How M&A Strategy Evolves in Education Technology

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I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Before we kick things off, I'd like to send a big thank you to you all, the listeners of the M and A Science podcast. I was just reading some of our recent Apple podcast reviews and feedback emails. I'm truly flattered and grateful we have listeners that are getting real value out of our podcast. Also wanted to point out that between mascience.com and dealroom.net, we now have over 1500 pages of content online. It's the largest publicly available collection of M and A content on the Internet. Anyways, thank you. Now onto the interview.

Welcome to M and A Science where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our free newsletter. Every Monday we share highlights from our interviews and invitations to events as we build the greatest community of forward thinking M and A practitioners. Again, that's mascience.com I'm your host, Kisam Patel, CEO and founder of M and A Science. Joining me today is Tom Horton, Senior Vice President of Corporate Development at Kaplan. Kaplan provides educational and training services to colleges, universities, businesses and individuals around the world. Kathleen's also a part of Graham Holdings, a conglomerate holding company that trades in the New York Stock Exchange under ghc. Today we're going to talk about staying true to your M and A strategy in a fast paced, changing environment. How's it going Tom?

Going great. It's great to be here Kisan. Thanks.

Thanks for taking time with me today. Can we kick things off with a bit on your background?

I've been at Kaplan for eight years now. Fun role. I head up corporate development and strategy for the organization and as you mentioned in the opening, we're owned by Graham Holdings Co. Which is a sizable holdings company formerly known as the Washington Post Company and it is a public company but it is effectively a family owned business. The Graham family of Washington Post famous with Katharine Graham, who was the publisher of the Washington Post for many years and is well known for Watergate. Some of you might have seen the movie the Post recently with Meryl Streep and Tom Hanks. That's about the Graham family. We're the largest holding of Graham Holdings Company. Now Washington Post was sold a few years ago to Jeff Bezos from Amazon. But the Graham holdings company now is still very active in media. But Kaplan is its largest holding about 70% of the revenue base overall. They've been in the education sector since acquiring Kaplan in 1984 as a public company. It is very unique. It's like a mini Berkshire Hathaway. And in fact Warren Buffett was very close to Catherine Graham and sat on the board of Graham holdings for 30 years. There's a very strong imprint of Warren Buffett on the way Graham holdings works and as a result on the way Kaplan works. Framing that because it's just as we get into the conversation today about staying true to your philosophy and principles when it comes to investment or M and A, that is very much a result of our ownership, Biogram holdings and sort of the Buffet influence on approach to investing. So I think that'll be a fun area of conversation today.

And you've been heading corporate development there for some time?

Yeah, a while. Not nearly there as long as the rest of the folks in the team. It is in many ways like a family run business. This team is exceptionally tight. People have worked together for decades and whole careers. So I still feel like the new guy on the block.

Wow.

Even though I've been there eight years. But it's been a fantastic place to work. It's a really great values driven culture and company. Very mission oriented around education.

I'd like to start with maybe just framing the education sector itself because the sector used to be really conservative behind the times, but now we're seeing more and more innovations. What's going on?

