One View on Why the Rice-BCM Merger Failed

Last Thursday, I was at the Jones School to watch the new documentary Haynesville (which was excellent and about which I may blog later). While there, I got into a conversation with one of my old professors. I'll call him Professor X to preserve his anonymity (he does not, as far as I know, have psychic powers, and he is definitely neither bald nor confined to a wheelchair).

We got to talking about the failed BCM-Rice merger. He was really, really bummed about it. He didn't claim to be an insider to the negotiations, but he knew some insidery stuff. Specifically, he blamed Baylor University for the breakdown of negotiations (which jibes to a certain extent with what has been reported elsewhere). I asked him about BCM's debt load and risk. Professor X said that on the BCM side, there were philanthropists lined up to make them whole if the merger happened. I argued that that money, given now, is money that wouldn't be given later (say in the form of estate giving). His argued that this money was money that was going to BCM, not Rice, and that if they didn't give it now, they would possibly never give it at all because BCM might cease to exist. In either case, Rice was never going to see that particular pool of philanthropic money. (Not that Rice doesn't have its own supply, obviously.)

Furthermore, Professor X talked about good things that would have happened had the merger succeeded. BCM foolishly burned many bridges in the past few years. In retrospect, it's insane what they did. But the merger with Rice would have been a new day. Institutions who were alienated from BCM were willing to come back on board if Rice was running the show. Specifically, Professor X suggested that Methodist might renew their partnership with BCM. (It was BCM's split from Methodist Hospital that triggered BCM's current downward spiral.) One worry about the merger was that Rice would be joining with an unloved institution that had no teaching hospital. Professor X basically said that being part of Rice would erase the old acrimony.

So what happened? All along, Baylor University had veto power. According to Professor X, they were informed at every step what the merger would mean. This was a process that was started over a year ago, recall. Then at the last second, Baylor U. stood up and started making noises, adding conditions. This was after a year of careful negotiations between Rice and BCM, lining up unprecedented financial help, mending fences with previously alienated partners, etc.

Evidently, the Baylor U. conditions and interference became too much. Professor X dropped a bombshell. It was Leebron himself that ended the negotiations. I can only imagine that he concluded that Baylor U. was trying to sabotage the merger, and that there was no way it could progress. His frustration must have been immense.

Why did Baylor U. do it? Perhaps they believe that they can essentially take all the work Rice did and proceed. After all, Rice apparently has lined up hundreds of millions of dollars to rescue BCM. The reason those people are giving this money is because they believe that it would be a tragedy for Houston to lose BCM. So Baylor may be thinking, even if we elbow Rice out of the picture, the motivation of the philanthropists remains the same--rescue BCM.

We'll see if it works. But in the meantime, I would like to say this to the leadership at Baylor University: thanks a lot, assholes. That was real "Christian" of you.

Letter from Leebron

I got this in my inbox overnight:

Dear Robert,         Below is a joint statement by Bill Butler, the interim president of Baylor College of Medicine, and me regarding the proposed Rice-BCM merger.  Although discussions have ended, we look forward to continued and expanded collaborations with our colleagues at BCM.        I especially want to thank the many alumni who provided thoughtful feedback and support throughout this process.  It is clear that you share a dedication to the institution and care deeply about Rice's success, and I appreciate your continued involvement in the life of the university. Very truly yours, David W. Leebron President January 12, 2010              We are writing to inform you that Baylor College of Medicine and Rice University have ended our discussions about a possible merger of our two institutions.  At the same time, both institutions have agreed to develop further our existing academic and research relationship, which has grown significantly over the years.         Since we signed a memorandum of understanding in March of 2009, we have been in extensive discussions in an attempt to meet several conditions that both institutions considered to be essential for a successful merger.  We joined in a thorough and deliberate process that explored the many benefits and challenges a merger would entail.  With the MOU due to expire this month, the leadership of both institutions decided it is in the best interests of both BCM and Rice University to strengthen the existing relationship without a formal merger.         The months of discussion have provided a great deal of information that we will use to build on existing joint programs, such as in neuroscience and global health initiatives, and to create new ones that will best serve both institutions.  A report prepared by a joint committee of faculty members from each institution identified many possibilities for collaboration that will be considered in the coming months.         We want to thank our administrative and faculty teams for their hard and creative work over the past year.  Our respect for each other increased daily as we grew to know each other and each other’s work better.  We learned that we share similar missions and a commitment to the highest standards of education, research and community service.  So, while we are bringing the merger discussions to a close, we are opening a new chapter of collaboration that will advance the field of biomedicine and improve human health.       David W. Leebron President Rice University William T. Butler, M.D. Interim President Baylor College of Medicine

