In a move that could strengthen competition in the market for online course management systems, educational publishing giant Pearson PLC said its Pearson Education unit is buying, which sells eLearning systems to K-12 and higher-education institutions, in a deal worth about $538 million.

Under terms of the transaction, eCollege shareholders will receive $22.45 in cash for each share they own–a 28-percent premium over the company’s average closing share price during the previous 90 trading days. In addition, eCollege’s Datamark enrollment marketing division will be sold for $41 million to an investor group led by Oakleigh Thorne, eCollege’s chairman and chief executive. The deal is expected to close in the third quarter of 2007, subject to eCollege shareholder approval.

eCollege, founded in 1996, works with schools to design, build, and support online learning programs. It provides a full range of on-demand software services, including course management, virtual campuses, and assessment, reporting, and retention monitoring tools.

eCollege supports approximately 180 institutions and its customers, including DeVry University, Kaplan University, Laureate, Texas A&M University at Commerce, and Eastern Michigan University. In 2006, student enrollments in its online courses were reported to be about 1.2 million.

Analysts say the deal is expected to boost competition in the eLearning systems market, which has been dominated by Blackboard Inc., especially after Blackboard acquired WebCT in late 2005. At the time of that merger, a survey done by Market Data Retrieval found that Blackboard and WebCT held the top two slots in the learning management systems market for U.S. colleges and universities, with a combined market share of more than 80 percent.

But Blackboard has angered many schools with its aggressive competitive stance, suing smaller rival Desire2Learn for infringement of a patent that many industry watchers contend is overly broad. (See Colleges eye LMS patent fight.) Though Blackboard eased some concerns when it said it wouldn’t use its patent rights to sue open-source course management projects, the ill will caused by the company’s moves has created an opening for the competition, many believe.

And with the resources of Pearson now behind it, eCollege could be the leading candidate to challenge Blackboard’s dominance in the eLearning space, analysts say.

Pearson’s acquisition of eCollege makes the company “a formidable competitor,” Peter Stokes, executive vice president of Eduventures Inc., told Inside Higher Ed. “You now have an 800-pound gorilla at the table,” he added, referring to Pearson.

Pearson is an industry leader in the use of technology to improve learning, with a strong presence in the markets for digital learning materials, student information systems, online testing, test scoring, and homework and formative assessment. Last year, Pearson generated more than $1 billion in sales from these digital learning products and services.

Pearson’s scale and reach will enable eCollege to serve new customers in school, postsecondary education, and professional/vocational markets, both in the U.S. and around the world, Pearson said in a press release. The two companies will reduce costs by eliminating eCollege’s corporate costs and sharing hosting, technical, and support services.

Matthew Schnittman, president of eCollege’s eLearning division, will join Pearson and continue to lead the company. It will operate as a separate unit from Pearson’s other businesses and will retain its offices in Denver.

In response to the deal, Blackboard issued this statement: “While Blackboard and eCollege have different primary audiences, we believe Pearson’s acquisition of eCollege highlights the tremendous growth of eLearning overall, and we see it as a positive indicator for the industry, including Blackboard’s business. Blackboard has strong relationships with all of the publishers and hopes to continue deepening its relationship with Pearson.”