Stars, strips, and start-ups

|Jul 16th, 2015

Published by: EducationInvestor

M&A activity in the US education industry is hotter than ever. Kirsten Noben looks at what’s driving the trend and the subsectors getting most love 

After the recession caused a slowdown, M&A activity in the US education space has begun to heat up again. According to a report published by investment bank Berkery Noyes, the total number of transactions surged by 9% in 2014 with deal value up by 25% (see figure 1). Although some sectors (read: for-profit education) are struggling, generally, investor appetite has increased and plenty of capital is being deployed.

While a bounce back in state spending has played a part, technology has been the main driver, with nearly $2 billion (£1.3 billion) invested in the ed tech space alone last year. In particular, technologies that focus on education access (eg. distance learning), data analytics (such as adaptive learning) and outcomes (assessment software for example) are fuelling the trend.

Although as Robert Lytle, managing director at Parthenon EY, tells EducationInvestor: “Technology is the big driver of everything but often what somebody is buying is a service enabled by technology.” For this reason he likes to differentiate between what he calls “raw tech” and ed tech-enabled services, which are delivered to institutions, an example being Deltak which provides software for online education.

According to the report, trade (or ‘strategic’) buyers accounted for 73% of the deals in 2014, but this number should be taken with a pinch of salt as it incorporates smaller deals and those done by investor owned companies (in fact, the report found that the median deal value across the whole space last year was just $20 million). The fact is, as tech companies continue to disrupt the education ecosystem, the traditional publishers such as Pearson and McGraw Hill are keen to snap them up to enhance their own offerings.

“The overwhelming trend continues that the large strategic buyers are the most active in education,” says Daniel Pianko, partner at investment firm University Ventures. “They buy in the technology space where traditional business models are being disrupted.”
An example is Houghton Mifflin Harcourt’s acquisition of Scholastic, an education resource provider, for $575 million, or publisher Wiley’s acquisition of CrossKnowledge, a French supplier of digital learning solutions, for $175 million.

The pool of strategic buyers is continuously getting larger, with firms in adjacent sectors such as media and tech also snapping up education assets. Matt Greenfield, managing partner at Rethink Education, a venture capital fund, says: “If you start talking to media companies you discover that every single media company on the planet wants to be in education and thinks they can do a better job.”

Greenfield refers to German media giant Bertelsmann, which last year proclaimed a goal of generating a third of its revenues from education. True to its word it’s doing a growing number of deals in the space, buying corporate training business Relias Learning last year for $540 million, and a 40% stake in Affero Lab, a Brazilian firm.

Despite the dominance of trade buyers, private equity and venture capital investors are buzzing like flies around the space, with deals by this cohort increasing by 34% in 2014. “Private equity firms are increasingly being drawn to the education and training sector, given the sheer scale of the market, the favourable lending environment, and the increasing number of companies that are growing with subscriptio-based revenue models in the space,” says Peter Yoon, managing director at Berkery Noyes.

What is more, as these venture capital-backed companies become successful, they start to buy and build, an example being PluralSight the online coding class platform. Backed by Insight Venture Partners, it has to date made half a dozen acquisitions.

The role private equity (PE) firms play in the sector is to create and grow companies of scale, which the strategic players often see as attractive acquisition opportunities due to their larger size. Among US PEs, there is fierce competition for quality assets and most are looking for multibillion dollar exits, often referred to as “unicorn” deals.

However, Christopher Curran, founder of strategy consultancy Tyton Partners, says “there is a whole new generation of private equity and venture capitalist financed competitors who are doing something different for the sector”. These might be interested in smaller deals that still generate high returns.

K-12 media and tech

Taking it sector by sector, Berkery highlights that M&A in the K-12 media and tech space was particularly strong in 2014, with deal volume up 17%. The biggest trends in K-12 are without doubt adaptive learning and behavioural assessment, which are increasingly being used in schools. A healthier state funding environment has helped too. “Partially spurred on by the recent recession, and as the state and local budgets continue to recover, administrators are becoming more open to utilising technology-based solutions to effect outcomes in a cost-effective manner,” explains Yoon.

Alive to the forces transforming this segment, investors have dived in. Take the sale of Turnitin, a plagiarism checking software tool that has become tremendously popular among students; its owner, iParadigms, was acquired by Insight Venture Partners for $752 million last year. Another big deal was Hellman & Friedman’s acquisition of Renaissance Learning, a K-12 assessment and analytics company active in the US and UK, for $1.1 billion.

Higher education 

The report says M&A activity declined by 10% overall in the higher education space last year, but the HE services vertical remains buoyant as budget cuts continue to hound US universities. “Companies who notice that big institutions are struggling and in need of help can provide technology which can help them stabilise the situation or grow the business,” says Parthenon’s Lytle.

Companies in this sub sector fall into camps, including learning platforms, those that do data reporting and analytics, and plain old enterprise resource planning software providers that support things like HR and finance. Indeed, “operational solutions in the higher education market that help institutions reduce infrastructure by combining various functions and also outsourcing solutions are in demand by acquirers as well”, says Yoon.

A stand out deal in 2014 was Advisory Board Company’s acquisition of Royall & Company, a provider of student engagement and enrolment management solutions, for $850 million.

Professional training 

There has been a surge in the corporate training market and Berkery Noyes defines it as the most active market segment in 2014, with more than 70 deals done. “You have more velocity in corporate training simply because it is a bigger sector and there are a lot more companies,” says Lytle. The sector’s largest transaction last year was the $2.3 billion acquisition of SkillSoft, a provider of cloud-based learning solutions, by Charterhouse Capital Partners.

Strategic players also want a slice of the pie, with tech giants such as SAP and Oracle buying companies in the human resources and training sectors. But it was LinkedIn’s acquisition of Lynda.com for a transaction value of $1.5 billion that really caused a thrill. Tech companies are increasingly eager to find out more about people’s skills, as it makes them more valuable to employers seeking to fill vacancies.

A new sub-trend in this space is coding boot camps – academies that teach people web development and UX design. Usually, students are already skilled people that want to increase their career prospects by garnering new skills. Boot camps in the US have gone from zero to 16,000 students in three to four years, with the industry valued at close to $200 million. There were a spate of VC deals in this space last year while Kaplan acquired Dev BootCamp, which offers a nine-week software coding programme.

For-profit colleges

Another sector where M&A lagged last year was for-profit colleges. With new laws curbing their access to federal student loan funding, some of the biggest players are suffering badly. Corinthians, once the country’s largest for-profit, closed its doors in May and the federal government has promised to provide debt relief to thousands of former students at a potentially huge cost to the taxpayer. Furthermore, a proposal to make community college free (which could diminish for-profits’ market share) looms on the horizon.

But although regulatory concerns and enrolment challenges have contained activity in the space, “the value proposition is obvious”, says Lytle. Most companies have been held by private equity firms for more than seven years and if rolled up could deliver interesting synergies. Others too agree consolidation would be a way forward for the sector.

Overall, the outlook for US education investment is good. With the recession behind us,  there will be “continued strong investment levels for early stage education companies [which] should provide a fertile ground for future partnerships and M&A activity”, states the report. Or as Lytle surmises: “At the moment, the US education space is a pretty nice market, it offers the cheapest areas from a buy side and the most expensive from a sell side”.  It seems the dog days are here to stay.