How M&A Strategy Evolves in Education Technology

‍Evolution of the Educational Sector

The market has been through a period of really rapid change and it was especially accentuated by the pandemic. It didn’t create absolutely new trends, but it accelerated a lot of trends that were already happening in the market. And it attracted a lot of new attention and investment from investors globally in the sector. 

Kaplan was one of the early leaders in online higher education. Between 2000 and 2010, we went from essentially like 35 students in the first year to 75,000 students by 2010. The development of online education just grew so rapidly and it was a product of the fact that higher ed institutions generally are super conservative with powerful brands. 

A huge segment of the population in the U.S. didn’t finished college, or never even went. And when they started working, there are requirements from the employers for higher ed degrees, so they had to  figure out how to get degrees while working.

Because of the lack of innovation in the higher ed sector in the US, there were new entrances that we're able to come in and start serving the segment of the population that literally hadn't been served.

It was highly, highly profitable early on because you think about the economics of face-to-face classroom campus-based delivery versus the economics of doing it online.

There was sort of like a price umbrella for a face-to-face education where people know today like to get a year's worth of college, many institutions in the US it's like 65, $70,000.

And it's that expensive because there's that much cost involved in delivering it. In an online world, a lot of those fixed costs and sort of variable repetitive costs go away.

So there was a lot of money flowing around early on in those years within that sector because of the pricing umbrella of face-to-face and lack of competition and innovation, that's changed over time.

And you're seeing sort of the proliferation now of online models like finally, the higher ed institutions have made it their own and they're all accepting it and they're figuring out, it’s in their best interest to serve these other segments. So they're all piling into the space as well to drive online delivery.

So that is one segment of the education market and one trend multiply that by like five or 10, because there are all sorts of other macro trends happening in the market that are really reshaping the ed sector globally. 

I'd say there's been a long fuse of many years of innovation in the sector, online education delivered in one of those things, but the pandemic absolutely hit the turbochargers on that and has really amped up the market. 

When it comes to just getting to the point about M&A and investing there are often cycles in education, but with the pandemic, we saw absolutely explosive growth. 

So in 2021, there were 450 acquisitions roughly globally and that total value is about $30 billion. That is probably small compared to a lot of other sectors, but just the sheer numbers and the growth of it's amazing.

So the 450 acquisitions that year was a 40% increase over 2020, which was a similar increase over the prior year and the valuations have kind of gone through the roof. So, like medium enterprise value on our revenue multiple basis was about three and a half on average in 2021.

But for larger companies, it was at 6.2 times revenue. Like those are some pretty eye-popping revenue multiples just generally. So it's a sign of like how much interest in buzz and activity was happening in the market. 

On the VC side, the global market in 2021 for investment was on the order of $21 billion.That was three times the level, $21 billion is three times the pre-COVID numbers. 

Since 2015, there have been 38 new unicorns that have come out of venture investing, 17 of those were minted last year. So there's been a whole bunch of IPOs as well. So like whatever sector of the market you're kind of looking at or whatever lens you're looking through, there's just been a tremendous amount of activity.

Organic vs Inorganic growth

Building up to 75,000 students was almost entirely organic, that's how rich the opportunity was. When we figured out the business model for that, we could grow it just because of the nature of the business. We didn't really need to acquire into that. It was a matter of the marketing that you could put into it just allowed for that kind of growth. 

And it was a national model, very unlike the current higher or traditional higher ed model, where it's all sort of regionally based in your campus, you're constrained by campus. You're no longer constrained by a campus. So you could achieve with national advertising, unbelievable growth. 

We've done 120 acquisitions and we've deployed almost 2 billion in capital on acquisitions 1996. That's a long period of time, but there were other segments beyond just our Kaplan University, higher ed segment, where we did do a lot of acquisitions. 

So for a long time, we were in the vocational ed sector and that was a case where it did make sense to do a bunch of acquisitions. There was a lot of roll-up and consolidation opportunities within that segment. And we absolutely use acquisition as a strategy to grow. Another area that we're very heavy into is professional education. 

We've used acquisition historically, where it makes sense in order to drive growth but where it can drive organic growth, that's typically our preference to grow organic where we are able to,.

Capital Allocation 

We think about four different types of capital allocation and strategies. So an M&A is sort of the third preference on that list because M&A traditionally it's pretty hard to get right but very powerful when you do. 

