Blog Archives - PhilOnEdTech

The Remarkable Turnaround in Instructure’s Position on Future Growth

The Instructure sales process ¹Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. has devolved into a public battle between Instructure and Praesidium, a large Instructure investor. As described in early January, Bloomberg reports that up to a third of Instructure investors are against the Thoma Bravo acquisition at $47.60 per share, and this is apparently significant enough that Instructure has come out with new message that essentially says they’re in trouble if the sale doesn’t go through.

Fighting Back

On January 13th, the lead independent director of Instructure, Lloyd “Buzz” Waterhouse, wrote a public letter directly attacking “dissenting investors” and specifically calling out Praesidium as “an activist investor” [emphasis in original].

However, we believe a certain activist investor is attempting to deprive all Instructure stockholders of the opportunity to realize this substantial return by deliberately perpetuating a false and misleading narrative about the Board’s deliberations, intentions and strategic transactions process, despite having publicly pushed for a sale process. The Board urges our stockholders to reject the opportunistic tactics being employed by this investor to derail the Thoma Bravo transaction by voting your shares in favor of the $47.60 per share Thoma Bravo merger proposal at the February 13, 2020 Special Meeting of Instructure stockholders.

I was surprised with this tactic, as it risks alienating those investors who agree with Praesidium’s argument but do so based on their own research. The letter is worth reading in full.

Today Instructure released an investor presentation that argues the same point but with lots of graphics.

The presentation even goes so far as attempting to refute Praesidium claims, point by point. See slides 16 – 18 to see the arguments and counter-arguments.

Shareholder Value

There was one other quote in the letter that surprised me with its direct and off-putting tone.

The Board of Directors has one priority: maximizing value for our stockholders.

I get the point that Waterhouse is arguing to other shareholders that the board has their back, but what about the message to Instructure clients? This trend of Instructure harming its brand by its consistent focus on monetization and shareholder value is concerning, despite some the recent blog post by the CEO.

A Reversal of Arguments

The second big point being emphasized in both of these public releases is that Instructure has reversed their narrative on the company’s growth prospects. On October 29th, I wrote about Instructure’s public counterargument to the LMS market slowdown described independently by us and by Raymond James analyst Brian Peterson. CEO Dan Goldsmith started the Q3 earnings call with this statement [emphasis added]:

Now I would like to share details on how key areas of our business are performing. Domestic Canvas is progressing nicely, on track to deliver results in line with our outlook for the year. So while some analysts have been reporting a sharp slowdown in Higher ED LMS switches we are not seeing that trend in our domestic Canvas bookings. In fact our high ED domestic bookings are on track to be up this year over last year.

Reading that paragraph above, the overall sentiment is that the Canvas business is strong and growing. “we are not seeing that trend in our domestic Canvas bookings”

Now, Instructure is arguing what appears to me as the opposite case, that Instructure’s growth is rapidly declining and they face some real challenges if the Thoma Bravo sale does not go through.

From the Waterhouse letter:

There is significant ongoing risk to Instructure’s core business and its long term prospects, and the price offered by Thoma Bravo exceeds what our Board, in consultation with its financial advisors, believes can be achieved on a stand-alone basis at this time.

The investor presentation today goes even further with this argument, describing “serious headwinds” should Instructure remain a publicly-traded independent company.

Slides 6 – 10 of the presentation flush out this argument even further. I do have a real disagreement with Instructure’s claim that “we had been warning the market” about the slowdown. It is true that the company’s guidance for future years included slower growth, and that the annual report quoted in the slide mentioned a slowdown, but their narrative and statements described a strong and growing Canvas business without “serious headwinds”.

The LMS Market Slowdown is Real

The obvious goal of the new Instructure argument is to influence investors to fear the alternative to the Thoma Bravo acquisition, and to get them to vote on Feb 13th to close the deal. Michael Feldstein wrote about an alternative possibility (based on long-term market potential and not based on share price) here – it’s worth a read, including the comment thread.

However, it is good to have Instructure acknowledge what we have been writing about. The growth of their education business, which is predominantly built on the Canvas LMS, is slowing. And this “rapid deceleration” is largely based on the LMS Market Slowdown. The data below is an update from the MindWires LMS Market Analysis service with our partners at LISTedTECH.

The Future is Coming Fast

There is obviously some real concern at Instructure that the shareholder vote to accept the Thoma Bravo acquisition is not a done deal. Feb 13th, 2020 will be a big event to watch, although I have no real insight beyond reading the Bloomberg article on which way the vote will go.

Beyond the shareholder vote and whether or not Bravo buys Instructure, this news will likely impact the LMS market in other ways that are more important to schools. I will admit to having too much of a recent focus on corporate finances, and in the next LMS post I’ll describe how much of the recent news is pointing to a new era for the LMS market, with new dynamics.

Update 22 Jan 2020: Changed description of Praesidium from “activist private equity investment firm” to “large Instructure investor. While Instructure calls them an activist investor, the company self-describes as “a value-oriented investment firm that applies a private equity approach to investing in the public markets”. The private equity label was a mistake on my part.

Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.

Purdue University Answers Questions on Purdue-Kaplan OPM Contract

On Monday I shared a post “Purdue University’s System-wide OPM Contract With Kaplan Higher Ed“ that was based on a public records request. In the post, I described a list of questions I had for Purdue University. Similar to the handling of the post on Purdue Global’s financial losses from the first year of operations, the university spokesperson provided welcome answers to the questions.

