Private firms eyeing profits from public schools
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Ohanian Comment: If the Common Core curriculum doesn't scare you, how about this:
Education entrepreneur John Katzman urged investors to look for companies developing software that can replace teachers for segments of the school day, driving down labor costs.
Take a look at the Rocketship Partner page, part of the "ecosystem of opportunity" detailed below.
And take a look at this breaking story about McGraw-Hill--to get an idea of the money involved in the ed business:
Exclusive: McGraw Takes Bids for Education Unit
By Greg Roumeliotis and Nadia Damouni
Reuters
NEW YORK | Thu Aug 2, 2012
(Reuters) - Bain Capital LLC and Thomas H. Lee Partners LP are among several parties that have put in initial bids for McGraw-Hill Companies Inc's (MHP.N) education business, which could value the world's second-largest education company by sales at around $3 billion, several sources familiar with the matter said.
Other bidders for the business include Apollo Global Management LLC (APO.N) and Cengage Learning Inc, the second-largest U.S. college textbook publisher, the sources said. Cengage is owned by Apax Partners LLP and OMERS Capital Partners.
McGraw-Hill Education, whose textbooks are distributed in 65 languages across 157 countries, could be valued by buyers at about six times its earnings before interest, taxes, depreciation and amortization (EBITDA), although McGraw-Hill has higher expectations, one of the sources added.
McGraw-Hill, Bain, Apollo, OMERS and Apax declined to comment while Thomas H. Lee did not immediately respond to a request for comment.
McGraw-Hill chief financial officer Jack Callahan said in a conference call with analysts last week that the company was evaluating other options to a spin-off of the textbook business, including a potential sale.
The sale comes a year after minority shareholders JANA Partners LLC and the Ontario Teachers' Pension Plan publicly urged McGraw-Hill to restructure.
McGraw-Hill, which has since streamlined its portfolio and made management changes, announced last September, after the activist calls, that it would split into two publicly traded companies - McGraw-Hill Financial and McGraw-Hill Education.
The financial company will include the famous credit ratings agency Standard & Poor's, S&P stock indexes, Platts commodity information and S&P Capital IQ. The company also accelerated stock buybacks and announced a drive to cut $100 million of annual costs from its nearly $5 billion of expenses.
"It is a much simpler venue - rather than spin off the company, simply sell it. It is much easier financially. I think they will get a better sense of value rather than worrying about the break-up value. It solves a lot of problems," said Ed Atorino, a media analyst at The Benchmark Company.
Cengage, which was acquired by Apax and OMERS from Thomson Reuters Corp (TRI.TO), the parent company of Reuters News, for about $7.75 billion in cash in 2007, is also considering a bid for online education services firm EmbanetCompass LLC, sources told Reuters earlier this week.
In a credit note last month, Standard & Poor's described Cengage's financial risk profile as "highly leveraged," adding the company had been adversely affected by the growth of the rental textbook market, which has increased the availability of discounted used books.
Cengage had "less than adequate" sources of liquidity to more than cover its needs over the next 12 to 18 months, based on the assumption that future refinancing costs might be prohibitive, the credit rating agency said. The sources suggested this may be driving Cengage and its private equity owners to consider acquisitions that would boost its cash flow.
"It wouldn't be appropriate for us to comment on what McGraw-Hill might or might not do with respect to a sale or spin-off of its education business," said Cengage CEO Ron Dunn.
"With regard to Cengage Learning, we continue to generate strong cash flows from operations and we are very confident that we can service our debt while continuing to fund our business at appropriate levels as we lead the migration to digital solutions in all our markets," he added.
McGraw-Hill Education had revenues of $2.3 billion and operating income of $260 million in 2011. About 18 percent of its revenues is international, while digital-related solutions accounted for over 20 percent of its 2011 revenue.
On Thursday, McGraw-Hill Education announced the acquisition of Key Curriculum, a developer of mathematics learning technology in the children's and higher education markets, without disclosing financial terms.
