This panel is made up of seasoned veterans of the M&A markets for Education Technology companies. They addressed the K12, Higher Education / Post-secondary, and general M&A climate.
The panelists are:
- Moderator Jeff Fromme – Dorsey and Whitney LLP
- Robin Warner – Managing Director at Van Tulleken Company. K-12 Market
- Vivek Kamath Director Berkery, Noyes & Co. – Higher Education.
- Mark Marchesano with the Jordan, Edmiston Group (JEGI). M&A in a Turbulent Market.
It is sponsored by Empirical Education.
- Look to the UK market – it is an 18 month leading indicator of what is going to happen in the US market.
- Professional Development is now mandatory for all solutions in the UK. Are publishers using this to hold open source at bay or is this a real switch taking place?
- The US market is contracting – there are fewer strategic buyers because they have all merged and the Private Equity guys are sitting things out for a while.
- Buyers don’t want to take any risk right now – only companies with proven business models, strong teams, and organic growth need apply.
- For profit higher ed is growing – the economy is actually helping with this as people look to expand their skill base.
- Expect to see many buyers looking for bargains over the next couple of years. Don’t expect to see much in the way of IPOs.
- In K12 multiples are higher (almost double) for companies that have a strong technology component – but it has to be integrated well – it can’t be a bolt on.
- Multiples are higher for Higher Ed than K12.
For my more free form notes follow below the fold.
Robin Warner – Managing Director at Van Tulleken Company. K-12 Market
First a look at the UK market because they are about 18 months ahead of the US – it is a great leading indicator. BECTA is the agency everyone has to work through there. They are now mandating Professional Development for ALL vendors. This is hurting open source solutions like Moodle. My question – is PD the way the publishers will hold Open Source at bay by using their connections through the adoption process in the US?
Budgets are increasing but for software they are declining about 3-4%. Whiteboards are everywhere in the UK. Web 2.0 and Virtual Learning Environments are hot. Big integration challenges even though they are using SCORM.
Her views on the US K-12 Market. The big K12 strategics are digesting all the acquisitions they did a few years ago. There are fewer strategics to around to do acquisitions. Some new players are entering the market (no specifics). Their buyer’s list has changed dramatically. Private Equity has been kicking the tires but not doing much.
She challenged us to never underestimate the strategics – they are too big and too well resourced and can affect small companies without even thinking about it.
Valuation trend over the past 3 years for education company acquisitions:
- 2005 2.0x,
- 2006 1.6x,
- 2007 2.5x,
- 2008 divergent (they got a 4x).
They used to do cash at closing – now buyers are demanding many layers underneath the deal (liabilities, staff retention). Deals have gotten more “creative.”
Where to focus? New term – turtle heads. Districts are retracting into their shell. Districts want to buy technology that looks easy – not willing to work hard at it (see my teacher message).
• Whiteboard content
• Online learning (compatibility with systems)
• Blended Technology
• Easy integration in the classroom
• Virtual Learning Environments
Vivek Kamath Director Berkery, Noyes & Co. – Higher Education.
Higher Ed is not as gloom and doom as the other sectors. The overall post secondary market has done well – with a focus on for profit providers of higher education services.
Enrollment continues to climb in the for profit providers – they are now 8% of the market – up from 2-3% in the early 90′s. This is expected to continue until 2016 when it will be 13.6% of the market (nice specificity there….) and 20.4 million students. Why? The economic downturn is driving a lot of it and since the for profit institutions have more of a vocational/skills focus they are a logical place to grow.
The financial community likes this space – there are high barriers to entry through regulations, accreditation, high start up costs, real estate, and brand development. Strategic players continue to roll up companies to build strong positions.
Post Secondary Companies have significantly outperformed the general market over the last 6 months. The big names are all trading at close to their 52 week high (DeVry, Grand Canyon, Strayer). It is relatively recession resistant. Revenue multiples are 3x right now and they expect this hold into 09 due to enrollment and profit growth.
There is still a lot of M&A activity in the space
They also see high growth in the on-line area – CAGR of 28% since 02 in this space. All the companies with the highest multiples have a heavy on-line component. They are using Web 2.0 extensively to attract new students and drive profitability. It is much more efficient than brick and mortar (but but but – this only works for the most motivated students).
Mark Marchesano with the Jordan, Edmiston Group (JEGI). M&A in a Turbulent Market.
There is activity taking place but it is different than other spaces. They are seeing more strategic buyers drive activity while the Private Equity guys are sitting things out for now. Quality Assets will find buyers even in a tough market (they did 2 deals in November).
Why are buyers still out there? They are expanding a core business, scaling a business, funding growth, and making preemptive offers. Buyers want “fully battle tested businesses” - proven business models, market strength, strong team, etc. In other words they don’t want to take much risk.
Education Technology valuations is driving much higher multiples 2.2x for ed tech sv. 1.1 for traditional publishing. This data is from earlier in 08.
Political sphere – National Conference of State Legislatures (NCSL) had a report in June on this.
• 31 states have budget gaps
• States are cutting education as part of this
• They expect market consolidation to occur because of the softness in the market – buyers can get deals.
Q – Will there be international buyers in the US market?
Robin Warner – Currency fluctuations and high growth in India and China are putting a damper on this – but they will be there.
Q – Should US Co’s expand overseas?
Vivek Kamath – Yes – they will continue to do this carefully. Mid-size Co’s are working through channel partners to handle distribution. Buying out their overseas channels is one way to build capacity at a lower risk and then integrate them at a later date.
Q – What is the IPO outlook for 2009?
Mike Marchesano – It will be a year of caution. Grand Canyon was able to go out now. It may be that companies sit it out because they feel the valuations will be low. Unless there is a driving need you won’t see people being aggressive here. Expect to see more activity in 2010. Expect to see the strategics continue buying in the middle market.
Q Nelson Heller – Question – Please speak to the wikinomics business model in K12?
Robin Warner – Lots of companies are doing stealth learning – high enjoyment content that exposes kids to content. Can’t see the education first and the social network second. Gamers and others are getting hired to help this.
Vivek Kamath – All the buzzwords are there – the challenge is monetizing on this in 09-10. Need to show revenue expansion due to this.
Q – What about early stage financing?
Vivek Kamath – The Venture Capital have raised a lot of money but they are finding it hard to exit current investments. They will continue to keep their current companies going rather than taking on new stuff right now (and prep them for 2010). This will present real challenges to new businesses looking for venture financing.
Robin Warner – buyers are looking for cash efficient companies with proven growth trajectory that is a must have product with a clear funding source in schools. For earlier stage companies this is a real challenge if you only have 1-3 years of revenues.
Q – Buyers are backing out after the letter of intent – how do you avoid or minimize this risk?
Robin Warner – This is the first year she has seen this happen. The buyers are taking advantage of the market (reducing prices by 50%). There is nothing you can do when this happens.
My perspective – if buyers are shopping for bargains expect to see a lot of this behavior in the next year or so. Companies should be ready and have their game plan thought out in advance on whether they will walk or play ball.