I am going to share Purdue’s response in full and then provide some initial thoughts below.

Purdue University Response

In this section, the original questions are in blue italics, and Purdue’s commentary is in quotation below each quote.

“The Kaplan agreement (the one for OPM services outside of PG) is significant. Can you describe how Kaplan was selected as your institution-wide partner? In other words, was there a competitive process, or was this tied to PG contract, or some other decision process?”

Kaplan Higher Education (KHE) was selected as a provider of basic services because it made sense to do business with a partner with whom we had a long-term relationship (via PG) and who had a shared interest in cultivating online offerings that would cater to different needs in a cohesive and logical fashion. One of the key reasons for acquiring Kaplan University in the first place was to obtain rapid and ready access to online support expertise, as opposed to trying to build it in-house. Since KHE has that expertise, they were a logical choice to turn to for similar functions on Purdue Online’s behalf.
Even still, the agreement with KHE is not exclusive. KHE currently serves five non-PG online offerings for Purdue, but there are a greater number that are not being served by KHE, including legacy programs with other OPMs, programs that Purdue self-services or directly sells to a customer for workforce development, and small niche programs.

“Which university groups have been briefed on the agreement and its implications?”

All colleges are aware of the options available to them as they develop and grow online programs.

“I was surprised that the entire section on distribution waterfall was redacted. Can you describe how the mechanics are different than PG waterfall (don’t need specific numbers like rates or rev share percentages)?”

The terms were developed through separate negotiations, but in general, the waterfall operates in a similar fashion: program revenue is distributed first to cover all program costs incurred by Purdue and KHE before any fee to KHE is paid. KHE is only paid a fee if all program costs of Purdue and KHE have been covered and if cash remains to pay KHE’s fee. Any residual revenue after that accrues to Purdue. To the extent there are differences between the two agreements, they likely stem from the fact that online programs being developed by Purdue are more in their infancy stage and the potential benefits of an OPM to a new program are different than those of an established program.

“How many programs outside of PG are using Kaplan for OPM services now that the contract is a year old?”

Five with a few more in the works.

My Commentary

Like the response on Purdue Global finances, this response from Purdue is quite helpful in filling in gaps in the public record. Given the increasing importance of the OPM market, and given the importance of institution-wide online strategy, it is important that other schools (and even for-profit companies) understand what is happening with this high-profile initiative, and to understand it accurately. I will share additional thoughts on this contract and what it means for Purdue and for the OPM market in a future post. Below I will just add some initial thoughts on the specific answers provided.

The Purdue response on how Kaplan was selected as an OPM provider addressed why Purdue perceived the need for an outside provider vs. using in-house resources, and they mentioned the explicit connection with the Purdue Global agreement. But what this situation means is that no, there was not a competitive evaluation for an institution-wide OPM partner with 30-year contract term and “limited exclusive” status. That is remarkable to me – making this big of a decision without any market evaluation or competition involved.

Purdue’s response mentions online programs not using Kaplan, but that somewhat misses the point. The contract listed named pre-existing exceptions to the agreement. Purdue has chosen to redact the information on the mechanics of how programs may end up using or not using Kaplan (section 4.1.1), but this is not a case where each program (or department, or college) can just pick who they want with no strings attached. This is an institution-wide strategy and approach with a “limited exclusive” partner.

Purdue’s response also seems to confirm that the contract decision was made by a small group of people without broad campus involvement or even information-sharing before decisions were made. What I believe the answer “All colleges are aware of the options available to them as they develop and grow online programs” implies is that this fait accompli has been communicated to individual college leadership (deans and staff) for decisions moving forward. Essentially a notification rather than a discussion.

The Purdue response on the financial structure is useful and confirms the hybrid approach. First, pay direct costs from Purdue as well as fee-for-service due to Kaplan. Second, look at net revenue to determine if Kaplan also received a revenue-sharing percentage (what I believe is meant by “the fee”). Third, accrue residual revenue to Purdue. Much of the discussion on the OPM market refers to a false binary between revenue-sharing and fee-for-service without recognizing the significant trend of hybrid revenue structures such as used in the Kaplan contract.

Time permitting, I’ll add some overall thoughts in a future post. For now, I’d like to thank Purdue University again for answering questions on this important topic.

Purdue University’s System-wide OPM Contract With Kaplan Higher Ed

Author Phil Hill, Blog January 13, 2020/3 Comments/by Phil Hill

Purdue University made its big announcement in Spring 2017 about the agreement to acquire Kaplan University and turn it into what is now known as Purdue University Global. Purdue further made news one year ago by announcing a centralized office to coordinate all online activities of the system – Purdue Online. What has not been made public is that Purdue also signed a Master Services Agreement one year ago with Kaplan Higher Education (KHE) to make it effectively a system-wide Online Program Management (OPM) vendor for online programs across all four campuses.

Historically OPM partnerships were program-specific, made with little oversight in a period that has been called “deans gone wild”. As online opportunities expanded and the OPM market grew, there were cases of multiple OPM contracts within the same institution, either a mix of OPM providers, multiple programs using the same OPM provider, or a mix. This trend towards centralization, or coordination, is now leading to institution-wide OPM contracts. This Purdue – Kaplan agreement represents perhaps the most significant case, while 2U’s recent agreement with the University of North Carolina represents another. Thanks to a public records request, we can get a much better understanding of this new OPM model.

