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Following in Kaplan's Footsteps

October 20, 2009

A leading test preparation company, seeking to diversify its revenue streams, decides that instead of just preparing students to attend other colleges, it wants to run its own. So it buys a company that provides career training to adults and has a virtual high school.

You’re to be forgiven if that sounded like Kaplan Inc. But on Monday, Princeton Review made its own foray into the for-profit higher education sector, agreeing to spend $170 million in cash (in a combination of debt and equity) to buy Penn Foster Education Group, Inc., doubling its base revenue and profit and sending the slowly rebounding Princeton Review off in several potentially new directions.

Princeton Review has had its struggles in recent years. It made an ill-fated purchase of the online-application provider Embark in 2001, and brought in a new management team in 2007 to try to restore the company to profitability. Princeton Review turned a $15 million profit, on revenues of about $145 million, in the fiscal year that ended June 30, said its chief operating officer, Stephen Richards.

With that goal accomplished, Michael J. Perik, the president and chief executive officer, said in a telephone interview Monday, Review officials began turning their attention to “what can we do with these profits?” and “how do you expand” the company?

With college enrollments booming and a “very supportive public policy environment” in which President Obama and others are aggressively pushing the need for more skilled workers and educated Americans, “your eyes naturally go to the career college market” to answer those questions, Perik said. “Over 40 percent of the country needs to be retrained, and a growing population is looking to do that online.”

He said that the company had been exploring a range of possible “partnerships” and other arrangements with traditional colleges (more on that later) when it learned that Penn Foster was up for sale. The 118-year-old company offers online associate and bachelor’s degrees in such fields as business management and paralegal studies, "self-paced" certificates and diplomas in career-oriented fields, and a virtual high school that operates mainly through partnerships with local school districts.

The company’s three branches -- Penn Foster College, Penn Foster Career School, and Penn Foster High School – together have 223,000 students in more than 150 countries, its officials said. It is accredited by the Distance Education Training Council for its postsecondary training programs and the Middle States Commission on Secondary Schools for its virtual high school.

The reach into for-profit higher education, particularly at the mostly low-end level (in terms of students’ educational preparedness) at which Penn Foster operates, seems in many ways like a break for a company like Princeton Review, which has largely focused on helping suburban kids pass tests that help them get into selective colleges.

But while Princeton Review “still helps kids get into Harvard and Dartmouth,” Perik said, the company has had an “evolving mission” that includes many economically disadvantaged students. He described a partnership, for instance, with the public school district in Broward County, Fla., in which the company helps underprepared students prepare for the ACT exam that students (as an alternative to a state-based test) must pass to graduate from high school.

“When we look at what Penn Foster does, we think it’s consistent with our mission of continuing to help people advance their educations,” Perik said.

Perik was cryptic about some of Princeton Review’s plans for aligning Penn Foster’s operations with its own, but he did say that the company was close to announcing “partnerships with existing institutions” that Princeton Review officials had been exploring before the deal with Penn Foster came about.

While he declined to get terribly specific about what those would entail, he said Penn Foster might help Princeton Review provide a “turnkey solution” that might help community colleges, for instance, take their associate degree programs online.

“We had been exploring some plans, and this [deal] will accelerate those plans,” Perik said. “If we are going to grow this business, they provide us with a model and a platform that will make that possible.”

Princeton Review officials also said they hoped to find ways to take advantage of some of Penn Foster’s strengths to improve the Review’s own operations, especially in the area of online marketing. Princeton Review derives most of its testing business from its 60 on-ground locations in mostly urban areas, but if it is to grow going forward, Perik said, “it’s going to have to have more online offerings,” and get better at marketing itself online. (Penn Foster’s own management team is led by Stuart Udell, a former executive at Kaplan.)

“Penn Foster does a very good job of online marketing,” said Jerry Herman, an analyst at Stifel Nicolaus who follows Princeton Review, noting that the company generated 1.5 million student “leads” for its various businesses last year.

Herman called the deal a “game changing” event for Princeton Review in terms of giving it more alternatives for the future.

Although some analysts described the price that the company has agreed to pay for Penn Foster as steep, investors seemed happy: Princeton Review's stock rose about 5 percent on Monday.

 

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