Nonprofit Colleges as Takeover Targets

Investors are buying traditional institutions -- but the hurdles, including "cultural risks," are many.
December 14, 2005

The conversation alone might send shivers down the spine of many a faculty member at traditional colleges. But at a time when the vast majority of attractive for-profit colleges have already been gobbled up by major publicly traded companies, a group of investors, college officials and financial analysts assessed the likelihood Tuesday that more commercial companies would try to buy nonprofit colleges in the coming years.

The answer, at a session of the 2005 Education Industry Finance & Investment Summit, was maybe. At least 10 such purchases occurred in the last year or so, said Neil Lefkowitz, a partner in the corporate and finance group of Dickstein Shapiro Morin & Oshinsky, which played a role in one of those deals, the sale of Salem International University this year. And the strong identities, regional accreditation and availability of many nonprofit colleges may make them attractive targets, he and other panelists said.

But they had caveats aplenty, including the likelihood of tough scrutiny from accreditors and state regulators, tax implications, and what was repeatedly and rather euphemistically referred to as "perception issues" and "cultural risks" -- generally meaning opposition from faculty members, alumni and others worried that a profit motive will significantly alter and, they fear, damage the nature of the institution.

Critics point to institutions like Grand Canyon University, which has had seen significant job cutbacks and turmoil, and Post University, which said last month that it would eliminate its liberal arts majors a year after going for-profit, as cautionary tales.

It was taken more or less for granted by the group that if they had their druthers, anyone looking to invest money in higher education would choose to do so in a for-profit college. But the “actual population of good sized for-profit schools that are not already public is quite small,” said James A. Rowan, managing director of Stifel Nicolaus, an investment and research firm. 

As the financial markets have rebounded and investors are looking for opportunities to put their money to work, it’s almost inevitable that they’d turn their eyes to nonprofit colleges. W. Britton Trukenbrod, a principal at William Blair & Co. --  which was involved in DePaul University’s sale of Barat College to American College of Education, a for-profit company -- said some nonprofit colleges would be attractive investments because they are well-established names in their communities, and they already have the regional accreditation that many for-profit colleges covet. He said there were about 125 nonprofit providers of career education that could be inviting for investors.

But the downsides can be significant, said Craig Pfannenstiehl, co-founder of Educor Capital Partners and president of Educor, Inc., which transformed the nonprofit Bay State College into Bay State College, Inc.

First, as a general rule, he said, nonprofits will consider being sold to a for-profit investor only as a last resort, typically when they are in “some sort of distress” because they’ve been losers rather than survivors in the  increasingly competitive economic environment gripping higher education. “You’re not going to see Harvard or a well-endowed not-for-profit look at this option,” said Pfannenstiehl. (Michael B. Goldstein, Dow Lohnes, said that one twist on this truism can occur when a nonprofit institution has created “something they see as having value,” like a distance education program or other profitable enterprise, and consider selling it to a for-profit investor because they are “short on capital to build something that is already making money.”)

Pfannenstiehl and others ticked off a list of other reasons why investors might shun nonprofit colleges: a tendency to be more hidebound and less willing to consider “innovative” solutions to problems; overinvestment in real estate, which for-profit investors prefer to avoid; and the significant regulatory scrutiny that are likely to ensue from aggressive state attorneys general and accrediting agencies, among others.
None, though, was seen as more of an impediment than the backlash that can result from faculty members, alumni and/or students to what Trukenbrod called the “perception” that introducing a profit motive will inevitably result in the college betraying its educational mission. The opposition can be especially strong at institutions that have faculty unions, the panelists said.

Several participants in the discussion discouraged an overly simplistic view of a profit-minded company swooping in and buying a struggling, old-fashioned nonprofit college. Bruce McClintock said that his firm, McClintock & Associates, worked with several nonprofit colleges that “act like for-profits” and “just happen to be structured as nonprofits.”

And Deirdre Brekke, general counsel of the Cardean Learning Group, suggested more of a “grow your own” approach to nonprofit/for-profit collaboration. She described her company’s partnership with the nonprofit New York Institute of Technology in Ellis College, a distance learning enterprise that is now a branch of NYIT but is expected, under an agreement between the two, to become a freestanding campus owned by Cardean.


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