When (For-)Profit Takes Over

Several recent transactions have featured private firms or college companies taking over traditional nonprofit institutions. Some investors, though, don't foresee a trend.
December 10, 2007

When colleges or universities take over other institutions of higher education, both parties are usually traditional nonprofits with mutual goals. When the buyer is a corporation, a whole new set of obstacles arises, from converting to for-profit status to reorganizing the board of directors.

The past several years have seen a crop of such acquisitions. Most recently, Bridgepoint Education purchased the Colorado School of Professional Psychiatry, weeks after a private equity firm announced its pending purchase of Touro College's distance education division. Those developments follow a string of for-profit entities seeking to boost their online learning operations by acquiring or partnering with private colleges. Given that backdrop, the first question at a session devoted to the practice at the Career College Association Investment Conference in Washington on Friday was simple: Do such "transactions" between for-profit and nonprofit educational entities reveal a growing trend?

According to the panelists, the answer was a simple and straightforward no. Citing a rough estimate of about 11 such acquisitions over the past few years (out of the thousands of colleges and universities nationwide), Bradley Palmer, the founder and managing partner of Palm Ventures, said that, despite the interest, "My feeling, for what it's worth, is I don’t really see this as a trend."

What followed at the session was a discussion on the conditions that arise to make such transactions desirable, the obstacles to making them work and the typical characteristics of the relatively few private takeovers that have occurred in recent years. Given that the CCA's members are postsecondary two- and four-year institutions, most of which are for profit, the audience was mainly receptive to the goals of purchasing nonprofit institutions and particularly interested in the inner workings of such transactions.

The panelists' assessment of the transactions was also at odds with the predictions of some analysts, who note that most available for-profit educational ventures have already been purchased, leaving a wide-open field of nonprofits for potential acquisition. And while nonprofit colleges may see an opportunity to sell off underperforming divisions or those that don't fit easily with their educational missions, for-profit firms may be looking for properties that boost their reputations and academic footprints.

Still, for the panelists, most of whom have been involved in for-profit/not-for-profit acquisitions, the obstacles tend to outweigh the potential opportunities. For one thing, noted Palmer, whose firm has spearheaded three such conversions, most of the nonprofit entities up for sale do so as a last resort. "I think you find in the vast majority, the few nonprofit conversions that have occurred are junior college-type or career college-type institutions that are not in a position, for whatever reasons ... to create that endowment that creates a sort of safety cushion or buffer ... that allow a lot of colleges and universities to get through the tough times," he said.

Often, he said, such institutions' boards aren't engaged in their financial affairs and "may wait too long to figure out how to solve the problem, and often it’s too late." (At least one audience member invoked the recent woes of Antioch College as a possible example.)

Palmer cited several other factors that lead him to believe that for-profit conversions won't be taking off as a significant trend:

  • Often, other nonprofit institutions in a financially distressed college or university's state will come to the rescue first. These acquisitions, not those by for-profits, are "going to be a significant trend," Palmer predicted.
  • Existing union contracts with faculty and staff may make transactions more difficult, he suggested -- more so than with two for-profit firms without constraints on hiring and firing.
  • For-profit buyers may be hesitant to purchase colleges and universities with significant brick-and-mortar facilities whose upkeep and management add to operating costs.
  • Palmer also predicted an "enormous wave of philanthropy" as baby boomers move into their 60s and begin to donate to their alma maters. That influx of capital, he suggested, would provide financial stability to institutions that would otherwise find themselves looking for a potential for-profit suitor.

So when should not-for-profit institutions seek out for-profit purchasers (and vice versa)? Anthony J. Guida Jr., the senior vice president of strategic development and of regulatory affairs and compliance at the Education Management Corporation, said it's all about the mission. Even if the acquisition is at first financially unstable, it can "create more opportunity for the furtherance of the mission," he said.

But even if both sides agree in principle, there are always obstacles to a successful deal, including "a rat’s nest of financial issues," Guida said.

Of course, when a nonprofit converts, it can no longer rely on donations (although those that have been purchased have tended to be institutions that rely on tuition more than donations) and must begin paying taxes that do not apply to nonprofit entities. But beyond those structural changes are challenges that arise in the new management structure. Often, the for-profit company will find the potential for regional accreditation an attractive consequence of purchasing a college or academic unit. The accreditation process, however, often mandates that 51 percent of board members be financially independent of the educational institution, Palmer said.

"Most investors can’t imagine putting [in] millions of dollars ... and having a board of trustees that they don’t control," he said.

Still, despite the difficulties and cultural differences between the nonprofits and for-profits, Palmer expressed a sentiment that elicited some agreement at the meeting, but probably not elsewhere in higher education. "We don’t say that we’re much different from a nonprofit," he said.


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