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Bullish On Education

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Earlier this year in New York, Lehman Brothers, the venerable investment house, held what it described as its first annual education-industry conference to introduce investment clients to promising companies that focus on education. "Investment opportunities start as a solution to a problem," said Michael Moe, a first vice president of Lehman and the firm's lead analyst on education-related companies. "There's no question that in education today there is a problem."

Wall Street, it seems, is discovering the business of education.

The two-day conference brought some of the hottest companies in school management, software, child care, postsecondary education, and corporate training face to face with investment bankers and fund managers looking for opportunities to profit from what Lehman Brothers and others describe as a $619 billion education market in the United States.

According to a Lehman Brothers report distributed at the conference, "The education industry may replace health care in 1996 as the focus industry."

The analogy to the health-care industry has been a common theme among observers looking at the rise of school-management companies, such as Education Alternatives Inc. and the Edison Project. Many suggest that public education today is in the same condition the health-care field was 20 or 25 years ago. Until the 1970s, the argument goes, health care was an inefficient industry dominated by government and nonprofit institutions. Things changed with the rise of private, for-profit health-maintenance organizations and later of for-profit hospital concerns. "Today, some of the largest for-profit companies in the world are in health-care products and services," the report points out.

The emergence of education as an industry worth watching has spawned its own terminology, and the investors and analysts at the New York conference peppered their conversations with buzzwords like "specialty service providers" and "EMOs." The former focus on small niches of instruction, such as disciplinary problems. EMOs are "education management organizations"--companies like the Edison Project and EAI that want to run schools or districts.

"I think we will think of education increasingly in consumer terms in our society," said John McLaughlin, editor of The Education Industry Report, a St. Cloud, Minn.-based newsletter. The newsletter publishes a stock index of publicly traded companies involved primarily in education. The value of these stocks grew by more than 65 percent in 1995, outpacing the composite membership of the over-the-counter NASDAQ stock market by more than 25 percentage points.

An issue of the newsletter published earlier this year proclaimed that the education industry is "coming of age." It notes that there have always been companies that sold textbooks and supplies but adds that the emergence of school-management ventures has refocused the industry.

There is little doubt that education-management concerns are at the cutting edge of this emerging industry. Many participants in the conference were eager to hear about EAI, Edison, and Alternative Public Schools Inc. of Nashville, Tenn., all of which are seeking to run schools under contract with local districts. Of those three, only Minneapolis-based EAI is a publicly traded company. EAI officials used the conference to announce that they had learned important lessons from their recently canceled efforts in Baltimore and Hartford and that the company was ready to move on. [See "Hartford Dumps EAI," March.]

Christopher Whittle, the media entrepreneur who founded the privately held Edison Project, based in New York City, urged investors to think of Edison as an education version of Home Depot, McDonald's, or Wal-Mart--companies that have become leaders in their industries through innovation. "We hope you think of us in that group," Whittle said. Edison operates four public schools this year and hopes to operate as many as 10 by next year.

Among the other companies making presentations were: KinderCare Learning Centers Inc., a major child-care chain; Nobel Education Dynamics Inc., a growing operator of private, for-profit K-12 schools; Princeton Review Inc. and Kaplan Educational Centers Inc., the two major competitors in college test-preparation centers and products; and TRO Learning Inc., a provider of remedial education software.

One publicly traded company that impressed many investors was Sylvan Learning Systems Inc., the owner of more than 500 private remediation centers around the country. The company has recently begun a push into public schools by providing remedial services to students under the federal Title I program. [See "Sylvan Goes Public," February.] Last fall, Lehman Brothers issued a highly favorable report on the company, recommending it as a stock buy.

Douglas Becker, Sylvan's president, told those attending the conference that the company has launched a $100 million advertising campaign to boost its name recognition. "There really hasn't been the emergence of a single well-known brand name in education," he said.

Several investment bankers and fund managers interviewed at the conference did not want to be quoted by name. One remarked wryly that what he sees as the sad state of education in the United States all but guarantees financial opportunities for the companies in the field. Another investor noted that he was wary of school-management companies because of the political volatility of contracting with public school districts, as reflected in EAI's recent troubles in Hartford and Baltimore.

"I would prefer," he said, "to invest in companies that own their own facilities."

--Mark Walsh

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