Partnership

We found some of the most success in partnering, so even above organic growth. A lot of elements of our business, they do best when you're working with really strong partners with established brands who have complementary skills and capabilities. And we typically do that with either higher ed or corporate partners. 

Organic growth 

Oganic allows you to control all the levers, but the conditions have to be right for organic to really drive the kind of success and growth. Organic was also very hard to do, but it's, it can be more capital-like. 

M&A

We typically go through the build versus buy type of analysis. 

Equity Investments

We definitely do equity investments selectively as well. We liked doing that, and we've been pretty successful at it. But you just have less control and sort of ability to make sure that whatever you're investing in, you can try to bring in a house over the long haul. So right now, we run a portfolio of about 20 investments of just pure equity investments and other companies. 

Shaping the M&A strategy

We go through a process all the time and try to figure out like where M&A strategy is going to best support our overall strategy and growth. We do a lot of work around developing an M&A playbook.

So just by sector, looking at if M&A is a good fit for this line of business, then identifying who would be on the shortlist of candidates to go after. Generally, we would much prefer to proactively develop opportunities than reactively respond to whatever is coming on the market.

And typically through a competitive bank or web processes, we do participate in those often. But we're also realistic that when you do that, the likelihood that you're going to get the winter's curse and overpaid for something is higher. 

And we would just much rather prefer to bring in companies that we've developed relationships with, we know the management, and they're in a sense, less competitive because you're going out sort of a trusted relationship in that approach. 

In terms of the acquisition, we have very specific criteria that we evaluate candidates by, there are five of them when it comes to acquisition. 

1. Strong history of earnings and track record of growth.

We want evidence that there is a strong underlying business there that can deliver results.

2. Long-term market visibility 

So Kaplan's ideal holding period for an acquisition is forever. So, a big driver of that are the markets that they're in like growth markets and health. At a minimum, we want to see that looking ahead is like, we can't predict the future forever, but for the next 10 to 20 years, like we think this is going to be a rich vein and growth opportunity.

3. Strong management

As a holding company, you want to buy companies where the management wants to come along with the business and not step away, so we look for strong leaders and managers.  

That's not necessarily needed or true when you're doing a pure bolt-on, and we do plenty of bolt-ons, but having at least a strong management team that was there before and built a good business, that's another indicator of strength of the business. 

4. Distance from their core 

Whatever we're buying is sort of within the competency of our existing flywheel. So we don't take big step-outs and take big risks. 

We want things that we  know how they work, but we know how to do them. We continue to want to grow and innovate the range of businesses that we have, but we just try to avoid total fliers that are not going to have any relation to the existing business. 

There may be cases where we do step-outs and we try new things, but we do that very consciously.

5. Reasonable valuation 

Price at the end of the day is such a huge determinant of whether or not acquisitions are ultimately deemed successful. We look at all the other criteria, but at the end of the day, is this something that we feel really confident we can deliver the value of against and get payback in a reasonable period of time with reasonable risk and add to the enterprise value overall. 

The general approach on those is, not having to answer the mail on every single criteria or nail it, but the preponderance of support has got to be there across those. And there are areas where they can get knocked out.  

Tracking the market 

I think the problem to solve is like, there is so much going on. The ed sector is so big, we won't catch everything that's for sure. When things get interesting, when we're going to do an acquisition, our preference would be to see that there's one that there are proof points in the business model.

It's gotten to a level of maturity where there's actually a viable business model. And then you start layering on like, if it’s a big enough segment to be like a needle mover for us.

So to the extent that you've built, you got proof points on a business model, you've got momentum, there's a segment of the population that is really interesting and attractive, then that's when it hits our radar and we get serious about. 

Team Alignment

What we did have were leadership meetings where we get together face to face, usually in New York. And at the end, they were all great sessions, but nothing really ever stuck like our units would come out of it and just get back to business as usual on the backside of it.

When the pandemic hit, those meetings got canceled. What we ended up doing though was creating a whole new approach and series of meetings online. And we were able to broaden the audience in that, engage more of the leadership because we weren't having so many people take a whole week off and travel for these other meetings.

We were able to come up with some governing frameworks and approaches that everybody can align to. We've been evolving. We've been at this now for what, like two and a half years with this new format after the pandemic and we aren't going back, we'll supplement with what face to face meetings. 

But one of the things that happened is we've been adding more people as we go. And in some cases, depending on the topics that we're picking off and we'll meet right now, we're sort of doing it. We're doing it like every three to four months having some form of meeting. 