The market has been through. Through a period of really rapid change and it was especially accentuated by the pandemic. Right. So you've. I'm sure a lot of listeners have experienced this with their kids being out of school and staying home and suddenly the pandemic coming on. There was just this huge flip to online education and the massive changes that Change. It didn't create absolutely new trends, but it accelerated a lot of trends that were already happening in the market radically and it attracted a lot of new attention and investment from investors global fully in the sector. So that's a backdrop. But really the story of online education goes back 20 plus years actually to the mid-90s when it was really came out of the US originally when university of Phoenix started and other players. But Kaplan was one of the early leaders and innovators in online higher education when it was unheard of. So between 2000 and 2010, so one decade we went from essentially 35 students in the first year to 75,000 students by 2010. Wow. In Kaplan University, Kaplan branded online higher ed program. And we were just one of many examples of the rapid growth. So big picture, the development of online education, it grew so rapidly and it was a product of the fact that higher ed institutions just generally, as you mentioned, they are super conservative, they're incredibly powerful brands. You don't often think about them as brands, but they are incredibly powerful brands that just stuck to traditional models and traditional ways of doing things. They weren't particularly innovative or fast moving. One of the things that became apparent was that most higher ed institutions were focused on serving 18 to 22 year olds in a traditional model on campus and wouldn't even think of changing that. But there were huge segments of the population in the US that started to get a college degree, didn't finish, other people who never even went and then who got into the workforce. And with all these requirements from employers for higher ed degrees and other drivers, they had to figure out how to get degrees while working and past the age of 22. So there was, because of the lack of innovation in higher ed sector in the US there were new entrants that were able to come in and start serving this segment of the population that literally hadn't been served. It unleashed a lot of really interesting dynamics in the market because there were a lot of for profit companies that got into that space, establishing their own degree programs, building their own brand names. And there was a real backlash from the higher ed institutions. When that segment grew, it was like the only growth segment within education. And when it became like 11 12% of overall enrollments in a given year, that's when it really started to get attention. And it was highly profitable early on because you think about the economics of face to face classroom campus based delivery versus the economics of doing it online. It's like the difference between the economics of a Broadway show and a movie. What happened was there was like a price umbrella of Face to Face education where people know today like to get a year worth of college at many institutions in the US is like 65, $70,000. It's that expensive because there's that much cost involved in delivering it. Of all the infrastructure of all the face to face classes in an online world, a lot of those fixed costs and variable repetitive costs go away. You can deliver like an asynchronous online delivery. You can record something once like a movie with the right kind of support and services around it to students. It can be just as effective a mode of delivery, but the cost structure is radically lower. So there was a lot of money flowing around early on in those years within that sector because of the pricing umbrella of Face to Face and the lack of competition and innovation. That's changed over time. You're seeing the proliferation now of online models like finally the higher ed institutions have made it their own and they're all accepting it and they're figuring out, oh, we have brand power and it's in our best interest to serve these other segments. So they're all piling into the space as well to drive online delivery, that is one segment of the education market and one trend, multiply that by five or ten. Because there are all these other macro trends happening in the market that are really reshaping the ed sector globally. To step back, it's been a long fuse of many years of innovation in the sector. Online education delivered being one of those things. But the pandemic absolutely hit the turbochargers on that and has really amped up the market. A few stats for you. Education is a massive global sector. It's on the order of $6 trillion globally every year spent in education. That's inclusive of K12, higher ed, a lot of corporate training, but it's just massive numbers. Within that 6 trillion though, there is so much fragmentation and diversity and complexity. Just think about even in the US like how many subsectors there are and then multiply that across the rest of the world. And it's incredibly important sector both to individuals and to nations. It's important to individuals because literally life changing opportunities come out of good education. It literally changes the arc of people's lives. A family's ability to earn a good living over their lifetime, have growth opportunities. From a national perspective or country based perspective, countries recognize that having an excellent education system or having a well educated population is critical to economic development and growth of countries. It's so central to so many things that people care about. That's kind of the order of magnitude of the size. Just getting to the point about M and A and investing and all that, a couple of stats for you. There are often cycles in education, but with the pandemic we saw absolutely explosive growth. So in 2021 there were 450 acquisitions roughly. Globally that total value is about $30 billion. That is probably small compared to a lot of other sectors. But just the sheer numbers and the growth of it's amazing. The 450 acquisitions that year was a 40% increase over 2020, which was a similar increase over the prior year. And the valuations have gone through the roof. So median enterprise value on a revenue multiple basis was about four, three and a half on average in 2021. But for larger companies it was at 6.2 times revenue. Those are some pretty eye popping revenue multiples just generally. So it's a sign of how much interest and buzz and activity was happening in the market. On the VC side, the global market in 2021 for investment was on the order of $21 billion. $21 billion was three times the pre Covid numbers. It's still not massive compared to other sectors again, but it is relative to where education as a sector had been. Those are just some kind of indicators of how explosive the growth has been and what the Buzz is. Since 2015, I think there have been 38 new unicorns that have come out of venture investing. Seventeen of those were minted last year. There's been a whole bunch of IPOs as well. So whatever sector of the market you're looking at, or whatever lens you're looking through, there's just been a tremendous amount of activity.

So can we go back? One of the stats that caught my attention was going around 2000 with the online model building out to 75,000 students. Was that all organic through acquisitions? I wanted to get a sense of what your strategy was and some of the acquisitions that you did do and then how you're playing with the current trend going on.

So honestly, the higher end was almost entirely organic. That's how rich the opportunity was. When we figured out the business model for that we could grow it just because of the nature of the business. We didn't really need to acquire into that. It was a matter of the marketing that you could put into it just allowed for that kind of growth. And it was a national model. Very unlike the traditional higher ed model where it's all regionally based and your campus, you're constrained by campus, you're no longer Constrained by campus so you could achieve with national advertising, unbelievable growth.