Sidenote: I try to provide hot links to items mentioned in news stories, and this involves browsing to find out who's in charge. I got caught up in equity firm Brockway Moran & Partners Inc investments. Everything from rodent control products and wild animal cage traps to innovative backpacks to wine distribution to medical air evacuation to urgent care centers to Nonviolent Crisis Intervention®, Dementia Capable Care to franchisees of Wendy’s Old Fashioned Hamburgers®. AND Turning Technologies, a leading developer, marketer and distributor of educational technology products, software and services to K-12 and higher education institutions, as well as corporations and government agencies worldwide. Turning Technologies specializes in student and audience response systems that are used by educators and trainers to improve learning outcomes, capture and analyze results, and increase student and audience engagement.
By Stephanie Simon
(Reuters) - The investors gathered in a tony private club in Manhattan were eager to hear about the next big thing, and education consultant Rob Lytle was happy to oblige.
Think about the upcoming rollout of new national academic standards for public schools, he urged the crowd. If they're as rigorous as advertised, a huge number of schools will suddenly look really bad, their students testing way behind in reading and math. They'll want help, quick. And private, for-profit vendors selling lesson plans, educational software and student assessments will be right there to provide it.
"You start to see entire ecosystems of investment opportunity lining up," said Lytle, a partner at The Parthenon Group, a Boston consulting firm. "It could get really, really big."
Indeed, investors of all stripes are beginning to sense big profit potential in public education.
The K-12 market is tantalizingly huge: The U.S. spends more than $500 billion a year to educate kids from ages five through 18. The entire education sector, including college and mid-career training, represents nearly 9 percent of U.S. gross domestic product, more than the energy or technology sectors.
Traditionally, public education has been a tough market for private firms to break into -- fraught with politics, tangled in bureaucracy and fragmented into tens of thousands of individual schools and school districts from coast to coast.
Now investors are signaling optimism that a golden moment has arrived. They're pouring private equity and venture capital into scores of companies that aim to profit by taking over broad swaths of public education.
The conference last week at the University Club, billed as a how-to on "private equity investing in for-profit education companies," drew a full house of about 100.
OUTSOURCING BASICS
In the venture capital world, transactions in the K-12 education sector soared to a record $389 million last year, up from $13 million in 2005. That includes major investments from some of the most respected venture capitalists in Silicon Valley, according to GSV Advisors, an investment firm in Chicago that specializes in education.
The goal: an education revolution in which public schools outsource to private vendors such critical tasks as teaching math, educating disabled students, even writing report cards, said Michael Moe, the founder of GSV.
"It's time," Moe said. "Everybody's excited about it."
Not quite everyone.
The push to privatize has alarmed some parents and teachers, as well as union leaders who fear their members will lose their jobs or their autonomy in the classroom.
Many of these protesters have rallied behind education historian Diane Ravitch, a professor at New York University, who blogs and tweets a steady stream of alarms about corporate profiteers invading public schools.
Ravitch argues that schools have, in effect, been set up by a bipartisan education reform movement that places an enormous emphasis on standardized test scores, labels poor performers as "failing" schools and relentlessly pushes local districts to transform low-ranked schools by firing the staff and turning the building over to private management.
President Barack Obama and both Democratic and Republican policymakers in the states have embraced those principles. Local school districts from Memphis to Philadelphia to Dallas, meanwhile, have hired private consultants to advise them on improving education; the strategists typically call for a broader role for private companies in public schools.
"This is a new frontier," Ravitch said. "The private equity guys and the hedge fund guys are circling public education."
Some of the products and services offered by private vendors may well be good for kids and schools, Ravitch said. But she has no confidence in their overall quality because "the bottom line is that they're seeking profit first."
Vendors looking for a toehold in public schools often donate generously to local politicians and spend big on marketing, so even companies with dismal academic results can rack up contracts and rake in tax dollars, Ravitch said.