Continuation of a Vision

While this institution-wide OPM contract has not been made public before today, there have been hints that this move might happen, including Purdue president Mitch Daniels’ presentation of the Purdue Global case to state officials in 2017.

The deal, Daniels contends, puts Purdue in line to get access to Kaplan’s online infrastructure, allowing the university to leapfrog its virtual campus efforts much more quickly than if it had tried to develop one on its own.

If we jump forward to December 2018, Purdue officials received approval from the Purdue Board of Trustees to establish Purdue Online as a new organization. As described by Inside Higher Ed a year ago:

“It’s a shift from a college-level strategy to a Purdue-level strategy,” said Frank Dooley, Purdue’s senior vice provost for teaching and learning. “We’ve kind of been drinking from a fire hose in the last year.”
Purdue’s vision for its online programs, according to administrators, preserves distinctions between traditional Purdue and its former for-profit extension while taking advantage of overlapping goals and complementary offerings. Online education observers will be tracking Purdue as a potential new collaborative model settles in. And Purdue’s faculty — portions of which bristled at Purdue’s handling of the Kaplan acquisition — will be watching closely and warily.

Not mentioned with the announcement of Purdue Online, however, was that the university signed a Master Services Agreement – dated January 1, 2019 – with Kaplan Higher Education. This contract gives Kaplan essentially the right of first refusal to be the OPM partner for online programs across the system.

The Services

The services to be provided are separated into basic and enhanced (pp 2-3), where basic is the minimum set of services to be provided and enhanced are optional services.

2.1.1 Basic Services. In general, at a minimum, KHE shall provide the services set forth on Exhibit A uniformly to each Purdue online Program that is the subject of a SOW hereunder (the “Basic Services”).
2.1.2 Enhanced Services. In addition, for a given Program covered by a SOW, KHE may also provide: (a) any of the additional services set forth on Exhibit B hereto that are selected by Purdue and the relevant Purdue Unit, to apply to that Program, by mutual agreement, and (b) any other support services not specifically described on Exhibit B that the Parties may mutually agree to include with respect to that Program (collectively, the “Enhanced Services”).
The Basic Services and the Enhanced Services are referred to herein collectively as the “KHE Managed Services”.

Exhibits A shows the basic services that include program and portfolio strategy, student recruitment, and reporting and analytics.

Exhibit B shows the enhanced services that can include, well, almost anything to be done in an online program. Including teaching and delivery. Everything except application decision and admissions policy.

Kaplan is now the limited exclusive provider of program services for Purdue’s online initiatives (p 5):

During the Term of this Agreement, KHE shall be the “limited exclusive provider” of Basic Services for all new online Programs developed and launched by Purdue Units during the Term, other than with respect to Program Exceptions.

This contract has reversed the dynamic of an OPM being selected for a program. KHE is now the provider for all online programs unless they are listed as an exception in the contract, or in the case that Purdue and Kaplan mutually agree to not work together on a program.

Exclusivity and Non-Competition

In section 6.2.1 on p 6, the contract specifies that for any new statement of work (SOW) governing a specific online program, Purdue may not use another vendor for similar services.

. . . KHE shall be deemed, in addition to its status described in Section 6.1, the “exclusive and sole provider” of the KHE Managed Services described in the SOW with respect to that Program, such that Purdue shall not enter into any agreement or arrangement with a third party to provide services similar to those covered by such SOW for the purpose of supporting the same Program offered by the same Purdue Unit via an alternative online channel or platform, unless KHE has elected to waive exclusivity in writing in such SOW.

Furthermore, Purdue has agreed to not allow programs to compete with each other (section 6.2.2 on p 6).

6.2.2 Additionally, once a SOW is entered into hereunder and remains in effect for a given Program, Purdue shall not do either of the following, unless, in either case, KHE has elected to waive the relevant restriction in writing in such SOW:
6.2.2.1 Enter into any agreement or arrangement with a third party to provide services similar to those covered by such SOW for a Purdue Unit’s proposed offering of an online program that is the same as or Substantially Similar to the Program covered by such SOW, or
6.2.2.2 Directly undertake the development, launch or promotion of any online program that is the same as or Substantially Similar to the Program covered by such SOW.
For purposes of this Agreement, Program(s) are considered “Substantially Similar” if they (i) compete for the same student population, (ii) result in the same credential level or degree (e.g., AS, BS, MS, PhD or other), and (iii) have the same six digits of their CIP Codes (as defined in Exhibit D).

Redactions

What is almost as interesting as what the contract says is what Purdue University chose to redact as part of the public records request.

One example is section 4.1.1 (p. 4), which describes Purdue’s obligations on which programs that Kaplan has the exclusive right to bid upon and the mechanics of how this limited exclusive provider works out in practice. I am not sure how this is considered a trade secret or confidential information.

Another example of redactions is the mechanics of payments. It is perhaps not surprising, however, that Purdue chose to redact the entirety of Exhibit F, which describes the “distribution waterfall” of how Kaplan gets paid. In the case of Purdue Global, the waterfall is mix of fee-for-service and revenue sharing provisions, with defined priorities of which party gets paid first, second, etc based on program revenue. None of this information was shared in the response to the public records request. I could see redacting specific revenue sharing percentages, but the basics of the distribution waterfall should be a public Purdue issue, not a proprietary Kaplan issue.