So you played on first comers advantage, essentially being one of the first big names to go out and do it.

Yeah, it was. It grew unbelievably quickly. I would say though, just stepping back, we have done, since 1996, we added this up recently. We've done 120acquisitions. We've deployed almost 2 billion in capital on acquisitions since 96. So that's a long period of time. But there were other segments beyond just our Kaplan University higher ed segment where we did do a lot of acquisitions. So for a long time we were in the vocational ed sector and that was a case where it did make sense to do a bunch of acquisitions. There was a lot of roll up and consolidation opportunity within that segment. We absolutely used acquisition as a strategy to grow. Another area that we're very heavy into is professional education. Think of that as like test prep and licensure for specific disciplines. So if you want to be a nurse, you take nclex. If you want to earn a cfa, you will take CFA courses. Those markets in professional ed and what's called continuing professional ed, lifelong learning, a lot of it is mandated. Those were areas where there were a lot. There was just huge fragmentation of a lot of mom and pops and there were a lot of opportunities for roll up in those spaces. So we've used acquisition historically where it makes sense in order to drive growth, but where you can drive organic growth, that's typically our preference to grow organically, where we're able to.

Can you walk me through where the M and A strategy fits in?

We think about four different types of capital allocation and strategies and M and A is the third preference on that list because M and A traditionally is pretty hard to get right, but very powerful when you do. Honestly, we found some of the most success in partnering. So even above organic growth, a lot of elements of our business, which I can get into describing what they are, but they do best when you're working with really strong partners with established brands who have complementary skills and capabilities. So that's typically number one for us and we typically do that with either higher ed or corporate partners. Number two would be organic again because we control all the levers. But the conditions have to be right for organic to really drive the kind of success and growth you need. Organic is also very hard to do, but it's. It can be more capital light. Third would be M and A and we'll do that again with very consciously in very specific situations and sectors. We typically Go through the build versus buy type of analysis and we can get into more detail on that. The fourth one, just to round it out, is equity investments. We do that selectively as well. And we like doing that. We've been pretty successful at it. You just have less control and ability to make sure that whatever you're investing in, you can try to bring in house over the long haul. Right now we run a portfolio of about 20 investments of just pure equity investments in other companies.

Pretty active there as well.

Yep.

Let's take apart the M and A strategy. How do you shape that? What does that look like?

We go through a process all the time of trying to figure out where M and A strategy is going to best support our overall strategy and growth. So we do a lot of work around developing an M and A playbook. We recall that. So just by sector, really looking at if M and A is a good fit for this line of business, then who would be on the short list of candidates to go after? Generally we would much prefer to proactively develop opportunities and reactively respond to whatever is coming on the market, typically through competitive banker led processes. We do participate in those often, but we're also realistic that when you do that, the likelihood that you're going to get the winner's curse and overpay for something is higher. We would just much rather prefer to bring in companies that we've developed relationships with. We know the management and they're in a sense less competitive because you're going on sort of a trusted relationship and that approach. So that's one general approach to it. In terms of acquisition, we have very specific criteria that we evaluate candidates by. There are five of them. When it comes to acquisitions, stepping back for all the different areas of investment that we pursue, we have criteria. So whether it's organic growth, it's equity investments, it's acquisitions, we have criteria and the general approach on those is, look, you don't have to answer the mail on every single criteria. You don't have to nail it. But the preponderance of support has got to be there across those and there are areas where they can get knocked out.

You want to take me through the five criteria? I'd love to hear it.

The first criteria we look at is just we want to see a strong history of earnings and track record of growth. We want evidence that there is a strong underlying business there that can deliver results. So that's the look back. The second criteria is look forward, just long term market visibility. So Kaplan's ideal holding period for an acquisition is forever. We literally want to buy things that we will layer into our business and reinforce that business. Add to the flywheel of the business. A big driver of that is are the markets that they're in, like growth markets and healthy. At a minimum, we want to see that looking ahead. We can't predict the future forever, but for the next 10 to 20 years we think this is going to be a rich vein and growth opportunity. The third thing is strong management and that's very much in the Buffett style. As a holding company, you want to buy companies where the management wants to come along with the business and not step away. We look for strong leaders and managers. Now that's not necessarily needed or true when you're doing a pure bolt on and we do plenty of bolt ons. But having at least a strong management team that was there before and built a good business, that's another indicator of strength of the business. The fourth area is just whatever we're buying is within the competency of our existing flywheel. We don't like to do typically like really big step outs and take big risks. We want things that we sort of know how they work, we know how to do them. We do like adjacencies. We continually want to grow and innovate the range of businesses that we have. But we just try to avoid like really big step outs or things that are total flyers that are not going to have any relation to the existing business. Now again, that's one that there may be cases where we do step outs and we try new things, but we do that very consciously. Right? So we might relax that criteria. The fifth one is reasonable valuation. Price at the end of the day is such a huge determinant of whether or not acquisitions are ultimately deemed successful. Whether or not you are able to earn a reasonable return on the invested capital. That's why at the end of the day, price factors into everything. We looked at all these other criteria, but at the end of the day, is this something that we feel really confident we can deliver the value against and get a payback in a reasonable period of time with reasonable risk and add to the enterprise value overall.