Since we're on a first name basis now, I want to say, thanks David for informing me of this and thanks for making what I feel was the right decision.

Rice-Baylor Merger Talks Collapse

This is huge.

Baylor College of Medicine and Rice University have ended 15 months of negotiations aimed at merging the two elite Houston schools.

In a joint statement sent to faculty staffs and students today, Rice President David Leebron and Baylor President Dr. William Butler gave no reason for the collapse of the talks. Just four months ago, they hinted a deal might be in place by the end of this month. (Todd Ackerman, The Houston Chronicle)

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.

Rice Merging With Baylor? Rice Faculty Say No!

That's the subtext to the "Interim Report of the Rice University Faculty Merger Review Committee." This report was completed in late August but only made public recently. The faculty on the committee come from a wide variety of academic departments. I only know one of them, Duane Windsor, who teaches the ethics and csr class for the Jones School.

Right from the very start, they express frustration with the lack of specifics about the merger.

The Faculty Merger Review Committee (FMRC) intended to make a full-scale report to the faculty at the start of the semester, but that has not been possible. Merger discussions have been going slowly, and many key decisions have not yet been made: the disposition of the incomplete hospital and its debt; the resolution of a clinical plan for Baylor College of Medicine (BCM); arrangements with participating hospitals, especially adult care hospitals; securing adequate philanthropic commitments; a reliable estimate of the expenses necessary to implement the merger; the amount of investment available for program enhancement and its allocation between Rice and Baylor; and plans for additional fundraising to make possible maximum academic benefits to Rice from a merger without starving existing or future non-medical related programs at Rice. Absent the resolution of these issues, it is impossible for the FMRC to fully assess the risks and benefits of a merger.

Am I reading to much into this if I say that there is a hint that the faculty are feeling they are being kept in the dark about certain things?  That would be my big worry--secret negotians and a plan presented as a fait accompli.Another frustration they state is that there is some information that has been devulged to the committee that the committee is not allowed to include in its reports.

For example: if a Rice/Baylor merger goes forward, Rice will make a substantial one-time investment to support the merger. The committee has been told the planned size of this investment. Because it is still subject to negotiations, the FMRC cannot disclose the amount. Therefore our ability to report to the faculty on the financial costs, including opportunity costs, of a merger is severely constrained. Part of Rice’s one-time investment will be in academic enhancement at BCM and Rice. An important issue for Rice faculty is the academic benefits that would flow from the portion of enhancement funds spent at Rice.

Then, constrained as they are, they make a list of risks and benefits. They're all worth reading, but I want to highlight the risks.

1. The merger would create one of the most unbalanced academic institutions in the US, with a very small university attached to a large medical school. This imbalance could impact Rice’s academic mission, culture, and its finances.
2. The financial risks to Rice of merging with BCM are significant and are amplified by the large size differential between the two institutions. The annual operating budget at BCM, for example, is almost three times the size of Rice's budget. Consequently, small fractional changes in total revenue of the combined institution could have a large impact on funds available for Rice’s traditional mission.
3. By joining with BCM, Rice will be acquiring a large exposure to a volatile industry with changing economics. Over time, e.g., NIH budgets may decline and the nation’s system of payments for medical services is likely to change.
4. The recent situation at BCM has led some of its staff to leave and others to contemplate leaving. It is possible that the BCM with which Rice would merge would be significantly weaker than the BCM of a few years ago.
5. Inadequate execution could limit anticipated benefits. (See Condition 6 below.)
6. Because BCM is in a turnaround situation, its financial future and the future of its institutional relationships are less predictable.

