Purdue University Deal To Acquire Kaplan University: Interview with Trace Urdan

The surprise news today is that Purdue University has agree to acquire the academic operations of Kaplan University. As stated in the 8-K filing by Kaplan University’s owner Graham Holdings:

On April 27, 2017, Kaplan Higher Education LLC and Iowa College Acquisition, LLC (collectively, “Kaplan”), subsidiaries of Graham Holdings Company, entered into a Contribution and Transfer Agreement (“Transfer Agreement”) to contribute the institutional assets and operations of Kaplan University (“KU”) to a new, nonprofit, public-benefit corporation (“New University”) affiliated with Purdue University (“Purdue”) in exchange for a Transition and Operations Support Agreement (“TOSA”), pursuant to which, among other provisions, Kaplan will provide key non-academic operations support to New University for an initial term of 30 years with a buy-out option after six years.

Additional coverage of the deal at The Chronicle, Inside Higher Ed, The Wall Street Journal.

This is an unprecedented move, and to get some insight, I interviewed Trace Urdan, who has long covered higher education as an investment analyst and is one of the most knowledgeable observers of the for-profit sector. The following description is based mostly on this interview, paraphrasing Trace’s explanations and adding quotes in places.

While this acquisition was a surprise to most observers, Trace noted the following forces at play that come together to explain the deal.

• Non-profit entities – both public institutions and private non-profit institutions – “wanting to get into the adult market and the online market”. This is the big push behind the Online Program Management (OPM) market, kick-starting these non-profits into online programs targeting adult education.
• For-profit entities “feel like they are being burdened by being for-profit”. One part of this is the regulatory burden from the Department of Education and even accreditors. But there is also a marketplace burden as non-profits like Southern New Hampshire University keep growing enrollments while for-profits are dropping.
• There is a “the investor enthusiasm for the services model” with OPMS, “and this is a model that investors love – it gives you access to the growth in online education, affiliation with strong brands, and it’s more or less free from the regulatory hostility” of the for-profit sector.

All of these forces come together in this case with the potential for immediate results. Purdue University instantly becomes a big player in the adult education market, and Kaplan University converts the asset into a services provider moving past the for-profit sector burdens.

Trace described how the deal is more complicated than a straight acquisition and should be thought of as an OPM deal. Purdue University gets the academic operations of Waldorf University – the school, programs, curriculum, instructional staff, and the accreditation. Kaplan, Inc (owned by Graham Holdings) retains the same elements as an OPM provider using a revenue-sharing model – marketing & recruitment, enrollment management, curriculum development, online course design, student retention support, technology hosting, and student and faculty support. “One way to look at this is effectively [Kaplan] is going to be like an Embanet with one client.”

I asked Trace about the challenge of getting the accreditor (HLC is the accreditor for Kaplan U) and Department of Education (ED) approval for this transaction. Trace described that the deal closing is contingent updated these approvals, as is typical, and the closest parallel is the Grand Canyon University (GCU) proposal last year, where “Grand Canyon wanted to spin out the academic university into a non-profit and hang on to the services piece as a for-profit entity and presumably grow that with other clients”. While we have not seen that actual agreement, the strong suspicion in GCU’s case was that the accreditor, also HLC, shot down the plans based on questions of whether the  non-profit entity would have actually been independent of the remaining for-profit OPM entity.

There are some big differences between Grand Canyon University and this Purdue / Kaplan University deal, however. The big difference is that Graham Holdings retains much more financial risk than GCU’s OPM move, as there is a 30-year agreement but Purdue has plenty of clauses that lets them get out and change OPMs or take over operations after six years. Also, Purdue University gets to appoint the board for NewU and Kaplan does not. On the softer, or political side, there is also a difference by using Purdue Universities reputation and name and Indiana’s plans to make NewU a public institution (albeit with no state funding).

Regarding the 8-K filing, Trace stated “What I see in that agreement is wildly different concerns from the two parties. The concern of the Purdue side of the equation is all about the risk.” What happens if they don’t hit revenue or profit or enrollment targets, what happens if Kaplan cannot continue operations, etc.Kaplan’s focus is all about benefiting from the removal of the for-profit burdens, effectively saying “Hey, if we’re not a for-profit anymore, we can blow the roof off this thing.” How do we benefit if enrollment takes off, etc? This makes the deal unprecedented.

It is worth noting that while Purdue and Kaplan claim to have done the analysis stating that this should all be kosher with accreditors and ED, these approvals have not been granted yet.

Trace indicated that the losers in this deal might include others in the OPM market, as there is a new player with 32,000+ students in their main account. The crowded market gets more crowded.

I want to thank Trace Urdan for his insights into the surprise news today. We’ll likely have additional analysis at e-Literate as we read and digest the news in more depth.