While producers of print-based curriculum and instructional materials are struggling, companies that are focused on technology-based instruction and tools for data collection and analysis are thriving in the K-12 market, says a new report by Berkery Noyes, an independent investment bank.
An emphasis on accountability and data-driven decision-making in education is part of what’s behind that trend, said Vivek Kamath, a managing director at the New York City-based bank who specializes in the education market.
“Schools are realizing that they need to treat their schools like businesses,” he said. “What they’re looking for are enhanced analytics.”
The report analyzes mergers and acquisitions in the education market over two recent six-month periods.
While the total aggregate deal value for both postsecondary and K-12 education fell by 38 percent in the first half of 2011 compared with the second half of 2010—from $3.5 billion to $2.2 billion respectively—the number of transactions stayed relatively flat, the report found.
Part of that drop in the value of mergers and acquisitions is the ambiguity around new regulations in the higher education market that may make investors nervous, Mr. Kamath said.
In June, the U.S. Department of Education released 14 new regulations concerning the transparency and quality of career-college programs, including a “gainful employment” rule, which states that a program can lose access to federal student aid if too many of its students do not find “gainful employment” based on three measures. (“ ‘Gainful Employment’ Rules Leave Many Disappointed,” June 15, 2011.)
“Until there is more clarity around the regulatory environment and how businesses are going to be judged by the accrediting bodies and investors, ... there’s going to be a very anemic deal flow just because of the uncertainty,” he said.
Budget Pressure
In K-12, the pressure on federal, state, and local education funding has made it difficult for companies that provide supplemental content and print-based materials to grow, Mr. Kamath said. “Stimulus money has really been used to preserve teacher jobs rather than being spent on instructional materials, so what you’ve seen is that there’s been a rise in more disruptive service providers that are bringing new tools or applications to the market,” he said, referring to one-time federal funding to education under the American Recovery and Reinvestment Act.
For instance, the number of online learning companies, technology-based intervention companies, and companies that sell response-to-intervention platforms—which aim to identify student learning challenges early and provide interventions to address those problems—has risen in the past year in the K-12 market, Mr. Kamath said.
The number of mergers and acquisitions in the education market is likely to continue at a similar pace moving forward, Mr. Kamath predicted. “I don’t see any slowdown.”
Steven Pines, the executive director of the Vienna, Va.-based Education Industry Association, said he sees growth in several categories in the K-12 sector, such as turnarounds and school improvement services, test preparation and tutoring, charter school management, special education, and early education.
He said leaders in these fields include companies such as Mosaica Education, Kaplan, Inc., and Pearson, all based in New York City; Princeton Review, based in Framingham, Mass.; Connections Academy, based in Baltimore; K12, Inc., based in Herndon, Va.; Knowledge Universe, based in Portland, Ore.; Specialized Education Services, Inc., based in Yardley, Pa; and Camelot Education, based in Austin, Texas.
Focus of Activity
Academic publisher Pearson has been the most active acquiring company in the first half of 2011, as well as over the past two years, making 17 disclosed transactions over that two-year period, the report found.
In the past six months, the company has acquired Education Development International, based in Coventry, United Kingdom; SchoolNet Inc., based in New York City; and Smarthinking, Inc., based in Washington; and it has invested equity in TutorVista, based in Bangalore, India.
Another driving factor in the K-12 market is a need for more in-depth analytics and data collection, as well as automating the manually intensive process of collecting longitudinal data, the report found.
However, although the K-12 market is holding steady for now, it is still a difficult market to break into for for-profit companies, Mr. Kamath said.
“You’re still dealing with the government buying these products and services, and you’re dealing with a very highly politicized environment with teacher unions and local politics, so, although there’s a lot of growth opportunity, it’s still a very slow-moving sector,” he said.
“You’re going to continue to see companies innovate and come up with new approaches, ... but the budget climate is still going to be pretty tough, and the clear winners are going to be the ones that really deliver a kind of blended solution that integrates learning platforms and professional development,” Mr. Kamath said.
Companies most likely to succeed in the education market right now, he said, are those that can provide multiple solutions and services that are integrated together.
By contrast, companies offering niche solutions to particular problems—for example, a company that handles just enrollment management or only alumni services for a college or university—“are falling behind, and they really risk becoming marginalized over the next 24 months if they don’t change their approach to selling in the marketplace,” he said.
However, Mr. Pines, from the Education Industry Association, said that the size of a company does not necessarily predict their success. “Just because you’re diversified doesn’t mean you’re going to be stronger and have higher growth,” he said. “At the end of the day, it comes down to quality and customer relations.”