So you look at value as a factor of its own?

Yeah, we really do. In practice there are a lot of things that we do to bring this whole process to life. I remember doing like in B school working on calculating a whack with. It took three pages in a conglomerate business to figure out the appropriate wac. Tons of models that are just so complicated. At the end of the day. Like one of the things that a lesson learned and an approach that we've adopted is just to really step back and focus on the fundamentals and deals and not get overly whipped up on complicated models and valuations like really trying to get in to evaluate business models, understand the earning capacity of a business as it stands and not make huge assumptions around synergies or we don't do a lot of financial engineering type of evaluations because we don't approach the market that way. We have Graham holdings as a very strong balance sheet. We don't typically worry about financing the way that a lot of other people do or use that as a tool. And we keep it very focused on the fundamentals of what makes for a viable, healthy business and what the earnings is now and what we think we can do with it. Then you apply the multiple based approach and figure out in a range what we're willing to pay for. But when you focus on the fundamentals and keep your discipline and wits about you on this, you come up with a price that it's worth to us. We stick to that in negotiation processes and we're fine walking away from things if the dynamics get too rough or the price gets too high and we just don't allow ourselves to get pushed too high. Now we will stretch on certain deals where we think that they're extreme, extremely valuable to the company. But we do that again very consciously and selectively.

So recap. Because I like this pretty straightforward. First thing you're looking at is history of earnings, track record of growth. Then from there it's looking forward 10, 20 years out and what that's going to look like. Then you're looking at the management team making sure they're going to stick around and they're well fit. They're also how it fits into the flywheel, the way your model works and then making sure you're getting value out of it, that the valuation is reasonable. And then when we tie this back up to your strategy, that's when it starts going into what verticals you're focused on based on your business units and where you want to double down or not.

Good example. So like right now we are very strong in professional ed sector and we're very strong in the healthcare vertical and the financial services verticals. We really want to double down in those areas and those are still pretty fragmented markets. So we've been pretty active the last few years in professional ed and doing bolt on acquisitions and doing even some step outs. We acquired a while ago a really niche Firm with a great long track record, strong management in the engineering and architecture segment which has nothing to do with financial services or healthcare. But it's a professional ad business that has many similarities and a strong team. And we looked at that and said hey look, this has been opportunistic acquisition here at one level but we think this is a really good investment. Just a good example of where we might do an adjacency or step out. And we aren't always firing an all cylinder and just doubling down on what we currently do. We're stepping out every once in a while too.

Do you pay attention to these early stage. For example we have M and A science academy that we put out there maybe a year and a half ago. But it's early. It's early. You're just now getting past whatever. We're approaching the half million revenue mark. Do you track that or is it just eh. I come across it. When does things start getting interesting? Is there a certain revenue number, something like that that you sort of look for or things you're just seeing a lot of their marketing. What starts drawing you in to be interested in the company, a problem to.

Solve for is like there's so much going on. The ED sector is so big and there's so much going on right now you can't keep track of it all.

That's what I'm saying. I was bored during COVID and we launched a new business line and it's in your wheelhouse now and you should be tracking it.

Yeah. So we do a lot of that. We do that the playbook work again and if it fits into sort of a theme that we're developing then we'll do scans. We won't catch everything that's for sure. When things. Things get interesting I think are when. If we're going to do an acquisition we again just given our philosophy we would. Our preference would be to see that one that there are proof points in the business. With the business model it's gotten to a level of maturity where it's. Yeah we can look at it and say yeah, they're onto something. There's actually a viable business model in here. And then you'd start layering on. Is this a big enough segment to be like a needle mover for us? Is it on strategy? It would go through those kinds of screens. There are like what you're describing. You're in a particular professional vertical.

