What One Faculty Member Has to Say About the Rice-BCM Merger
In my most recent post about the Rice-Baylor College of Medicine Merger, I got a comment from Dr. Moshe Vardi, a computer science professor at Rice. He had just given a talk (on October 26) about the merger, and the talk is posted online. I urge you to check it out--it's a bit long (over an hour) but worth listening to all the way through (including the questions at the end). His slides and referenced materials for the talk are also posted online.
His basic point is that the two stated reasons for the merger--increase in prestige for Rice and increased synergies between Rice and BCM--are not good enough, because the merger involves so much risk for Rice. In finance terms, the net risk-adjusted return appears to be negative.
Vardi in particular looked at the books for Rice and BCM. BCM took on a lot of debt to build its own hospital--which it abandoned halfway through the building process, which means it will get no cash flows from it to help repay the debt. (In fact, and this is shocking, BCM is in technical default right now.) But that's OK, right, because Rice is rich. As an alumnus, that's what I've always thought. But recall that we have a president who has been on a building spree--which may pay off in the future, but right now it has not only cost Rice a lot of money, but it forced us to start carrying debt. This debt was incurred in order to build the "Collaborative Research Center"--which has been renamed the "Bioscience Research Collaborative" for some reason. Ironically, the idea behind it was to give Rice the benefit of working with the hospitals and schools in the Medical Center without the cost and hassle of owning and operating a hospital. And double ironically, they built it and only one partner from TMC has chosen to cooperate. This facility was supposed to be rented out, in a sense, to researchers from TMC. So far, this goal has not been met.
So Vardi's point is that Rice, already burdened by debt, buys Baylor, and either our endowment shrinks a lot or we end up with more debt--either way, increasing our leverage and assuming the risks that go along with that leverage. He concedes that Rice won't shoulder the burden alone--that Rice and BCM will be asking deep-pocketed philanthropists to help pay. But the quantities of cash required to right the listing BCM ship are so massive that Rice will surely pay a lot of it.
Furthermore, he talks about the supposed synergies of the merger and makes the following points. First, there is nothing stopping Rice and BCM from collaborating on stuff right now, without a merger. We do it all the time (as well as collaborate with other institutions in TMC). And second, any increased synergy would cost money--for new facilities, new staff, etc. Which puts us right back at the state in the previous paragraph. More money, increased risk. (Obviously the current economy makes these kinds of decisions even riskier.)
Vardi speculates that their are other motives--that certain people at Rice (and BCM) are afraid that U.H. will come in and take it over as part of their quest to become a tier 1 university. Vardi suggested that if this is true, it's an administration concern (and perhaps a board of trustees concern), but not something that should matter to the faculty. The faculty should be happy to have more tier 1 universities in Houston. (Does Harvard regret sharing Boston with MIT, Tufts and B.U.?)
In the question and answer period, someone who is a faculty member and a member of the administration lashed out at Vardi for making unwarranted assumptions about the actions and motivations of the administration in this matter. He apologized, but said everything in his talk was based on publicly available information (which is posted on his website). Just as the Interim Report of the Rice University Faculty Merger Review Committee implied, one of the great frustrations is the secrecy involved. So this woman who spoke (and I am sorry I didn't get her name) is privy to information that Vardi doesn't have. If Vardi is putting an unoptimistic gloss on things, he is reflecting the facts as he knows them and the unease he must feel from the lack of transparency.
The conclusion is that BCM should be saved and may well go under or be permanently diminished if it isn't saved. But that Rice should not merge with BCM in order to save it.
His basic point is that the two stated reasons for the merger--increase in prestige for Rice and increased synergies between Rice and BCM--are not good enough, because the merger involves so much risk for Rice. In finance terms, the net risk-adjusted return appears to be negative.
Vardi in particular looked at the books for Rice and BCM. BCM took on a lot of debt to build its own hospital--which it abandoned halfway through the building process, which means it will get no cash flows from it to help repay the debt. (In fact, and this is shocking, BCM is in technical default right now.) But that's OK, right, because Rice is rich. As an alumnus, that's what I've always thought. But recall that we have a president who has been on a building spree--which may pay off in the future, but right now it has not only cost Rice a lot of money, but it forced us to start carrying debt. This debt was incurred in order to build the "Collaborative Research Center"--which has been renamed the "Bioscience Research Collaborative" for some reason. Ironically, the idea behind it was to give Rice the benefit of working with the hospitals and schools in the Medical Center without the cost and hassle of owning and operating a hospital. And double ironically, they built it and only one partner from TMC has chosen to cooperate. This facility was supposed to be rented out, in a sense, to researchers from TMC. So far, this goal has not been met.
So Vardi's point is that Rice, already burdened by debt, buys Baylor, and either our endowment shrinks a lot or we end up with more debt--either way, increasing our leverage and assuming the risks that go along with that leverage. He concedes that Rice won't shoulder the burden alone--that Rice and BCM will be asking deep-pocketed philanthropists to help pay. But the quantities of cash required to right the listing BCM ship are so massive that Rice will surely pay a lot of it.
Furthermore, he talks about the supposed synergies of the merger and makes the following points. First, there is nothing stopping Rice and BCM from collaborating on stuff right now, without a merger. We do it all the time (as well as collaborate with other institutions in TMC). And second, any increased synergy would cost money--for new facilities, new staff, etc. Which puts us right back at the state in the previous paragraph. More money, increased risk. (Obviously the current economy makes these kinds of decisions even riskier.)
Vardi speculates that their are other motives--that certain people at Rice (and BCM) are afraid that U.H. will come in and take it over as part of their quest to become a tier 1 university. Vardi suggested that if this is true, it's an administration concern (and perhaps a board of trustees concern), but not something that should matter to the faculty. The faculty should be happy to have more tier 1 universities in Houston. (Does Harvard regret sharing Boston with MIT, Tufts and B.U.?)
In the question and answer period, someone who is a faculty member and a member of the administration lashed out at Vardi for making unwarranted assumptions about the actions and motivations of the administration in this matter. He apologized, but said everything in his talk was based on publicly available information (which is posted on his website). Just as the Interim Report of the Rice University Faculty Merger Review Committee implied, one of the great frustrations is the secrecy involved. So this woman who spoke (and I am sorry I didn't get her name) is privy to information that Vardi doesn't have. If Vardi is putting an unoptimistic gloss on things, he is reflecting the facts as he knows them and the unease he must feel from the lack of transparency.
The conclusion is that BCM should be saved and may well go under or be permanently diminished if it isn't saved. But that Rice should not merge with BCM in order to save it.
Labels: Baylor College of Medicine, Rice University, Rice-BCM merger
posted by Robert Boyd at
7:33 PM
2 Comments:
This is generally a fair summary of my position.
One correction, though, regarding "Vardi suggested that if this is true, it's an administration concern (and perhaps a board of trustees concern), but not something that should matter to the faculty. The faculty should be happy to have more tier 1 universities in Houston."
I did not make a distinction here between the Administration, the Board, and the Faculty. I think everyone at Rice should welcome an additional Tier-1 university in Houston.
Moshe
I think Vardi missed one important point, which is what happens if Rice does not merge with Baylor. He did say that a quick merger with the University of Houston is not likely. But what then? With Baylor already in technical default, it may have no choice but to seek bankruptcy protection from its lenders.
Here is where it gets interesting. The directors of a charity that files for bankruptcy may find themselves personally liable for certain debts. Thus, the Baylor trustees may be personally liable for Baylor's massive debts. Some of these trustees are also trustees of Rice. Thus, these people may be negotiating their own personal bailout!
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