Net Effect

The net effect is that Kaplan has an institution-wide OPM contract for almost all of the system’s online offerings moving forward, with Kaplan provided exclusivity and non-competition status. I do not believe that any of this information has been competitively bid or shared with the university community, and it certainly has not been described publicly.

I have requests out to both Purdue University official channels and with several faculty member on the following. When I get answers from Purdue I will share an update.

The Kaplan agreement (the one for OPM services outside of PG) is significant. Can you describe how Kaplan was selected as your institution-wide partner? In other words, was there a competitive process, or was this tied to PG contract, or some other decision process?
Which university groups have been briefed on the agreement and its implications?
I was surprised that the entire section on distribution waterfall was redacted. Can you describe how the mechanics are different than PG waterfall (don’t need specific numbers like rates or rev share percentages)?
How many programs outside of PG are using Kaplan for OPM services now that the contract is a year old?

The Master Services Agreement

I have further thoughts on this agreement, what it means for Purdue, and what it means for the OPM market. But I will leave this commentary for a future post while waiting to see if I can get answers on some of the questions above.

I appreciate Purdue University’s timely response to the public records request. You can download the MSA here or view below.

REDACTED-TS-PURDUE-KHE-MSA-2019-Signed-Copy-2-5-19_Redacted-1

Instructure Sale Update: No bids received, a third of investor shares now against sale

Author Phil Hill, Blog January 9, 2020/3 Comments/by Phil Hill

At midnight last night the Instructure ¹Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. “go-shop” period, where the company could solicit and accept a superior bid to Thoma Bravo’s bid, ended with no new bids and a revised proxy statement. At the same time, there is much more investor protest against the sale, both from named investors and anonymous ones. A third of investors appear to be against the sale.

Revised Proxy Statement

As part of the process, Instructure has revised the proxy statement that is used to inform shareholders of relevant details leading up to the vote. They have also filed details about the end of the go-shop period.

To date, no party has submitted an alternative proposal to acquire Instructure.
At the direction of Instructure’s Board of Directors, representatives of J.P. Morgan, Instructure’s financial advisor, broadly solicited and contacted third parties that Instructure and J.P. Morgan believed might be interested in a possible alternative transaction, approaching a total of 24 potential buyers during the go-shop period to determine their interest in exploring a potential transaction with Instructure, including 9 parties with whom Instructure had discussed a potential strategic transaction prior to the execution of the merger agreement. Instructure and its financial advisor engaged with a total of 55 parties regarding a possible transaction.

The revised proxy also describes details on the shareholders’ vote:

The vote is scheduled for February 13, 2020.
The Directors and Executive Officers control approximately 10.1% of outstanding share and have already indicated they will all vote FOR the merger agreement (technical nature of the acquisition) and FOR the executive compensation plan.
The vote for the merger agreement is binding – they must get a majority of shareholder votes to complete the acquisition, but the vote for the executive compensation plan is non-binding (advisory).

More Investors Come Out Against Sale

At the same time, a fourth large investor (this one with a 1.5% share) has come out against the sale. As described by Bloomberg:

Thoma Bravo’s agreement last month to buy Instructure for $47.60 per share sharply undervalues the company, Lateef Investment Management said in a letter to the board. Instructure is worth at least $60 per share — and that’s before factoring in the value of deductions it can make to lower its taxable income, Lateef said in the letter, a copy of which was obtained by Bloomberg. [snip]
“Goldsmith staying on as CEO seems like a conflict of interest where he’s putting his own interests ahead of shareholders,” Tran said. “We don’t think Dan has done a good job with Bridge and this deal rewards him rather than hold him accountable.” Bridge is Instructure’s employee development software division.

It looks like the protest goes beyond even the big four, again according to Bloomberg:

At least four stockholders — Praesidium Investment Management, Rivulet Capital, Lateef Investment Management and Oberndorf Enterprises — have written letters to the board expressing concerns about the sales process and possible conflicts of interest in the deal. Several other investors expressed their dissatisfaction with the deal to Bloomberg on the condition of remaining anonymous because their corporate policies prevent them from discussing their views with the media.

“The number of large, long-term, diligent shareholders which have expressed opposition to the proposed merger speaks for itself,” said Oberndorf Chairman William Oberndorf, whose firm owns a 3.8% stake in Instructure. “The management and the board have lost the trust of shareholders and now face the prospect of a failed shareholder vote.”

This is just the second time in his 40-year investing career that he has written a letter to express concerns about a management team or board for what he said was a failure of their fiduciary duties.

Additional Details

If approved by shareholders, the deal is expected to close before the end of March, 2020, allowing for final regulatory approval (anti-trust, primarily) and filing of final legal paperwork.

The big differences in this new no-shop phase are that Instructure may not actively solicit new bids and that the termination fee, should Instructure walk away from the Bravo agreement, rises from $29 million to $63 million.

The deal is not dependent on securing financing. This doesn’t mean that Thoma Bravo will not get debt financing for Instructure, but it does mean that their bid is secured with cash funds.

This one is still worth watching.