And depending on that, we have a very set agenda sort of like looking a year ahead. And as we hit specific topics where we're extending this to a broader set of people. So there have been director-level people and there's a certain core group and then there are certain people that rotate through. 

But as we're expanding, we're also, even though we typically don't go above like 65, 70 people at any one of these sessions, we will put the material out there or like recordings to a slightly broader group. It's really helping to drive awareness and ultimately an alignment, it's having a huge impact around that. 

And, again, we're solving it in a way that works for the particular idiosyncrasies and culture of our business, where it's not, we're not, we're sort of bringing people along, we're soliciting ideas and information sharing, or providing kind of governing frameworks and tools and kind of lessons learned for people.

Staying True to Your M&A Strategy

One of the things that we did this spring was around investment philosophy. We had an entire series that involved a bunch of pre-reads, podcasts interviews, and then a live session where we talked about our investment philosophy broadly and tie that to what's happening in the markets.

People would get very frustrated that they put all this effort into like coming up with ideas and we basically say no because the prices are too high. And there are people getting that understanding and alignment have been key.

I think broadly, even the markets externally will look at us and say we’re very stodgy. We got a lot of, in some cases like attitude from bankers when they're running a process, we're just we're out because it's just the prices are too high.

And we look in really hot markets. We can look naive and uninformed, but right now what's happening in the markets, people think we're wise. 

Transformation from For-Profit to a Non-Profit

What I didn't say about the higher ed market was that when grew to 75,000 students and all of these other players got into the space, the universities and others,  the Congress reacted really aggressively and they went after for-profits, it's still a really big issue right now, the Biden the administration.

The market got really rough as a result of that. And there was a whole new crop of entries        that came in. He went to not-for-profit status. They were really like for-profit models. They were new companies that emerged, but they were playing to the not-for-profit positioning.

And then universities themselves started getting very active in the space. So the traditional for-profits were targeted and really whacked and for good reason, there were a number of players that. There was some much money in the space that it attracted a bunch of bad actors, but the bad actors, are a target for everybody.

So our board of directors at Graham Holdings decided to exit our own branded for-profit university. And we were looking for ways to do that. We ended up doing a partnership with Purdue where we essentially, we sold them the academic side of the operations.

We literally sold them that for a dollar. But as part of that, entered into a long-term servicing agreement with them where we managed all the plumbing and the infrastructure to run the non-academic side of it. And so, we're in a long-term partnership with them over that.

Purdue is in absolute control of the academic quality, the academic standards, the delivery of all the teaching and a lot of the advising, and Kaplan is a service provider to them for a lot of the key elements of the business around marketing students and recruiting students, providing support early on, helping students make the transition back to being students and being able to succeed.

So there are a lot of back-office-type things that we do and things behind the scenes. And there's a provision in there where it is a long-term agreement, but if they eventually want to buy us out, they're able to do that. It's a very unique structure.

It was just the whole model was something new and different that we had to go through. It took us a good year of just kind of completing that deal with them. 

It was effectively like a disposition that we did, but it was one that had all sorts of, it was almost like an acquisition as well, because we had all sorts of problems that we had to solve for to make the relationship get incentives aligned and make the relationship work. So a lot of kind of innovative problem-solving. 

Lessons Learned

When it comes to M&A when you're evaluating acquisition opportunities. Just generally, acquisitions are just hard to get right, so don't over-complicate them.

And whether that's again, like we typically won't bank on synergies because it's usually offsetting negative synergies. So if you're making your case fully on synergies, beware.

 In the ed sector, like with the advent of sort of like technology and education, there are a lot of companies that are positioning themselves as tech companies.

And honestly, they aren't at the end of the day. It's really hard to purely tech enable education. So just being realistic about that is key. So understanding like most education typically ends up having a fair amount of variable cost of it. 

And online can reduce that and it can reduce fixed costs, but asynchronous online on its own is not always going to cut it.

We have a lot of debates internally about should we get back to that example of the engineering and architecture company and what should we do with opportunistic deals or should we always be purely focused on strategic deals?

Does it fit in really centrally to one of our strategies? And honestly, I think there's an argument to be made for both. We do absolutely do these kinds of strategic deals that are enablers of a broader strategy and have a high value. 

But we do have a lot of experience and good experience with doing smaller acquisitions that are more opportunistic or both of them sort of build your layer on, additional layers of earnings in the company can be successful in, creating new growth avenues for the company.  

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