That's the thing. I'd have a hard time selling you on a TAM because we don't even Know what that is, right? Are we done at 1 million? Are we done at 5 million?

It depends. One thing we're super interested in thematically right now is what's going on with communities. A lot like what you're doing and there are a lot of other players out there doing with podcasting and things like that is actually building community based strategies. That's interesting to us. I haven't really described kind of the breadth of Kaplan yet because we're made up of many parts. One of the things that we faced as a company is the origins of Kaplan were in test print. That's what it's most known for in the us Even though today that's a very small portion of what we do. What we found in our business is that we will see students, the same student, multiple times over the course of their career, but we're very episodic in dealing with them. So if you think about just in the frame of test prep, the way things have historically worked, we've been in SAT and ACT prep for a long time. Again, very small chunk of our business, but what we're known for. So we go out and we acquire students, we market to them, we have acquisition costs, we bring those students in for a relatively short but highly important chunk of time and then they go to college, they get into college that they want to go to, they go to college and we might see them again when they decide, oh, I'm going to become a doctor or a lawyer and they take MCATs or LSAT. So we reacquire them. We have another very intensive high value ad engagement with them on something that's very high stakes for them getting into med school. And then we might see them again when they do their medical licensing. Usml, LE or nursing nclex. So we're touching students like multiple times, but we're reacquiring them. And one thing that we're trying to do is become much more relevant to a student along their journey and to be engaged with them across that. We're not the only ones doing that in the ed sector. A lot of people are trying to solve that problem because the fundamental drivers in the education sector are literally cost of acquisition and LTV. Right? It's the same drivers of SaaS based models. And especially as like Google and Facebook have just dominated the marketing channels, there's so much competition now for students that the cost of those leads and acquiring students through those channels is going through the roof. What we are very conscious of is trying to acquire students through our own unique Sources not relying on those channels where we can avoid it and making sure we are engaged with students so that we don't have to reacquire them every four years. In any case, this is a very long and way around the story. But, but community building, that is a really fascinating way to maintain engagement with people. That's an area that we're definitely really interested in doubling down on. We're doing investments, we're doing acquisitions, we're doing organic things. That's broadly a strategy that's very interesting to us. So to the extent that you've got proof points on a business model, you've got momentum. There's a segment of the population that is really interesting and attractive. That's when it hits our radar and we get serious about it.

I keep working my history, make sure I got good financials for you. So let's take that example, especially like the community one that's up and coming. How do you take this strategy and get your organization aligned around it?

Again, the pandemic kind of threw a bomb into the middle of how we traditionally gone about things. We've been really lucky in many ways that it happened because we've come out of it strong. How to summarize this? So Kaplan as a family owned business and people who have been there a long time, it has its idiosyncrasies. Culturally. I've worked in other organizations where there's a real operating system that gets put in place to do strategic planning. That would not work at Kaplan for a whole bunch of reasons. What we did have were series of leadership meetings where we get together face to face, usually in New York and you put a lot of effort into prepping those sessions at the end. They were all great sessions but nothing really ever stuck. Our units would come out of it and just go back to business as usual on the backside of it. That even though there are all these opportunities where if we could pull together the capabilities and the assets and the resources across Kaplan, we could really get after like new, bigger opportunities. So when the pandemic hit, those meetings got canceled. They would typically be meetings of 30 to 40 people max. What we ended up doing though was creating a whole new approach and series of meetings online where we call these the Capital Leadership Meetings klm We were able to broaden the audience in that, engage more of the leadership because we weren't having so many people take a whole week off and travel for these other meetings. We really just systematically got after starting to work broader strategy issues for the organization and doing it In a way that was going to work for Kaplan. What doesn't work is to have a centralized team like mine. And it's not a big team, it's three of us. But. But to have our team go out and basically say to the units, here's what we want you to do, that does not work within Kaplan. It would not work. But what we were able to do through that process was really come up with some governing frameworks and approaches that everybody can align to. An example would be I just mentioned about how cost of acquisition has gone up and we are trying to innovate our own preferential sources of students in order to lower tax and to not just be in there competing against every other education vendor that's out there. That's a really good example of one of these sort of planks of strategy where we can talk generally in these KLM meetings about that and we can pull out examples from different business units that are doing that or trying to solve problems around that that informs the whole organization about both the strategic intent and ambition behind it, and then examples of what's working and not. And it gets people collaborating and sharing ideas. That's a really great example. I'll give you a very tangible example of how that played out on M and A. We acquired a startup called Bridge U. It does college advising and creates a platform that college advisors in high schools can use. And they specialize on international schools that are all over the world. There's like 10,000 international schools across the globe. And when we talk about international schools, so you go to a place like Malaysia or Indonesia or Spain, and there are high schools that generally teach in English. They align to either like the British curriculum or the American curriculum or the International Baccalaureate, the Bach. But they serve kids in local geographies and emerging markets. And there's a very high preponderance of those kids who want to study in the West. So to the extent that you can go into those schools and develop tools that are really helpful to the professionals who are running college advising and to the students and to the parents, where you make it easier for students to learn everything they need to know about applying to schools in the west and helping to facilitate that process, that's extremely valuable both as a source of unique students that colleges is love and just a really. It's a very unique way of sourcing students. It's a good example on a bunch of dimensions of both coming out of that kind of strategy process and what we do on M and A.