For more details on the information disclosed in the proxy statement, see the posts “Insights From Instructure Preliminary Proxy Statement” and “Instructure Sale: Two large investors against deal and claiming conflicts of interest (update – Three)“.

Postscript on Purdue University Global Post

Author Phil Hill, Blog January 7, 2020/1 Comment/by Phil Hill

After my Sunday post “Purdue University Global Loses $43 million in First Full Year Since Kaplan Transfer“, a spokesperson from Purdue University contacted me and provided commentary on several points made in the post. I welcome this clarification, especially as it helps explain the $90 million line item on non operating revenue and whether that is relevant to long-term Purdue Global financial viability. In short, that revenue is relevant, and therefore it is best to interpret the loss last year as $43 million and not $133 million.

I am going to share Purdue’s response in full and then provide my thoughts below.

Purdue University Response

In this section, quotes from my original post are in blue italics, and Purdue’s commentary is in quotation below each quote.

“Strictly speaking, the $43 million number is most relevant for this year, but this amount obscures the effect of one-time or short-term payments from Kaplan that were part of the initial agreement. In other words, the operating losses matter from a long-term viability perspective.”

This is false. Payments from Kaplan have no impact on the profit and loss and even if they did, they occurred last fiscal year not this one.
Additionally, “operating losses” are constrained by some accounting rules and they are only one part of Purdue Global’s financial picture. Due to accounting rules, virtually every university in the country reports an “operating loss” and so the reported number is an insufficient and misleading measure of “long-term viability.”
However, you do raise an important question regarding what was in the $43 million number? That included a deliberate one-time, $28.5 million marketing investment as we launched a new university brand. It also included $9 million in accrued but unpaid KHE fee that won’t need to be paid until the cash flow is positive. Only $5.5 million was a loss from operations.

“What is not entirely clear is the breakdown of $90 million in Non-Operating Revenues. Purdue University Global is a public institution, but it does not receive state funding. I believe this revenue includes $30 million in transfers from Kaplan’s parent company, Graham Holdings, that was defined as part of the initial 2017 agreement.”

This is false. The $90m is tuition and fee revenue from Pell grants plus a small amount of investment income and gift revenue. It’s only classified as non-operating due to accounting rules. It’s clearly revenue from student enrollments, not transfers from Kaplan.

“The Purdue – Kaplan deal was never popular among Purdue University faculty and last spring there was an interesting debate in a local paper between three faculty members …”

This is an overgeneralization, especially following our work on campus to dispel myths and to explain the opportunity. There will always be some vocal critics, but the University Senate is in a much different place than it was a few years ago in regard to Purdue Global. Over the last year, the Senate declined to take up a resolution critical of Purdue Global. A special ad hoc committee established by University Senate to study a variety of issues related to Purdue Global has effectively disbanded after concluding that any concerns had been addressed. In addition, faculty from at least four Purdue West Lafayette colleges are now engaged with Purdue Global to offer new educational offerings through the new online university.

“I am not sure the difference between the following numbers (around 29k) and the IPEDS numbers reported by Purdue (see above, around 36k), but nevertheless the following updated numbers indicate a new steady state of enrollment.”

IPEDS has some unique requirements for Purdue Global since it’s on a quarter system. The chart you chose is ours and was correct at the time and an easier way to look at the data. The most up-to-date, year-over year comparison looks even better with enrollment growth from 2018 to 2019.

source: Purdue University updates using October 2018 and October 2019 census dates

“… but for now it is not apparent that Purdue Global will be financially viable.”

Purdue Global had $45 million cash on hand at the end of FY19. The deficit in FY19 was primarily driven by one-time strategic start-up investments, particularly brand marketing and the development of some new programs that align with Purdue’s strengths and competitive advantages. For FY20, we have every expectation that Purdue Global will generate an operating surplus.

My Commentary

This response from Purdue is quite helpful in filling in gaps in the public record. Given the importance of Purdue Global, it is important that other schools (and even for-profit companies) understand what is happening with this high-profile initiative, and to understand it accurately.

In particular, the most important clarification is that the “$90m is tuition and fee revenue from Pell grants plus a small amount of investment income and gift revenue”. Additionally, it is useful to see details on the “deliberate one-time, $28.5 million marketing investment” and “$9 million in accrued but unpaid KHE fee that won’t need to be paid until the cash flow is positive”.

In my opinion, the majority of the $90 million non operating revenue is relevant to operations, meaning that the $43 million loss (and not $133 million) is applicable. I disagree, however, with the statement that “only $5.5 million was a loss from operations”.

The $28.5 million marketing investment does NOT imply that Purdue Global spent only that amount on marketing and will not need to in the future. What it means is that based on internal budgeting Purdue Global spent $28.5 million more than what they believe is a steady state marketing level, and that they believe they can go back down to steady state marketing in FY2020. For perspective see this Purdue Exponent article.

According to the May 2 SEC filing, Kaplan will assist PUG in areas including admissions support, technology support, marketing services and international and domestic student recruitment. The filing does not cite expected costs of those services, but according to a fact-finding team from the Higher Learning Commission, Purdue representatives estimated the cost of KHE’s “back office services” to be about $200 million in addition to an estimated $100 million to be spent on marketing. The Higher Learning Commission’s report was published earlier this year.

If accurate, this information indicates that Purdue Global likely spent more than $130 million on marketing in FY2019.

