Editor’s note: This is the first in a two-part series about the University of Arkansas board’s vote against affiliating with the University of Phoenix and what it means for Idaho.
On May 18, with just 24 hours’ notice to the public and 90 minutes of a public meeting, Idaho board members unanimously agreed to create a nonprofit organization to purchase the University of Phoenix for $550 million.
That decision came less than a month after University of Arkansas system board members voted, 5-4, against a similar deal.
Even though board members there voted against the deal, after watching recordings of the University of Arkansas board’s three hours of deliberations, I had much more confidence in Idaho’s decision to affiliate with the University of Phoenix.
Here’s what I heard at the University of Arkansas’ meetings — that I didn’t hear in the Idaho State Board of Education’s meeting — that gives me more confidence that maybe Arkansas’ loss is Idaho’s gain:
Due diligence. Multiple teams of lawyers and financial analysts in Arkansas studied the University of Phoenix for two years. They looked at more than 5,000 documents, analyzed monthly financial statements, had an audit done by Deloitte, had multiple projected earnings reports done internally and by PriceWaterhouseCoopers, and were able to analyze financial projections in real time over two years, during which they saw consistent financial performance.
Avoiding others’ mistakes. They learned the lessons of other similar deals: Purdue University and Kaplan; University of Arizona and Ashford; and University of Massachusetts and Brandman. All were land grant universities that purchased private online universities. The Arkansas deal, like the Idaho deal, is structured differently to avoid the problems of those other deals.
Further, the University of Arkansas has already done this successfully, albeit on a smaller scale, purchasing the private, for-profit online Grantham University in 2021.
Reputational risks. The Arkansas folks did a much more thorough job of addressing the reputational risks associated with the University of Phoenix, noting that a new management team was put in place in 2016, after the university engaged in business practices that got them a Federal Trade Commission fine. They right-sized the business and cleaned up its act. They noted that the University of Phoenix has 45 years of unblemished accreditation from the Higher Learning Commission.
Donald Bobbitt, University of Arkansas president, read a letter from 17 University of Phoenix alumni, who wrote about what a great education they received and how it helped their careers.
Liability risks. Because the University of Phoenix would fall under the new nonprofit, the University of Arkansas system, like Idaho, would assume no corporate liability, according to Julie Miceli, a higher education lawyer and managing partner at Husch Blackwell, the Chicago law firm hired to work on the deal.
She said her firm analyzed several areas of legal liabilities, including, among others: “corporate governance, litigation, investigations, material contracts, state and federal regulatory compliance, including with respect to the U.S. Department of Education, accreditation, COVID relief benefits, intellectual property, information technology, labor, employment and benefits, real property, environmental issues and other property assets.”
“This review was not just a snapshot,” she said. “It has been ongoing for the last two years.”
Strong financials. University of Phoenix has high cash flow, with annual revenue of $800 million and operating profit of $145 million, or earnings before interest, taxes, depreciation and amortization, according to Marshall McKissack, head of mergers and acquisitions at Stephens, an investment banking consulting firm. Like Idaho’s deal, Arkansas’ deal included leaving $200 million in cash on the balance sheet. The purchase price of $535 million in Arkansas represented 3.8 times operating profit. With $200 million in cash left on the balance sheet, that’s less than 3 times the operating profit.
“That’s an extremely attractive valuation when other companies either currently trade for five, six, seven times (operating profit),” McKissack told board members.
Enrollment cliff. Traditional higher education is headed for an enrollment cliff starting in 2025 because of declining numbers of people in the college age group. Arkansas is anticipating as much as a 15% drop in enrollment, hitting smaller, regional campuses hardest. Tapping into the online, adult learner population would help to offset that loss.
Financial future. University of Arkansas vice president for academic affairs Michael Moore made one other interesting point: The affiliation with the University of Phoenix would help increase revenue without raising tuition.
That was a point emphasized by Arkansas board member Ted Dickey, an investment portfolio manager, a general partner of a real estate fund, and an adviser to Innovate Arkansas, a technology entrepreneurship initiative. Dickey, who voted in favor of the deal, previously spent six years in corporate finance at Stephens Inc., the company evaluating the University of Phoenix deal.
“Raising tuition every year is an unsustainable, broke model,” Dickey said. “And that’s what we continue to do. That’s our knee-jerk reaction.... So we have an opportunity here to innovate away from public funding, an ability to appeal to a broader audience to free up resources to become a highly regarded research institution, while reducing or at least reducing the growth of tuition. We’ll set ourselves apart.”
Though it’s not quite apples to apples, Dickey likened the deal to when Blockbuster turned down the opportunity to purchase Netflix for $50 million.
Board member Ed Fryar said “this is a FedEx moment,” referring to FedEx’s decision 50 years ago to leave Arkansas and move to Memphis because Little Rock would not extend its airport runway to accommodate FedEx.
“How different would the Little Rock economy look today if FedEx headquarters and all of those jobs are still in Little Rock?” Fryar said. “To me, this is a FedEx moment.”
Matt Waller, former University of Arkansas dean of the business school, highlighted several key strengths of the University of Phoenix, including a long, proven track record of developing online and mixed-delivery courses quickly and cost-effectively, an ability to build courses based on data they collect of in-demand job skills and an established relationship with 1,600 corporate partners.
Waller also noted that University of Phoenix instructors have an average of 14 years’ teaching experience and 27.6 years of professional experience.
University of Phoenix debate
But most importantly, here’s what I heard in Arkansas that I didn’t hear in Idaho: debate.
University of Arkansas board members met for two-and-a-half hours for the first time on April 19 and tabled their decision so they could look over documents and spend more time thinking before making a decision. They met five days later for another half-hour of debate before voting.
Over the two meetings, Arkansas board members heard extensive testimony from local, regional and national experts. They asked lots of questions. They shared their thoughts, their reservations. They weighed the benefits. They talked among themselves. They disagreed. They agonized. They debated before coming to their decision.
Idaho board members, meanwhile, met for only an hour-and-a-half in public, most of which was a rapid-fire, cursory slide presentation, and asked very few questions. When they did ask questions, some didn’t get answered. They didn’t debate. They didn’t even address the reasons and serious reservations that University of Arkansas board members had just a month earlier.
Maybe they asked some questions and debated in their three previous closed-door sessions, but that’s not how open government is supposed to work.
It’s understandable that there would be doubts about Idaho’s decision, which came only 24 hours after a press release went out to the public announcing that the board would be making a $685 million decision.
I wish the Idaho State Board of Education members had as robust and open discussion as Arkansas’ board members.
I certainly would have felt much better about their decision.
So why did University of Arkansas board members vote against the deal? And how does Idaho’s deal differ to avoid those objections? I’ll highlight those differences in the second part of this series.