In short, Rice could end up stuck with a money-sucking white elephant that would everwhelm the university.

They, as faculty at Rice, are understandably afraid of becoming second bananas in an unequal partnership. And they are right to worry about that. It is critically important that Rice remain a strong, independent university, with its primary mission being to educate undergraduate and graduate students. If this merger causes this to become a secondary mission to, say, running a hospital, then it should not be permitted to go forward.

(See also this and this.)

Rice--Baylor Merger Update

Just like the merger of Lex Luthor and Braniac, the Rice-Baylor merger is experiencing its own set of difficulties.

Rice University President David Leebron announced last November that a proposed merger with Baylor College of Medicine would be resolved one way or another by May, but a spokeswoman suggested this week that the two institutions still aren’t close to an agreement.

The acknowledgement followed an internal Baylor update that it has reduced its $85 million deficit by $30 million and Rice faculty agitating for more input into what they note is the most important decision in the institution’s history.

That latter bit seems like it should make the merger easier. Although if Baylor improves its situation financially, while it makes Baylor more attractive to Rice, it may also make Baylor more reluctant to enter a deal (certainly they would be in the position to demand more concessions.)

Baylor’s shaky finances and uncertainty about its hospital, however, are considered stumbling blocks to a deal. Baylor hopes to trim an additional $35 million by next June, taking its deficit down to $20 million, interim President William Butler recently told faculty. Baylor also is trying to figure out a home for its doctors who practiced at The Methodist Hospital or St. Luke’s Episcopal Hospital before Baylor split from both.

“In visiting with Rice, there are two areas of concern,” Baylor Trustee Bob McNair said at a faculty meeting in February, an executive summary from which recently began circulating outside the institution. “One area has been that operating losses have been growing. The other was: What are we going to do with the hospital project?”

Baylor’s hospital project, a 250-bed facility near the veterans hospital, was much touted after the splits with Methodist and St. Luke’s but more recently became saddled with debt. In March, Baylor announced it would suspend construction of the hospital, a move Butler said would buy time to acquire more capital before continuing. Some sources said the delay would also allow the school to sell the building.

To me, it seems like having a hospital is necessary, and since there is one halfway built, it should be finished--assuming money can be found. Of course, Methodist and St. Luke's, having been burned by Baylor, might be more willing to negotiate with Rice.

At Rice, concern that the case hasn’t yet been made for a merger prompted faculty to meet in April. More than 200 professors turned out for the single-issue gathering, a rare event at the usually placid university. The meeting was closed, but Rice’s Faculty Senate posted minutes from the meeting on its Web site.

“The famous astronomer Carl Sagan once said, ‘Big claims require big proofs,’ ” computational engineering professor Moshe Vardi wrote in a letter also posted on the Web site. “The claim that the potential benefits of merging Rice with Baylor outweigh the risks is a ‘big claim’; it requires a ‘big proof.’ ”

Vardi wrote that he is skeptical about the merger and has encountered that sentiment among colleagues.

Professors who attended the meeting, however, said faculty opinions are all over the map, often coinciding with whether that professor’s discipline would stand to benefit from Rice having a medical school.

Faculty overwhelmingly adopted a resolution creating a faculty merger committee larger than the one appointed by Leebron and chaired by a professor instead of the president. Leebron accepted the resolution.

The committee is expected to bring to another meeting of the faculty in early fall a report on the potential benefits, costs and risks of the proposed merger and actions that could be taken to maximize the opportunities and minimize the risks.

This, I think, is the important part of this story. Seen from the outside, it seems like there is resistence to Lebron's eternally expansive approach to Rice.