How'd you find that Opportunity kind of networks.

That's where I was curious about.

When you're communicating this strategy and getting this dialogue internally, how far does it go? Is it just purely people holding a VP level title or. Or does it go even broader than that?

We've been evolving. So we've been at this now for what, like two and a half years with this new format after the pandemic, and we aren't going back. We'll supplement with like face to face meetings. But one of the things that's happened is we've been adding more people as we go and in some cases, depending on the topics that we're picking off, and we'll meet every three to four months. And we have a very set agenda, like looking a year ahead. And as we hit specific topics, we're extending this to a broader set of people. So there have been director level people and there's a certain core group and then there are certain people that rotate through. But as we're expanding, we typically don't go above 65, 70 people at any one of these sessions. We will put the material out there or like recordings to a slightly broader group. It's really helping to drive awareness and ultimately alignment, which is what your question was about. It's having a huge impact around that. Again, we're solving. Solving it in a way that works for the particular idiosyncrasies and culture of our business, where we're bringing people along, we're soliciting ideas and information sharing, we're providing governing frameworks and tools and kind of lessons learned for people.

This helps you stay true to your strategy even though this market's been upside down the last couple of years.

One of the things we did this spring was everything we're talking about today around investment philosophy. We had an entire series that involved a bunch of pre reads, podcasts, interviews, and then live session where we talked about our investment philosophy broadly and tied that to what's happening in the markets. And so we had a lot of really rich Q and A. One of the things that people who aren't as steeped in our investment philosophy today would question is, you just got to pay what you got to pay on an acquisition right now, even though the markets are hot, we need to acquire that company. Why aren't you doing that? And you're just like, people would get very frustrated that they put all this effort into coming up with ideas and we basically say no because the prices are too high. Getting that understanding and alignment has been key broadly. Even the markets externally will look at us and say, oh, Kaplan's very stodgy and it's just not with the times right now around participating in the market. We get a lot of, in some cases attitude from bankers when they're running a process. We're just, we're out because it's just the prices are too high and we look in really hot markets we can look naive and uninformed. But right now what's happening in the markets where actually people think we're wise.

Yeah, you're going to be ready to go on a shopping spree pretty soon if things continue the way they are.

Exactly.

One of the things I wanted to touch on is in a prior conversation you told me about some not for profit transactions you've done and I'm not sure if it's either converting a not for profit to a for profit. I know you had that partnership with Purdue where.

Yeah, it's the Purdue thing that I'm talking about.

And that was taking for profit to a not for profit.

Yeah. What I didn't say about the higher ed market was that when we grew to 75,000 students and all these other players got into the space, the universities, others, Congress reacted really aggressively and they went after for profits. It's still a really big issue right now with the Biden administration. But the market got really rough as a result of that. And there was a whole new crop of entrants that came in who had not for profit status. They were really like for profit models. They were new companies that emerged, but they were playing to the not for profit positioning. And then universities themselves started getting very active in the space. So the traditional for profits got really, they were targeted and really whacked and for good reason. There was so much money in the space that it attracted a bunch of bad actors. But the bad actors target for everybody. Our board of directors at Graham holding decided to exit our own branded for profit university. And we were looking for ways to do that. We ended up doing a partnership with Purdue where we essentially we sold them the academic side of the operations. We literally sold them that for a dollar. But we as part of that entered into a long term servicing agreement with them where we managed, we had all the plumbing and the infrastructure run the non academic side of it. And so we're in a long term partnership with them over that.

So it's pretty much a carve out.

