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Published in Print: January 26, 2005, as Hooked on Phonics’ Acquired by Educate Inc.

'Hooked on Phonics’ Acquired by Educate Inc.

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The education services company Educate Inc. has acquired the parent company of Hooked on Phonics, the controversial but popular literacy and math program advertised on television.

Hooked on Phonics has a large array of learning materials for children that it markets to parents.
Hooked on Phonics has a large array of learning materials for children that it markets to parents.
—Courtesy of Hooked on Phonics

The purchase ushers the Baltimore-based Educate Inc. into the early-education market and paves a way for the company to reach cost-conscious consumers, analysts say.

Educate, whose divisions include the K-12 tutoring-services giant Sylvan Learning Centers, announced the $13 million acquisition of the Santa Ana, Calif.-based Gateway Learning Corp. on Jan. 13. Included in the deal were the 600 Hooked on Phonics reading centers in child-care facilities nationwide, adding to Sylvan’s 1,000 tutoring centers.

“This is a very important step for Educate,” R. Christopher Hoehn-Saric, Educate’s chief executive officer, said in a Jan. 14 conference call with analysts. “Hooked on Phonics is really an American icon and defines phonics and reading programs for over 2 million customers. . . . [T]his is both a profitable and scalable business.”

In addition to the acquisition’s $13 million price tag, Educate will pay $6.6 million if Gateway Learning meets certain performance benchmarks, which so far are undisclosed. The company expects Gateway Learning revenues to be in “the single-digit million-dollar range,” said Kevin Shaffer, Educate’s chief financial officer. Gateway Learning, which has about 50 employees, will remain in Southern California, and most of the company’s senior management will also stay there, said Mr. Hoehn-Saric.

Chip Adams, the chairman of Gateway Learning, was unavailable for comment.

The acquisition will help Educate aggressively expand its services to more families in more locations, said Kirsten Edwards, a vice president and knowledge-services analyst with Think Equity Partners, an investment bank based in San Francisco. Tutoring services at Sylvan Learning Centers can cost in the thousands of dollars for one student, while Hooked on Phonics’ “Learn to Read” reading kit costs about $300.

The purchase follows Educate’s announcement in December of its partnership with the education software and toy company LeapFrog Enterprises Inc., based in Emeryville, Calif., to open learning centers in up to 20 Wal-Mart stores.

FTC Complaints

Gateway Learning has a checkered past. Last year, the company settled a complaint by the Federal Trade Commission that it sold customers’ personal information to marketers, a violation of company policy.

And in 1994, the FTC charged that the company made promises that it could not fulfill: that the Hooked on Phonics programs could teach anyone to read, regardless of learning disabilities or other limitations. The company, then called Gateway Educational Products, agreed to ditch its advertising campaign as one of several concessions to settle the FTC claim.

But Gateway Learning’s controversial history is a nonissue for Educate Inc., Mr. Hoehn-Saric said. The Hooked on Phonics materials have improved over the past decade, he said.

“Can a single program hope to teach every single child? That’s an impossible task,” he said. “I don’t see it as a substitute for what happens in the classroom, but as a supplement for parents in the home.”

Furthermore, Educate bought Hooked on Phonics for the brand name, and that’s what consumers remember, said Trace Urdan, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based investment firm.

“What consumers remember about Hooked on Phonics is not that they overpromised and underdelivered,” he said, “but that it helps kids learn to read.”

Vol. 24, Issue 20, Page 9

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