As the chart above and my original post showed, Purdue Global seems to have slowed down or even reversed the enrollment declines of Kaplan University (good for them), but the additional marketing spend was clearly a key part of this change. The total marketing spend, even the amount above steady state, is very relevant to operations.

Furthermore, the accrued but unpaid KHE fee of $9 million is also relevant. The liability has not gone away, it is part of annual operations, and (assuming PG becomes cash flow positive) due to Kaplan Higher Education in the future.

Purdue’s claim about me overgeneralizing that the “deal was never popular among Purdue University faculty” is a fair point, but in the same way I challenge their brushing off of faculty complaints as “myths” and “some vocal critics”. It would be interesting to survey the Purdue faculty on this question to get a better sense of support, but that is not in the cards (at least as public information).

All in all, this is a valuable update from Purdue University. Looking forward, the final statement Purdue provided is the one to watch – “For FY20, we have every expectation that Purdue Global will generate an operating surplus”.

Purdue University Global Loses $43 million in First Full Year Since Kaplan Transfer

Author Phil Hill, Blog January 5, 2020/2 Comments/by Phil Hill

Update 7 Jan 2019: Purdue responded to this post and answered some questions raised below. See follow-up post “Postscript on Purdue University Global Post“. I have adjusted the text below on the new information on non operating revenues.

One of the biggest stories in postsecondary online education in the past few years was the partnership between Purdue University and Kaplan University, where KU was transferred to Purdue and rebranded as Purdue University Global under a 30-year contract. The high-profile move, announced in March 2017 and finalized in April 2018, converted the 30k+ university from a for-profit into a public nonprofit under the Purdue brand while turning Kaplan Higher Education into a single-client Online Program Management (OPM) vendor.

Last year it was reported that Purdue Global was losing money, almost $16 million in the partial year (Purdue’s fiscal year starts on July 1st), and now we have more recent data.

Financial Report

Based on the latest Purdue University Financial Report provided to the Board of Trustees in October 2019 and approved in December, Purdue University Global had $133 million in operating losses and $43 million in net position losses in its first full year of operation. Strictly speaking, the $43 million number is most relevant for this year, ~~but this amount obscures the effect of one-time or short-term payments from Kaplan that were part of the initial agreement~~. In other words, the operating losses matter from a long-term viability perspective.

The financial report describes its separation of Operating Revenues and Non Operating Revenues as follows (p. 15):

Revenues are classified for financial reporting as either operating or nonoperating. Operating revenues are generated by providing goods and services to our students and other important constituents of the University and include tuition and fees, grants and contracts, and sales and services. Tuition and fees and housing revenue assessed to students are reported gross, with the related scholarship allowance presented separately. Nonoperating revenues are those received by the University without providing a corresponding good or service and include our state appropriations, investment income, and private gifts.

The July 1, 2018 through June 30, 2019 statement of activities (p. 77) shows the revenue and losses. The key numbers are in the Loss before Other Revenues line.

What is not entirely clear is the breakdown of $90 million in Non Operating Revenues. Purdue University Global is a public institution, but it does not receive state funding. ~~I believe this revenue includes $30 million in transfers from Kaplan’s parent company, Graham Holdings, that was defined as part of the initial 2017 agreement.~~ But I have to admit that I’m not sure here, and I can find no public reporting to better explain the numbers.

Falling Enrollment

It should not be surprising that Purdue University Global is losing money, as Kaplan University was already losing enrollments like most of the for-profit sector. Looking at IPEDS data from Fall 2012 through 2018, I have combined all of Kaplan University and Purdue University Global campuses into one institution and showed on the same chart as other large online enrollment institutions. The data show a persistent drop in enrollment since 2014, although the losses may be slowing.

Administration Statements

The Purdue – Kaplan deal was never popular among Purdue University faculty, and last spring there was an interesting debate in a local paper between three faculty members and the Purdue CFO, Bill Sullivan (there is a good summary by Derek Newton in Forbes). In Sullivan’s response to the faculty members’ initial letter, he described the initial losses and expectations moving forward.

While it is true that, in its first year of operation, Purdue Global invested more in startup costs than it offset by revenues, this was a deliberate strategic choice and was, importantly, prefunded by Kaplan Higher Education through the assets it brought to Purdue at acquisition. It is important to note that Purdue Global had more than $66 million in cash at the end of 2018 – a far cry from “bleeding the system dry.”
Another important consideration is that under the acquisition’s terms, Purdue is guaranteed payments of $10 million a year for the first five years. These funds could be reinvested at Purdue Global or they could even be shifted to other areas of Purdue, potentially including the regional campuses. Again, that is a far cry from “bleeding the system dry.”
But perhaps most important is the fact that Purdue has the first claim on any revenue Purdue Global takes in. Recall that Purdue owns and runs the university while Kaplan is reimbursed for its expenses in providing various back office support services as marketing, human resources, admissions and information technology. In the waterfall of cash flow, the last to get paid will always be Kaplan and the first will always be Purdue. That is, as money comes in, Purdue’s side of the operating costs and its $10 million priority payment are paid first.
This is an important point because I expect elevated startup costs to continue into 2019 and more modestly in 2020.

