Looking Beyond the Tale of Two Tech Company Sales
The buying and selling of ed tech companies by investment firms seems to create more distance between owners, management and campus clients.
It has been an interesting summer for some of the companies that are major software and service providers to colleges and universities. On July 29th Reuters reported that Blackboard’s owner, Providence Equity Partners, was planning to sell the company at auction. And on August 12th, Reuters posted news that buyout firm TPG Capital was the likely winner of an auction for Ellucian, the firm that provides the Banner, Colleague, and Power Campus administrative software platforms to hundreds of colleges and universities. Two days later, a press release on the Ellucian web site announced a “definitive agreement” by the current owners, investment firms Hellman and Friedman and its co-investor JMI Equity, to sell their majority stake in Ellucian to TPG and Leonard Green Partners.
Collectively, Ellucian’s three ERP or administrative systems platforms (Banner, Colleague, and PowerCampus) are used by more than three-fifths of the nation’s public and private, non-profit colleges and universities to manage their finances, student records, personnel files, alumni information, and other critical operational data. The Reuters reports suggests that the sale price for Ellucian will be about $3.5 billion.
By way of background, Ellucian was the new name given to the merger of two (previously) competing administrative software companies. Hellman and Friedman bought Datatel in 2009 from another investment firm. Ellucian emerged after Hellman and Friedman bought SunGard Higher Education in 2011 and then merged the two companies, under the Ellucian name.
As I wrote on August 4th about a potential Blackboard sale (asking price: about $3 billion), this may also be a good time for Ellucian’s owners to sell Ellucian. As noted by EdSurge, big money is currently pouring into education market investments. During the first six months of 2015, venture capital investments in education firms totaled $1.6 billion, while the value of mergers and acquisitions (M&A) totaled $6.11 billion. For the three-year period from January 2012 – December 2014, education market M&A activity totaled $28.1 billion.
If the both Blackboard and Ellucian sales close by December 31st, the aggregated sale price for these two companies will surpass the total ed market M&A activity for the first six months of 2015: an estimated $6.5 billion for just Blackboard and Ellucian during the final six months of the current year vs. 177 transactions totaling $6.1 billion from January-June 2015.
There are some interesting similarities in the Blackboard and Ellucian announcements. In both instances, the “hold time” (how long the seller owned the company) was relatively short: Providence is selling Blackboard after four years; Hellman and Friedman is also selling Ellucian four years after merging Datatel and SunGard Higher Education into one company. And in both instances, the sellers understandably seek a significant return on their outlay for the initial acquisition and any additional investments.
(Sidebar: For the record, I am not an “academic socialist,” a term that some IT industry executives have used privately to characterize their campus clients. Kudos and financial rewards should go to investors who take on risk, grow firms, and then have an opportunity to realize a return for their investment and their efforts.)
With both the Ellucian and Blackboard sales, the immediate concern of many campus IT leaders will be what does this mean for us? How will this affect us? What are the short- and long-term consequences of a new owner for one of our key technology providers?
Specifically campus IT leaders will want to know a) if Blackboard’s and Ellucian’s new owners will seek to recover the cost of the purchase and follow-on investments by raising licensing fees; (b) if the new owners will make necessary investments to upgrade and enhance products and services; and (c) who on the current executive suite management team and which field personnel (who deal directly with campus clients) will remain in the months after the Blackboard and Ellucian transactions close.
But if I step back, what strikes me about the Blackboard and Ellucian sales, as well as other similar M& A transactions that occur both the K-12 and higher education markets, is the distance that increasingly separates owners from campus clients, and in many ways even separates managers from campus clients.
The owners – investment firms – are separated (buffered) from direct contact with campus clients by the management at the firms they acquire. Moreover, as the tenure of executive suite and field personnel declines – as people increasingly move from job to job and company to company – the individual and institutional relationships that are critical to buyers and sellers the higher ed market often suffer.
Let me place this in a broader context: the continuing lament I have heard over the past two decades from higher ed IT officers about their corporate contacts is that people on the corporate side, be they executive suite personnel or the account executives who visit their campus, “don’t stay.” To paraphrase the comments of one campus official: “It takes us 12-18 months to build a relationship with a new person and then, poof, they are gone a year or two later and we have to start all over again.”
Admittedly, higher education is not unique with regard to the distance that increasingly separates owners from clients and the buffering role of management. A quick look at the portfolio of any of the firms involved in the Blackboard and Ellucian transactions reveals that these investment firms (and others) own dozens of companies across several sectors of the economy.
But rightly or wrongly, many campus officials feel that higher education is a “special sector” and consequently seek special treatment (discounts and additional services) from their technology providers. They also often want (demand!) more information from their tech providers than their counterparts in other sectors. And unlike equally complex organizations in the for-profit sector, higher education cannot amortize its errors. Consequently, colleges and universities are often slower to make major decisions because they are (understandably) very risk aversive.
The question of “distance” between owners, management, and clients really centers around the issue of investment firms making short- or long-term investments. Admittedly, some investment firms – for example Warren Buffett’s Berkshire Hathaway – are known for making long-term investments: they “buy and hold.” Following a major investment or acquisition, Buffett generally retains the current management and gives them resources and autonomy to grow. Interestingly, a quick scan of the Berkshire Hathaway portfolio reveals no education companies, and also no tech firms. His close personal friendship with Bill Gates notwithstanding, Buffett has explained the decision to avoid tech investments as a search for operations that are “virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.” That same reasoning may also explain why Buffett has avoided investments in the education market.
But other firms do invest in the education (and ed tech) market, seeking to “do good and do well.” So much as campus clients ask their technology providers to provide a three-to-five year roadmap for products and services, new owners would also do well to offer their education clients a three-to-five year roadmap of their investment plans for the firms they acquire:
- Do they plan to be “long” or “short” on the education and ed tech firms they acquire?
- Are they going to raise prices, and if so, by how much and over what period of time?
- Will they invest in the firms they acquire to improve products and services? and
- What are their plans for the people in the executive suite and those who are “on the ground” who have the most direct contact with campus officers and end-users?
Trust is the coin of the realm in the relationship between colleges and their technology providers. And transparency is a key component of trust. The investment firms that buy higher ed technology providers would do well to be transparent about their long-term plans if they hope to become or remain trusted tech providers to colleges and universities.
Disclosure: Blackboard and Ellucian are corporate sponsors of The Campus Computing Project.
Follow me on Twitter: @DigitalTweed
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