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A Busy Summer for Investment Bankers and Lawyers

In the course of preparing the “catch up” issue of School Improvement Industry Provider Announcements (the monthly publication takes a vacation in August), I was surprised at the number of investments that took place in July and August. Going back to July revealed even more transactions. Investment bankers did a lot more business in the sector than they have for a while.

Here’s my quick scorecard:

Acquisitions

Children’s Internet by private investors
Harcourt by Houghton Mifflin Riverdeep Group
• Freerain by eSchoolMall
Educate by management
• Thomson Prometric by ETS

Equity Investment

Achieve 3000
SMART Technologies
Tutor.com
Princeton Review

Public Offering Announced
Scientific Learning Inc.
K12 Inc.

Recapitalization
Haights Cross Communications

Observations

1. The school improvement industry has come a long way from the dark days’ after the internet bust. Recall that the internet boom only reached the “new education economy” at the end of its expansion – as all that free money created by irrational exuberance ran out of pure internet plays but still needed to be placed by venture capital firms.

I remember observing a board meeting of Co-nect as the President of the Education Entrepreneurs Fund after the bust. Then-board chair Lamar Alexander compared the environment to “nuclear winter,” and reminded the group that “after nuclear winter, there is no spring.” The image resonated with this former nuclear strategist. At one point thereafter Co-nect owed the Fund $3 million. My successor, Keith Collar was undoubtably satisfied that it weathered the storm and was purchased by Pearson in 2005.

2. Looking at the deals on their own merits, they fall into three categories.

The Harcourt and Prometric acquisitions are rearrangements of the parts, or “same monkeys different trees.” Education conglomerates units are just moving around. I see no huge impact of the market for years. If these are smart moves by the buyers, the proof wont be clear for perhaps a decade. Why”? Because the plays are strategic, Houghton Mifflin Riverdeep Group is trying for the end-to-end solution, just like its big rivals. ETS is consolidating its testing presence.

Most of the equity investments are bets that the company in question possesses unrealized value. SMART is a bet on smart whiteboards, Princeton on a brand that’s been sub-optimally managed, Tutor.com on CEO George Cigale, Achieve on edtech. The management buy out of Educate on the Sylvan name. These bets depend on the prospect of a sale to the publishers, and the value of that depends at least in part on whether the investors have the option of an IPO,

Scientific Learning’s and K-12’s offerings are to some extent a bet on the markets interest in public education. The first strikes me as a company with less risk, because it has a high quality product and proprietary technology. K12 is weak on the merits. But in the end, whether these transaction take place, and the funds they raise, depends a lot on perceptions of public education as a safe place to put your money.

3. I can’t help but wonder if we are not seeing a repeat of the internet boom-bust experience. I fear that the school improvement industry is the last place to benefit from an investment boom, and the first to affected by a “liquidity crisis.” We've just been through a huge amount of hype about private equity, a sure sign the best deals are behind investors, and a reason to worry about the more recent. And now we are in the midst of the mortgage markets implosion. If the K-12 IPO doesn’t go forward, one reason will be that the markets just aren’t prepared to place whatever money they have left in the risky school improvement sector.

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