Mission-oriented investors often refer to the “double bottom line” when saying how they care just as much about making a positive social impact as they do about financial returns. But at the end of the day, making money is a legal fiduciary duty. (After all, investors have investors, too.)
With two acquisition deals alone totaling $2.5 billion, 2019 offers some edtech investors hope that their bets could pay off. But others had to cut their losses, as there were also distress deals with transaction amounts too low to publicly disclose or acknowledge.
So far this year, the wheeling and dealing has clustered around higher education and workforce development, observes Kelly Fuller, a director at BMO Capital Markets who covers the education technology sector. She says that a key driver is the question: “How can technology be used at scale to address the massive re-skilling that’s going to be needed in the workforce going forward?”
Fuller, who has covered the edtech industry for over a decade, recently shared her take on current trends on edtech mergers and acquisitions. What follows is a transcript of the conversation, lightly edited for clarity.
Has there been one highlight M&A deal in K-12 this year that has caught your eye?
There was a ton of activity in the K-12 space in 2017 and 2018, and a lot of stuff that got done then. You have Weld North being bought by Silver Lake in 2018 (and now actively pursuing digital curriculum tools) and Cambium being bought by Veritas Capital. Then Francisco Partners acquired Renaissance Learning and Discovery Education to enter the K-12 market. Many of these deals happened at very attractive EBITDA multiples. So by the time 2019 rolled around, it was like all the big deals had been done.
Maybe the most notable transaction, more perhaps for negative reasons, was the Pearson deal, which got done for next to nothing. [Editor’s note: The publisher sold its K-12 courseware business for $25 million cash upfront and will receive more money over the following years.] There was a print component to that, too, so that’s sort of a little gray area on whether that’s edtech or not. But to date, more of the activity has been in higher education and lifelong learning.
What are some of the big deals on your radar in the postsecondary space?
There is a growing theme around workforce development, and how we are shifting the notion of traditional corporate training—and to some extent higher ed—into workforce development and reskilling. How can technology be used at scale to address the massive re-skilling that’s going to be needed in the workforce going forward?
On the lifelong learning and certification side, I would say Colibri Group [an online education company that serves licensed professionals], which bought Western Schools. OnCourse Learning sold some of its financial education assets this year. I’d also add Revature, which Investcorp bought at the beginning of the year, which I would say is more of a hands-on model because they are a hybrid between reskilling, workforce development and IT staffing. They work with corporations to train their incoming classes on the exact skills that they need to be trained on.
One of the biggest deals this year is 2U’s $750 million acquisition of Trilogy Education. Do you see this deal as setting the bar for future deals involving providers of coding or technical training services?
Absolutely. We have certainly had conversations with other players that are looking for smaller Trilogies, but in different sub verticals. Zovio just bought [Fullstack Academy], so they are trying to do something similar in the bootcamp space.
People talk a lot about coding bootcamps, but there are certainly other spaces where this can be relevant. While Trilogy certainly has a huge head start and obviously brand recognition now, there’s a lot of white space in this area for other players to come in and develop other sub-verticals.
Much like people have talked about alternatives to the four-year degree, we are starting to see some pushback against even the need for a master’s degree. Why do you need to go back and spend $75,000 on a two-year master’s degree when you can do some type of short-term certification, whether it’s in coding or something else, and end up in pretty much the same place? Because what employers are really looking for now is competency, and whether you can come in and do the job from day one.
Another major deal is the planned merger between Cengage and McGraw-Hill Education. Did that catch you by surprise?
No. People have sort of been discussing it for a while just because there’s so much synergy potential. If you look at the trends in higher-ed publishing, and the challenges they have faced as the transition to digital has taken longer than expected, this just makes a lot of sense.
This deal would enable them to have a lot of flexibility in terms of what they’re offering to students whether it’s the Cengage Unlimited or McGraw Hill’s Inclusive Access subscription models. There’s a lot of flexibility in terms of how to make the textbooks more affordable to students versus before. Certainly the “gating issue” now is: What’s the Department of Justice going to say?
Another publisher, Wiley, bought Knewton and Zybooks in a span of two months. Do you see publishers pursuing digital courseware assets as a trend?
It is, and I think part of the reason why [Wiley CEO] Brian Napack joined was to make more acquisitions. He’s certainly executing on that plan, and that’s the direction where higher ed publishing is going. They all see the value in providing digital content to the students. It’s a better business model, and it’s cheaper for the students. In theory, they are getting more resources because they have all the supplemental resources available to them as well outside of just a physical textbook.
Our hope is that the publishers would start to play more in some of these bids for digital assets. But that’s [to be determined]. I think everyone thinks that they should, and they need to diversify out of the core publishing into supplemental. That will be important for them on the K-12 side.
In recent years we’ve seen private equity players buy up a lot of edtech companies. Do you expect them to maintain that interest?
Yes. Ever since I’ve even been working in education, private equity firms have been the dominant buyers within education. They like the cash flow characteristics and the growth profile of these businesses.
Especially in the past several years, a lot of the digital assets that have come to market [that] the publishers should’ve been buying. But their valuations just didn’t align. So, if you look at what Well North, Cambium, and Renaissance were going for versus how the big publishers are valued—the big publishers can’t buy these assets because of the disconnect in their valuations. So, that really leaves a private equity buyer community to bid on these assets. Our view is private equity will continue to be the dominant buyers within education.
A rule of thumb is that companies generally needed to generate about $10 to $15 million in revenue before attracting private equity interest. Does that bar sound reasonable in edtech?
It depends on the fund, but growth equity funds and a lot of the smaller funds aren’t going to take you seriously until you get to $10 million to $15 million because that’s a proving point. It’s hard for a lot of companies to pass that $10 million bar, and there’s a sense that if you do pass that bar then there’s a there there. Generally for a lot of funds that we talked to, the bar is higher than that.
The biggest deal we’ve seen is Advance Publications’ $1.75 billion purchase of Turnitin. Is that an anomaly, or are we seeing media companies interested in this space?
I would classify that as more of a family office deal. So, as we look at Advance [which is owned by the Newhouse family], Hearst … they’re starting to look at education, not as a media company, but as more as something that feels like a family office. For some family offices, education is an attractive bucket for them because there is a mission-driven sense there. We’ve seen the impact funds increase their interest in education for that same reason.