The massive debts and outrageous accounting scandals that have sent shares plummeting and clouded the future of industry giants such as WorldCom and Vivendi Universal have made one thing clear: Schools are as vulnerable to the missteps and misfortunes of big businesses as are shareholders and other consumers.
Like other markets, the education industry has experienced a record number of mergers and acquisitions since last year. But as the recent troubles of Vivendi and WorldCom illustrate, corporate consolidation can compound the sting when things go wrong.
In early July, French company Vivendi Universal became the latest corporate titan to make headlines when a French newspaper reported that Vivendi sought unsuccessfully to inflate its 2001 accounts by $1.47 billion. Vivendi’s chairman, Jean-Marie Messier, resigned July 2 in the wake of the scandal and with the company facing a mountain of debt.
Reportedly the world’s second-largest entertainment conglomerate (behind AOL Time Warner Inc.), Vivendi’s holdings include Universal Studios and Universal Records. The company also owns educational software companies Sunburst Technology and Knowledge Adventure, as well as textbook publisher Houghton-Mifflin Co.
Messier had orchestrated a string of costly acquisitions aimed at transforming Vivendi, which had it roots in water and waste treatment, into a multimedia entertainment behemoth. In doing so, however, he accumulated the biggest debt load in French corporate history, ultimately causing investors to flee and Vivendi shares to tumble 75 percent this year. The company’s troubles leave its fateand those of its school customersin limbo.
According to a report released in June by Eduventures Inc., an independent research firm focused on the education industry, there were 114 publicly announced, education-related mergers during 2001, up from less than 30 the year before.
This year, the trend continues. Scantron Corp., a provider of testing solutions for schools, on July 9 announced plans to acquire EdVision Corp., a maker of web-based curriculum development and assessment tools, for $29 million.
In May, the Concord Consortium’s nonprofit subsidiary EdTech Exchange Inc. acquired HighWired, a company that provides free web communication tools to thousands of schools and teachers. Also in May, PLATO Learning, which makes comprehensive courseware for schools, acquired NetSchools Corp., which sells one-to-one eLearning solutions for education.
Although these mergers are relatively small in scale, three corporations in particularVivendi, Pearson plc, and Riverdeep plchave significantly increased their dominance in the education market by acquiring numerous education companies in the last few years (see chart, opposite page).
International media and publishing company Pearson plc, with revenues of more than $6 billion last year, includes Penguin Books, the Financial Times of London, and Pearson Education. Among Pearson Education’s assets are Electronic Education (publisher of Waterford reading and math software), NCS Pearson, NCS Learn, Prentice Hall School, and Scott Foresman. NCS Learn was formed last year from Pearson holdings NovaNET and Computer Curriculum Corp.
Riverdeep plc, with world headquarters in Dublin, Ireland, has acquired several ed-tech companies since 2000, including Edmark Corp., EDVantage Software, SmartStuff Software, Teacher Universe, and The Learning Company. Riverdeep’s total revenues were nearly $52 million last year.
These mega-corporations aim to operate more efficiently than a series of smaller companies, because they can consolidate redundant tasks such as human resources and marketing. They also have deeper pockets, meaning they have more capital to spend on research and development to create new or better products.
But consolidation traditionally leads to less diversity and choice in the marketplace. And, as the recent problems at Vivendi and WorldCom show, having fewer companies means there is greater impact when one of the giants struggles or falls.
Mergers can be quite complicated and expensive to execute smoothly, said Peter Grunwald, president of Grunwald Associates, an educational technology research and consulting firm. Often, cost-cutting occurs in the short term to help the company survive the consolidation process, he said.
“In the near term, [consolidation] may mean less product development and fewer resources put into marketing and customer support,” Grunwald said. “A lot of times, the cost savings [these companies] think are going to happen don’t happen.”
Ultimately, the relationship the company has with its customer is damaged, Grunwald saidbut if the company divests and separates into smaller companies, it can benefit customers.
“Smaller companies are closer to the customer and more focused on their core competencies,” he said.
Complicating matters is growing doubt over the reliability of corporate financial statements and questions of honesty on the part of CEOs.
“Many high-profile mergers in recent years have failed to deliver the promised benefits,” Frederick W. Green, president of The Merger Fund, recently wrote to shareholders. “Not only must senior managers convince themselves that a deal makes sense, but they also must be able to sell the transaction to Wall Street, which is no longer willing to give would-be acquirers a free pass.”
Green cites the Hewlett-Packard purchase of Compaq Computer Corp. earlier this year, which was sold to investors based on its long-term benefits but was opposed because of its near-term effects on the company’s earnings and the distractions of integrating two companies.
“CEOs are under increasing pressure from all sides to get it right when they undertake a significant merger or acquisition, and the crisis of confidence that pervades many executive suites has not been good for our business,” Green wrote.
In reference to Vivendi, Grunwald said some observers think that when a company’s leader is trying to execute his vision and then overnight he is no longer in charge, the company’s fate seems uncertain. This fear is especially heightened if the company is overextended financially, he added.
Analysts said French banks likely will bail out Vivendi on condition that the company sells off some of its assets. Indeed, this has already started to happen, as Vivendi received an initial loan of $990 million July 9.
“They’re giving liquidity for the short term because they can see Vivendi has a good cash flow,” said Jose-Luis de Moran of Merrill Lynch.
Meanwhile, France’s culture minister, Jean-Jacques Aillagon, said he wrote to new Vivendi chairman Jean-Rene Fourtou to express his concerns about Vivendi’s role as a protector of French culture.
“This ministry cannot remain indifferent toward the company’s situation and the risks that would exist from its breakup,” he told reporters.
School leaders, increasingly dependent on solid performance from the private sector, are finding that indifference to corporate turmoil isn’t feasible for education either.