There are signs, also from Board of Trustees report from October, that the enrollment has stabilized since Fall 2018. It is worth noting that Indiana offers a 45% tuition discount to state residents in undergraduate programs at Purdue Global, and that Purdue employees can attend for free. I am not sure the difference between the following numbers (around 29k) and the IPEDS numbers reported by Purdue (see above, around 36k), but nevertheless the following updated numbers indicate a new steady state of enrollment.

Kaplan Higher Education as OPM

Due to the Purdue deal, Kaplan Higher Education changed from a for-profit set of institutions into an OPM provider. In their most recent earnings release, the Kaplan Higher Education division of Graham Holdings showed $238 million in revenue in the first nine months of 2019 from Purdue University Global (I believe Purdue represents the vast majority of this division’s activities), based on p. 28.

Extrapolating this number for a full 12 months, Kaplan HE as an OPM is likely making close to $315 million in revenue from the Purdue agreement, out of Purdue Global’s roughly $437 million in operating expenses. While Kaplan’s case is unique, that is still a large OPM operation, especially from just one client.

Note that the fiscal years of Purdue and Graham do not align, so use these numbers as a rough estimate.

Termination Clause

There is one other item worth mentioning here, in that the original Transition and Operations Support Agreement (TOSA) between Purdue and Kaplan had a clause for either side to terminate the contract based on financial losses. I am not suggesting that either side is considering this option based on the current losses, but it is worth remembering this option. From p. 26 of the TOSA:

Either Party shall have the right to terminate this Agreement in the event that New University generates $25 million or more in annual Cash Operating Losses for three (3) consecutive Fiscal Years, or incurs, during any period of the Initial Term, aggregate Cash Operating Losses greater than $75 million (taking into account gains during such period) (either circumstance being called a “Triggering Loss
”).

Where (p. 2 of Exhibit A):

“Cash Operating Losses”, for any Fiscal Year, means the amount by which: (a) the sum of: (1) the Academic Costs plus the Support Costs incurred in such Fiscal Year, plus (2) $10 million for each of the first 60 months following the Effective Date, exceeds (b) the total Revenue earned by New University in such Fiscal Year.

I believe the “Cash Operating Losses” for any year refers primarily to $43 million. ~~Essentially $43 million plus the annual $10 million priority payment, or $53 million for this year.~~ Clearly this exceeds the clause (i) above for the first year.

More to Come

Enrollment at Purdue Global appears to be improving, but at what cost? There are some real one-time revenue items obscuring the true financial state of Purdue Global, and the enrollment stabilization includes free or reduced tuition offers. I’d like to see details on the $90 million in nonoperating revenues as well as some breakdown of expenses, but for now it is not apparent that Purdue Global will be financially viable.

As it turns out, however, there is a lot more to the Purdue – Kaplan story beyond Purdue Global, as I’ll share in an upcoming post.

Insights From Instructure Preliminary Proxy Statement

Author Phil Hill, Blog January 1, 2020/0 Comments/by Phil Hill

On December 23rd, Instructure ¹Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. filed a preliminary proxy statement as part of their process to be acquired by Private Equity firm Thoma Bravo. This document is part of the formal SEC process to disclose relevant details to shareholders of the company prior to a formal shareholder vote on the acquisition agreement (technically called a merger agreement, but it’s an acquisition). There will be a definitive proxy statement after SEC approval and prior to the vote.

This proxy statement gives us one of our last looks into Instructure’s financial plans, assuming the deal goes through, as it will no longer be a publicly-traded company with public filings. And the document is quite interesting, giving indicators on such items such as whether Canvas pricing will go up or not, as well as providing an extensive history of the sales process over the past year.

The Proxy Basics

When the proxy was released, I shared a Twitter thread with the basics, shown below unrolled. Afterwards I’ll analyze some of the details.

1/ Instructure ($INST)’s preliminary proxy statement is out, which is doc describing upcoming shareholder vote on whether to accept the Thoma Bravo acquisition. sec.gov/Archives/edgar…#LMS #Canvas #edtech

2/ Doc has a lot of new details, including total price of deal (adding in stock options, etc): $1.959 billion

3/ Fees that Instructure would owe Thoma Bravo if deal does not go through: $29.3 million if superior bid comes in before Jan 8 (go-shop period) from party who had not already given bid, or $63.5 million otherwise. Instructure would get $136.9m if Bravo walks.

4/ Board of directors unanimous recommendations 1) to approve acquisition (technically called a merger), and 2) to approve executive compensation agreements tied up with acquisition.

5/ Timeline estimated for vote and completion of agreement in Q1 2020.

6/ Extensive “background of the merger” starting p 26, including initial informal offer of $53-$55 / share, subsequently reduced to $49-$51 / share after some due diligence; Bravo initial bid of $50, subsequently reduced to $47.60.

7/ No other bids have come in during go-shop period (thru Jan 8). Bank contacting 24 parties (9 had already been in talks, 15 new) to gauge interest, signed one new confidentiality agreement.

8/ Executives other than CEO Dan Goldsmith getting 6-month severance + 80% bonus package if terminated not for cause; CEO gets 12 months.

9/ Executives (Goldsmith, Kaminsky, Kaminer, DeBellis) and directors full packages (RSU = restricted stock units, basically compensation issued in form of stock); CEO Goldsmith getting $25m – not sure of conditions on $22m of RSUs. [note – see section below for clarification on Goldsmith and Kaminer forfeiting half of their unvested RSUs].