Purdue is in absolute control of the academic quality, the academic standards, the delivery of all the teaching and a lot of the advising and Kaplan is a service provider to them. For a lot of the key elements of the business around marketing to students and recruiting students, providing support early on, helping students make the transition back to being students and being able to succeed. There's a lot of back office type things that we do and things behind the scenes.

That's interesting.

Yeah, there's a provision in there where it is a long term agreement, but they're like if they eventually want to buy us out, they're able to do that.

Okay.

It's a very unique structure. It was just the whole model was something new and different that we had to go through. It took us a good year of just completing that deal with them. It was effectively like a disposition that we did, but it was one that had all sorts of. It was almost like an acquisition as well because we had all sorts of problems that we had to solve for it and get incentives aligned and make the relationship work. So a lot of kind of innovative problem solving.

It's interesting. That's the fun part about doing these interviews is you learn about these unique deal structures. Have you ever been on the other side where you've taken a not for profit entity and turned it into part of your for profit?

Not that I'm aware of. That's a lot more complicated.

I've come across a few deals like that. I was just really intrigued by that. How does that work? How do you go back with all the back tax taxes they're due?

And I had to advise it was somebody who worked at Kaplan as a small startup who was trying to do just that. And so I gave him a little bit of advice. But there are a lot of tax consequences of doing that and complexity. So I've personally never been through that.

Just curious if that was ever the opportunity. Let's get into what are some of the big lessons learned from your experience.

Yeah, I gave a couple of them just around KISS principle and focusing on fundamentals. Just when it comes to M and A, when you're evaluating acquisition opportunities, just generally acquisitions are just hard to get right. So don't overcomplicate them. Whether that's. Again, we typically won't bank on synergies because it's usually offsetting negative synergies. So if you're making your case fully on synergies, beware. In the ed sector, with the advent of technology and education, there are a lot of companies that are positioning themselves as tech companies. Honestly, they aren't. At the end of the day, it's really hard to purely tech enable education. So just being realistic about that is key. So Understanding most education typically ends up having a fair amount of variable cost in it and online can reduce that and it can reduce fixed costs. But asynchronous online on its own isn't always going to cut it. There's one player in the market you've probably heard of called Coursera. And Coursera has got a hundred million claimed users globally right now. It started off as a moot one of these massively open online courses and it was for free. Like they use freemium strategy to bring a lot of people in. They're very aggressively partnering with higher ed institutions, like leading institutions, helping them bring certain courses online. And then Coursera has built a platform and they're offering whole portfolios of branded courses to higher ed institutions, to corporates and they're going global and they're even getting into offering full degrees online at a much, much lower price point. Terrific degrees for $30,000 or less. Like the whole degree. The reality is they're onto something. There's definitely that they, I think they have a lot going for them around this kind of platform based strategy and that that approach. But I think their Achilles heel is frankly that most students have a hard enough time learning in face to face classrooms. Independent self study, totally on your own in an asynchronous mode is hard for them to really be successful and get and yield educational outcomes and return on an educational investment. You've got to deliver the support and the services. I just think that's generally true and Kaplan has really deep experience in that. Because of our test prep DNA we are super focused on educational outcomes and kind of the return on investment. I think that's one where we will solve our own path to participating in the global online higher education and corporate marketplaces. But service and support will be an important element of what we do.

Really know your business model, know your strengths and play off of them.

Yeah, we have a lot of debates internally about getting back to that example, the engineering and architecture company. Like should we do opportunistic deals or should we always be purely focused on strategic deals? Does it fit in really centrally to one of our strategies? Honestly, I think there's an argument to be made for both. We do absolutely do these kind of strategic deals that are enablers of broader strategy and have high value. But we do have a lot of experience and some good experience with doing like smaller acquisitions that are opportunistic or both have that build on your layer on additional layers of earnings in the company can be successful in creating new growth avenues for the company that's one thing. The generally other lessons learned are just around. It's not so much related to acquisitions, but like lean business development approaches where we're always trying to think about how do we chunk up big investments into smaller investments and layer them on incrementally and have decision points like in any new business venture, you're always facing risks because of the uncertainties. You don't know if your business model is going to work. You don't know if you'll have product market fit in any venture that you're trying to go after. Even if you've done an acquisition as a base to start with and you're trying to build from there, you want to think about trying to figure out what the biggest uncertainties and risks are and knocking down early as you can the proof points on those and only spending as much money as needed to figure that out and making decisions as you go. So we really, we try to employ that approach. I don't know if you run into that a lot with as a methodology that other companies are using, but it's one we really believe in.