"They're taking education, which ought to be in a different sphere where we're constantly concerned about raising quality, and they're applying a business metric: How do we cut costs?" Ravitch said.
BUDGET PRESSURES
Investors retort that public school districts are compelled to use that metric anyway because of reduced funding from states and the soaring cost of teacher pensions and health benefits. Public schools struggling to balance budgets have fired teachers, slashed course offerings and imposed a long list of fees, charging students to ride the bus, to sing in the chorus, even to take honors English.
The time is ripe, they say, for schools to try something new -- like turning to the private sector for help.
"Education is behind healthcare and other sectors that have utilized outsourcing to become more efficient," private equity investor Larry Shagrin said in the keynote address to the New York conference.
He credited the reform movement with forcing public schools to catch up. "There's more receptivity to change than ever before," said Shagrin, a partner with Brockway Moran & Partners Inc, in Boca Raton, Florida. "That creates opportunity."
Speakers at the conference identified several promising arenas for privatization.
Education entrepreneur John Katzman urged investors to look for companies developing software that can replace teachers for segments of the school day, driving down labor costs.
"How do we use technology so that we require fewer highly qualified teachers?" asked Katzman, who founded the Princeton Review test-prep company and now focuses on online learning.
Such businesses already have been drawing significant interest. Venture capital firms have bet more than $9 million on Schoology, an online learning platform that promises to take over the dreary jobs of writing and grading quizzes, giving students feedback about their progress and generating report cards.
DreamBox Learning has received $18 million from investors to refine and promote software that drills students in math. The software is billed as "adaptive," meaning it analyzes responses to problems and then poses follow-up questions precisely pitched to a student's abilities.
The charter school chain Rocketship, a nonprofit based in San Jose, California, turns kids over to DreamBox for two hours a day. The chain boasts that it pays its teachers more because it needs fewer of them, thanks to such programs. Last year, Rocketship commissioned a study that showed students who used DreamBox heavily for 16 weeks scored on average 2.3 points higher on a standardized math test than their peers.
SPECIAL ED AS A GROWTH MARKET
Another niche spotlighted at the private equity conference: special education.
Mark Claypool, president of Educational Services of America, told the crowd his company has enjoyed three straight years of 15 percent to 20 percent growth as more and more school districts have hired him to run their special-needs programs.
Autism in particular, he said, is a growth market, with school districts seeking better, cheaper ways to serve the growing number of students struggling with that disorder.
ESA, which is based in Nashville, Tennessee, now serves 12,000 students with learning disabilities or behavioral problems in 250 school districts nationwide.
"The knee-jerk reaction is, 'You're just in this to make money. The profit motive is going to trump quality,' " Claypool said. "That's crazy, because frankly, there are really a whole lot easier ways to make a living." Claypool, a former social worker, said he got into the field out of frustration over what he saw as limited options for children with learning disabilities.
Claypool and others point out that private firms have always made money off public education; they have constructed the schools, provided the buses and processed the burgers served at lunch. Big publishers such as Pearson, McGraw-Hill and Houghton Mifflin Harcourt have made hundreds of millions of dollars selling public school districts textbooks and standardized tests.
Critics see the newest rush to private vendors as more worrisome because school districts are outsourcing not just supplies but the very core of education: the daily interaction between student and teacher, the presentation of new material, the quick checks to see which kids have risen to the challenge and which are hopelessly confused.
At the more than 5,500 charter schools nationwide, private management companies -- some of them for-profit -- are in full control of running public schools with public dollars.
"I look around the world and I don't see any country doing this but us," Ravitch said. "Why is that?"
(Editing by Jonathan Weber and Prudence Crowther)
— Stephanie Simon
Reuters
August 02, 2012
http://www.reuters.com/article/2012/08/02/us-usa-education-investment-idUSBRE8710W220120802
Index of Common Core [sic] Standards
