How M&A Strategy Evolves in Education Technology

Online education is not new. Back in 2010, Kaplan University already had 75,000 students in its online higher education program. It grew rapidly and was highly profitable since online schools have lower costs than face-to-face campus delivery-based education. 

But because of the pandemic, the entire educational sector was forced to shift in this direction, increasing competition. There has been a 40% increase in acquisitions since the pandemic, and interest in the education sector has exploded. 

In this article, Tom Horton, Senior Vice President of Corporate Development & Strategy at Kaplan, Inc., talks about how M&A strategy has evolved in education technology.

“Acquisitions are hard to get right so don't over-complicate them” - Tom Horton

According to Tom, acquisitions are not always easy, which is why M&A is not their top priority when it comes to growth strategy. At Kaplan, they look at four different types of capital allocation:

1. Partnership - Their top priority is to find strong partnerships. They are the most successful when working with partners with established brands who have complementary skills and capabilities. 

2. Organic growth - They prioritize their organic growth simply because they have control of all the levers, which makes it a bit easier than acquisitions. Plus it’s cheaper.

3. M&A - They look at acquisitions very consciously and only in specific situations. Before they execute deals, they go through a buy or build analysis.

4. Equity investments - Their last priority is equity investment. They do this selectively because they have less control over it and there is no guarantee that they will be able to bring in the investment in-house over time. 

M&A Strategy

Even though Kaplan is very careful before executing M&A, they understand the importance of proactively sourcing target companies. Kaplan likes to develop opportunities rather than reactively responding to the market. Participating in competitive bank processes will most likely cause an acquirer to overpay. 

Kaplan looks at five criteria before considering an acquisition:

1. Strong history of earnings - This is done to ensure that the target has a good track record of growth, and provide evidence of a strong underlying business that can deliver results.

2. Long-term market visibility - They buy and hold long-term so it is extremely important that the business can stand for a long period of time.

3. Strong management - Having strong leadership and management is an indication of a strong business. Also as a holding company, they would prefer if the management stays post-close.

4. Distance from their core - They don't like taking big steps out of their core competency. They like acquiring companies within their wheelhouse that they already know how to grow and improve. 

5. Reasonable valuation - Price factors into everything. At the end of the day, the target company needs to be reasonably priced so that the acquirer can earn a reasonable return on capital investment.

Team Alignment 

Before the pandemic, Kaplan used to have leadership conduct face-to-face meetings in an office. However, when everyone was forced to go online, Tom found virtual meetings more effective. They were able to broaden their audience and engage more leadership since there was no traveling involved and more people were available. 

With online meetings, they were able to be more systematic with strategy sessions and come up with a more effective governing framework for their M&A strategy.

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