Under Leebron’s leadership, the Rice campus is undergoing some $850 million in construction projects to add two new residential colleges to house a 30 percent growth in the undergraduate student body, a 10-story research center to deepen Rice’s collaboration with the Texas Medical Center and new campus amenities including a library-based pavilion and sports arena.

Perhaps they see Lebron as a reckless empire builder. Without knowing everything of the pitfalls of the merger, however, I support it. It would help Rice compete against the Ivies. Rice adding Baylor would balance William Pierce. The danger of increasing the size of the student body, as Lebron is doing, is that it might require Rice to become less selective. But adding an already very selective institution doesn't hurt Rice's reputation for selectivity. (For the same reason, I would oppose Rice buying the South Texas College of Law, which is more a meat-and-potatoes law school. South Texas College of Law is considered a 4th tier school and is unranked by U.S. News, while Baylor is ranked the 17th best research medical school by U.S. News and 17th best for primary care as well.)

Rice and Baylor College of Medicine to Merge?

They're thinking about it, according to the The Houston Business Journal.

Rice University and Baylor College of Medicine in Houston are in talks aimed at a possible merger of the two institutions.

“Rice and Baylor have a long history of valuable collaborations and are exploring the possibility of a closer affiliation,” the schools said in a joint statement. “Preliminary talks are under way.”
Spokespersons at both institutions said no officials would talk further about the negotiations at this time.
Rice is one of the top-ranked private universities in the country and Baylor is among the country’s top medical schools. It also is one of fewer than a dozen medical schools not affiliated with a university.
Both institutions are located in The Texas Medical Center in Houston.
Such a merger would bring Rice’s strong financial backing to Baylor, which has struggled financially since it separated from its long-time affiliate, The Methodist Hospital, in 2004.
And universities like Rice are increasingly seeking partnerships with medical schools to expand and enhance their biomedical research capabilities.

Wild, huh? A few years back, I heard Rice President Lebron speaking about plans for the University. Lebron is a controversial figure at Rice--many see him as a careerist type who is using Rice to build up his resume. But he has been aggressive about expanding Rice--increasing the undergraduate population (and building three new collages for them), and increasing the size and scope of many departments (for example, the business school will now be offering an undergraduate business minor). So at this meeting, Lebron was asked about the possibility of Rice adding a medical school or a law school. He was frank about the difficulties of both--in the first case, you needed to have a hospital, which was a big obstacle for starting a medical school from scratch. (For a law school the obstacle was that someone would need to give Rice a check "with eight zeros".)
Baylor seems to solve the main problem. This seems like a win-win, especially as Rice has been moving so heavily into bio-medical research (including a new building devoted to it in the Medical Center, the "Collaborative Research Center."). The only bad thing is that Rice would inherit Baylor's financial problems and (current) bad leadership. The latter can be dealt with easily enough, but the former will put a strain on even a rich institution like Rice. I expect to get a few more begging-ass letters from my dear old alma mater.
Update: It looks like this information was not meant to be leaked, because Lebron immediately sent out the following letter to alumni apologizing for not keeping them in the loop.

Dear Robert,

As you may know, today's Houston Chronicle includes an article on a potentially closer affiliation between Rice and Baylor College of Medicine. (You can read the article here: http://www.chron.com/disp/story.mpl/front/6083117.html.) This possibility has been discussed for many years, and the two institutions already have collaborations that we are always seeking to build upon. I am writing to let you know that such a discussion is in fact under way, but is very preliminary, tentative and exploratory. Yesterday afternoon Rice and BCM issued the following joint statement:

"Rice University and Baylor College of Medicine have a long history of valuable collaborations and are exploring the possibility of a closer affiliation. Preliminary talks between the two institutions are under way. No further details are available at this time."

I can assure you that the Rice leadership team and Board of Trustees will not undertake a decision like this without the utmost care and due diligence. I had the opportunity to update the Association of Rice Alumni board of directors at their recent meeting, and will keep you apprised of the situation as conversations between Rice and BCM may continue in the months to come.

Sincerely yours, David W. Leebron President