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Friday Guest Column: Virtual EMO K-12's IPO - Shades of Investors' Experience with 'Real" EMO Edison?

Nancy Van Meter is Deputy Director, Office of the President, American Federation of Teachers

This week’s Initial Public Offering (IPO) by K12, the Herndon, VA-based operator of virtual charter schools, generated much less attention than the buzz surrounding Edison Schools’ much-heralded IPO nearly ten years ago. Edison’s pioneering IPO was greeted with predictions that innovative reforms, improved student achievement and economies of scale would follow the private sector expansion into operating public schools. By contrast, K12’s IPO received scant notice beyond newspaper business sections. AP reported that investors “embraced” K12’s offering while The Washington Post reported that K12’s shares rose 36%.

However, the offering raised only about 63% of the $172.5 million sought by the company, according to their prospectus filed this summer.

Reading the prospectus may give pause to potential investors. K12 reports almost half its revenues come from just four schools, the Arizona, Colorado, Ohio and Pennsylvania Virtual Charters. While the company foresees no problems, K12 admitted Colorado audits of student enrollment figures forced the company to return payments. As contracts come up for renewal in each of these four states, look for K12 to dramatically increase its lobbying.

K12 also acknowledged that their “turn key” management contracts generate significantly more revenue than their single service provision contracts. State policy makers and charter school boards – take note when negotiating your deals!

K12 instructional costs and services range between 50% and 60% of total revenues, averaging 54% in 2007. The company reported 2007 selling and administrative costs were 36 percent of revenues and 6 percent of revenues were spent on product development. (This balance sheet for virtual education must be heresy to conservative backers of the 65% Solution, who campaign to ensure “at least 65% of our education tax dollars reach the place that makes the difference – America’s classrooms”.)

Both Edison and K12 opened at $18 per share, but investors were more enthusiastic in 1999. Edison raised $122.5 million to K12’s $108 million. Edison and other for-profit education experiments have dampened investor expectations, creating skepticism that education management companies can deliver on their promises to improve education for millions of students.

Even promoter Chris Whittle no longer touts investor-backed schools for low and moderate income students. His latest edu-venture, Nations Academies, backed by Dubai partners, promises to deliver education to the children of the world’s mobile elite for fees of $15,000 - $40,000 per head.

If you’re in the metro-DC area, next week you can see the master marketeer pitch his first campus in Bethesda. Whittle must convince wary neighbors that his proposed 1600-student private school won’t increase traffic congestion and reduce open space.

Former Yale president Benno Schmidt will be on hand to lend Ivy League credibility in status-conscious Bethesda, accompanied by school choice/ PR maven Jeanne Allen Strother. See them at the Bethesda Marriott at 6 PM, Monday, December 17.

Edison went from an $18 IPO to a penny stock in less than five years. While Whittle and Schmidt moved on to other projects, small investors lost their equity when the firm went private in 2003. Potential K-12 investors should heed the Edison experience and apply appropriate risk management strategies. Caveat emptor!

Readers note: Other postings on k12 on edbizbuzz by edbizbuzz (Marc Dean Millot).

K12 Inc Gets Virtual Charter in Utah


Not K12 Inc. (LRN). What About Scientific Learning (SCIL)?

What DeVry's Entry into Online High Schools Means for Virtual EMO K12

A Nagging Worry About Recent Investments in K-12


A "Must-Read" for Would-Be Investors in Virtual EMO K12

Disaggregating K12's Service Offering

Would-Be K12 IPO Investors: Is Cyber-Ed A Cutting Edge Business?

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