When you mentioned it, I started thinking of rollups because that's a big thing where you got to just get better at it. That's the nature of it, doing it. You have more control over that before you bet the house. You're at least validating that the this is actually going to work.

And it doesn't always work that way. We've had misfires too where we've had a business unit team that is aggressively arguing we got to spend $100 million to get into this sector. We got to plant a stake in the ground and be an early mover. And in one case we did that. There's a whole emerging area around new economy skills training like you see in these coding boot camps or like data science or digital marketing. We acquired very early on one of the early bootcamps. It was actually like the Kleenex brand. It was called Dev Bootcamp. And we did an acquisition early on. That's where the boot camp moniker came from. Paid a bunch for the acquisition and then it was all like face to face site based delivery with individual teams. So we had a site in San Francisco, a site in New York, and so you have a rent. You have to do all the B2C recruiting to go out and recruit the students. Students. And it looked like a really good business when we bought it. And that was going to be like our stepping stone into that space. There were some others that kind of got into it at the same time. And that market turned into a bloodbath because there weren't really barriers to entry, which we hadn't thought through properly. And everybody hog piled into it. And it became really hard to recruit students at a reasonable cost of acquisition. And you only had them for 13 weeks, so you could charge 13 or $14,000. But the economics just didn't work. Work. The team that did the acquisition, that was going to be their stepping stone. And so they were advocating, before we'd even gotten proof on that environment, that one boot camp in San Francisco could work economically. They were really pushing the. We got to have 10, 20 of these set up. So we ended up having a lot more operating losses on top of that. And we tried to pivot it, we tried to sell it. We ended up losing money on that. But over the long term, there have been companies that have been pretty highly valued and successful, but they were more like fast followers. And they tried different models that were more capital light and weren't reliant on B2C. And that is a market that will exist. We were just in there, hadn't thought through it enough and were in there too early when there was just competition went through the roof. And it just would have taken as much investment to try to get ourselves out of the hole as we got ourselves into. So good testament to really thinking through again the fundamentals and how the landscape's likely to evolve, what the business model looks like, like, what are the moats around the business, really thinking that through from all aspects and then being nimble in the approach, which we really weren't. We got really locked on too much to one model and didn't pivot fast enough. So we weren't the only ones that got whacked in that environment. But there have been fast followers and others who have been successful. We weren't in that case.

M and A ain't easy.

Yeah.

Tom, what's the craziest thing you've seen in Mike?

I've had interesting moments. I don't know if I see anything.

Truly crazy you have to have then you haven't done an M and A if you haven't seen anything crazy.

We did an acquisition that we closed on March 19, 2020. So that was a week into utter panic around the pandemic. So we ended up closing that deal, but it almost didn't happen because of the pandemic. And we definitely. There were a lot of people that were spooked by that. And. And there were some negotiations in the end just to make it everyone was trying to conserve cash and we negotiated. At the end we said, we'll honor the deal and go through with it. Despite the world seems to be falling apart. It's got to be on the following terms. We don't ever like to do that, but that was a very extreme circumstance. We weren't alone in that. A lot of that's happening now as well. People are retrading on deals left and right. We definitely don't like to do that. So that was retail rough. Like another one, we had a deal where we bought a small medical simulation company that was doing some really innovative work and they were on the verge of bankruptcy, but they had a grant that was made from one of the richest entrepreneurs in India of like 10 million bucks. And they had, as a result of that, they had certain rights for global sales and all that. And we just didn't want all that complexity. So we basically. It was a tiny acquisition at the end of the day and we were basically, basically saving it from bankruptcy. But the negotiation on it took six months and it was tiny. I'm talking less than $2.5 million of an acquisition. But we had to negotiate with the representatives of one of the wealthiest guys in India over this grant that had been made. So they were acting in a sense like it was equity. They didn't want to lose that investment. But it was a very complicated negotiation to basically get what was going to be required for us to even take it out off the verge of bankruptcy. I've had other crazy experiences like almost getting arrested in Israel during an acquisition. But it wasn't related to the acquisition because I was outside a building taking a photo of downtown Tel Aviv and it happened to have the IDF Israeli Defense Forces headquarters in the frame unknowingly.

Oh, that's funny.

Yeah, that was a fun one.

Where'd Tom go? Anybody see him?

I had to remove it from my camera. It was a digital camera. Thanks.

That's good. I'll let you keep the camera. Thank you so much for this conversation. I enjoyed it.

Yeah, same.

Here's to the deal.

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