (2009) explains that horizontal merging and acquisition involves two companies with the same industry which produce similar products or combinations of brand. The example of similar products and services are like colleges with another colleges or plantation company with another plantation company.

Basically, according to Perrier (1997) as cited in Hanby et al., (2009), essentially the income sources for the company are derived from assets such as tangible assets, brands and related intangible assets. Out of all elements, the branding’s contribute the most towards the company earnings since a well manage brand produce the higher financial returns. Hence, in a horizontal merger and acquisition, brand integration triggers the most value in the particular firms.

There are several types of mergers which has been discuses widely in the literature. Botha (2001) pointed out that the types of mergers are as the followings:-

friendly vs hostile mergers

Friendly merger represent the agreement between the two companies to joint into one company. The agreement will clearly pin point that the two company’s profitability is better rather than operating separately and there is a mutual understanding between the two companies’ stakeholders.

The scenarios of hostile merger will be like the disagreement of the management towards the combination and the issues of who will control who will be arise.

strategic versus financial mergers

The financial merger happens when there is a need to improve the cash flow by restructuring the acquired company.

Strategic merger took place in order to accomplish the scales of economic.

Vertical, horizontal, concentric, conglomerate and congeneric mergers

Vertical merger happens when the management from the target company switch from helping the market to connecting with the acquiring company.

Horizontal merger is the type of merging between the companies which operating same product and services.

Concentric merger is the types of merging between the firms with more or less same production technology.

Conglomerate merger is the types of merging between the firm which do not have any business or relationships.

Congeneric merger is the type of merging that involved firms from same industry but in different business nature.

Nevertheless, Botha (2001) added that, there are several reasons for the merging of a higher education such as for the financial reasons, strategic reasons and also for the diversification reasons. Financial reason for a higher education is due to the lack of funding and students’ fees therefore by merging it will ease the funding matters. Strategic reason is more towards the steps that taken in order to be competitive advantage among the colleges. Finally, the diversifications happens when the colleges have to switch the course that they offer and also the settings. The switching of courses might be more attractive for the students and meeting the current demands of the industry.

3.2 Private Higher Education’s Institutions

Malaysian education system was originated from the Razak report in 1956 (Yahaya, 2003). The report which was introduced by the late second Prime Minister Tun Abdul Razak was carried out the purpose to fulfil the needs and harmonious relationship between three major races in Malaysia namely Malay, Indian and Chinese through a proper and standardized education system (Yahaya, 2003).

The Malaysian education system can be classified in two major categories namely public higher education and private higher education. Public education sector consist of public universities, polytechnics and public community colleges and the private education sector consist of private universities, private universities colleges, foreign branch and private colleges and institutions (Hassan & Sheriff, 2006).

Earlier, the world economic crisis had given an impact towards the Malaysia’s socio economic development. Therefore, the government has given the higher priority to the higher education sector, as nation’s human and intellectual capital growth as an essential to the development and to the advancement of the nation in a competitive globalised world.

As a result to the high demand for higher education needs each year and the establishment of government universities is not sufficient, thus private higher education institutions were authorized to operate under a strict supervision and control by the various forms of government agencies to ensure the quality of the academic programmes offered by such institutions.

In addition, Hassan and Sheriff (2006) added that 1990’s represented an era of rapid development for the Malaysian private higher educational institutions and was characterized by the growth in the number of institutions; variety of courses offered and course structures. Rapid establishment of private higher education institutions has enabled the private higher educational institutions to support and work together with the efforts of their public counterpart in producing highly skilled and trained professionals to meet Vision 2020. Hassan and Sheriff (2006) explained of an intend of this vision is to make Malaysia a fully industrialized nation by the year 2020. In addition, the private higher education institutions have also contributed significantly to the Malaysian economy growth via foreign exchange earnings from the influx of foreign students.

Private higher education institutions develop and award their own certificate and diploma level qualifications to students. The private higher education institution’s unique and long established inter-institutional collaborative arrangements with foreign partner-universities have created pathways for students to acquire foreign university degree qualifications in a much more cost-effective manner. Thousands of Diploma graduates have gone to foreign universities to finish the final part of their Bachelor's degree programmes, although there are also many who choose to remain in Malaysia to complete their degrees.

Basically, the curriculum and examination of this programme are set by the local private colleges, following by the quality criteria set by the Ministry of Higher Education and quality assurance agency namely Malaysian Qualification Agency (MQA) and validated or moderated by their foreign collaborative university partners (MQA, 2011).

The Malaysian Qualifications Agency (MQA), was established on 1 November 2007 with the coming in force of the Malaysian Qualifications Agency Act 2007. The Malaysian Qualification Agency was officially launched by the Honourable Minister of Higher Education, Dato’ Mustapa Mohamed, on 2 November 2007(MQA, 2011). The main responsibility of the Malaysian Qualification Agency is to execute the Malaysian Qualifications Framework (MQF) as a basis for quality assurance of higher education and as the reference point for the criteria and standards for national qualifications. The Malaysian Qualification Agency is responsible for monitoring and overseeing the quality assurance practices and accreditation of national higher education (MQA, 2011).

Apart from this, the private higher education is also supported by Malaysian Association of Private Colleges and Universities (MAPCU) and National Association of Private Educations Institutions (NAPEI). Generally, Malaysian Association of Private Colleges and Universities (MAPCU) was established on March 18, 1997 as Malaysia's most prestigious grouping of private colleges and universities with membership from major and well-established private colleges and universities (MAPCU, 2011).

According to MAPCU( 2011), all the colleges and universities under this association’s members offer post secondary and tertiary level courses independently and in collaboration with established local and foreign institutions of higher learning. In addition, these prestigious grouping members of the Malaysian Association of Private Colleges and Universities consist of the major and well-established private colleges and universities in Malaysia.  

Furthermore, Malaysian Association of Private Colleges and Universities (MAPCU)  committed to the development of the Malaysian higher education sector and entirely support the Malaysian 9th Plan in human resource development, "Strategic Plan For Higher Education: Laying The Foundation Beyond 2020" & "National Higher Education Action Plan 2007-2010" (MAPCU, 2011). In addition, this association will assist the government to sustain the principles of the National Education Philosophy and encourage professionalism as well as the integrity and quality of education at private colleges and universities within Malaysia.

On the other hand, National Association of Private Educational Institutions (NAPEI) established on September 15, 1987, represents all levels of private educational institutions in Malaysia (NAPEI, 2011). The origin of National Association of Private Educational Institutions is to require uniting of private educational institutions from the smallest to the biggest. With an initial registration of 26 members, NAPEI currently has membership strength of 70 institutions (NAPEI, 2011).

National Association of Private Educational Institutions jointly with the support from the Ministry of Education and other Government agencies continue to represent the issues of local private educational institutions which is crucial in this period of phenomenal growth of private education.

4.0 Conclusion

Merger and acquisitions in a higher education is capable to be a motivator to improve the business performance and to increase the business goal. Now a days, private colleges become more market driven and the competition among the colleges are increasing tremendously. Therefore in order to compete among each other, the financial strength must be there. However, if any particular college are struggling to sustain in a business it is recommended that merging is better than closing down the business.

In a private higher education institutions especially in private colleges, there are offering the same services even though the product is different. Therefore, the process of merging will not be so critical since there won’t be any drastic changes in term of the nature of the business.

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