10/ Revenue, earnings (EBITDA), and free cash flow projections from management (p 56):

11/ Will read in more detail; add blog post with analysis.

Process Details

The proxy is unusually detailed, compared to your typical proxy statement, in its description of the sales process over the past year. The process started January 8, 2019:

On January 8, 2019, a financial sponsor (“Sponsor A”) requested a meeting with Joshua Coates, the Executive Chairman of Instructure. In response to Sponsor A’s inbound inquiry, Mr. Coates had a call with Sponsor A that same day during which Sponsor A expressed an interest in acquiring Instructure for $53.00 to $55.00 per share. On the same day, the Board of Directors held a meeting to discuss Sponsor A’s expression of interest.

What follows on pages 26 – 42 is a description of 40 separate financial sponsors (i.e. private equity firms) in contact with Instructure, with 19 of them signing non-disclosure agreements to get financial information, leading to two formal proposals – one from Thoma Bravo and one from another firm. In addition, there were five industry participants (i.e. other technology firms) contacting Instructure as part of the sales process with none of them making a proposal.

The bids ranged from $47 to $53 per share, with two best-and-final proposals in $47.50 – $47.60 range. It is interesting that prices consistently dropped upon further diligence, and several financial sponsors dropped out due to concerns over bookings trends (likely from the LMS market slowdown and even changes in the overall win rate).

Strategic Plan, With or Without Acquisition

The document makes clear that Instructure’s board had already been making plans to become a “Rule of 40” company, whether the acquisition goes through or not. On September 23rd (p. 30):

Following such presentations, the Board of Directors discussed the timeline for Instructure to achieve profitability, an education focused strategy, cost-realignment plans, and changes that would need to be implemented for Instructure to achieve status as a “Rule of 40” software company with a combined growth rate and profit margin of at least 40%.

What this likely means, in essence, is that Instructure needs to reduce expenses and increase revenue. On November 25th we learn of concerns from financial sponsors on this plan [emphasis added] (p. 37):

On that same day, each of Sponsor E and Sponsor K declined to further pursue a strategic transaction with Instructure. In declining to pursue a transaction, Sponsor E indicated concerns about new bookings performance, the ability of Instructure to increase prices and the consequences of implementing cost reductions. Sponsor K indicated that Instructure did not fit within its investment profile.

Bridge LMS as Schrödinger’s Cat

A lot of the discussion about Instructure over the past year has centered on the fate of the corporate learning Bridge LMS product line, with strong hints provided in November that Bridge would likely be divested, sold, or just shut down. What I find strange in the proxy statement is that there is no view of Bridge, one way or the other. This proxy document is meant to inform shareholders of relevant details before the vote, yet there is no view to show whether Bridge is dead or alive. No inclusion in the management projections of the costs or revenue from a potential Bridge sale or shutdown. I realize that this is a minor part of the Instructure business, but it’s strange to see Bridge disappear from discussions when that topic dominated the earnings call questions over the past four years. By subtraction we can see that Bridge generates roughly $20 million in revenue with losses in the low tens of millions.

Big Paydays for (Mostly) New Executive Team

The size of payouts for the executive team seems remarkable, especially as most of that team was hired in the past year or two to improve the Bridge corporate learning market more than the Canvas academic market. Yet the company’s future is all about Canvas.

Josh Coates with his potential $105 million payday is different. The company started with a project in a class he taught at BYU, he was the first investor, and he was CEO from 2010 – 2018 while taking a $1 salary.

A Bloomberg article today described some of the payout for other executives.

Two weeks after the suitor made a nonbinding offer in January, directors on Instructure’s compensation committee enacted a new policy for rewarding the company’s most senior employees, turning their cash bonuses for 2018 into a package of restricted stock units that was 25% larger, according to the company’s filings. The panel also discontinued cash bonuses through 2022 in favor of new, long-term stock grants for executive officers. And it gave all staff the option of receiving 20% of their base salary in equity.
The shift — which the company says was in the works months before buyers began circling — positioned Chief Executive Officer Dan Goldsmith, Chief Financial Officer Steven Kaminsky and General Counsel Matthew Kaminer to receive more compensation in the form of stock at a time when it could surge in value. Since the policies were adopted Jan. 23, shares of Salt Lake City-based Instructure have outperformed the broader market, gaining 23% as it reached a deal to sell itself. Some of the stock has already vested, and when combined with what’s left, the trio is set to reap a cash windfall of more than $25 million, even as Goldsmith and Kaminer give up half of the unvested portion of their RSUs in light of the accelerated payout.

Matt Kaminer has been with the company for years, as has retiring CFO Steven Kaminsky. CEO Dan Goldsmith joined Instructure a year and a half ago and became CEO on January 1, 2019. CMO Marta DeBellis joined 11 months ago, EVP / Head of Sales Frank Maylett joined five months ago, and the Bloomberg article notes one other payday of relevance.

In May, Instructure hired Goldsmith’s sister as chief strategy officer, awarding her a long-term stock incentive of $3.59 million, according to a filing. The appointment was approved by the audit committee. She reported to Kaminer, not her brother, the person said.

Last-Minute Change to Financial Projections

One other detail that jumps out at me – Instructure changed their financial projections in terms of free cash flow (FCF, how much available money the company will generate each year) on December 3rd, the same day that Instructure was finalizing the agreement with Thoma Bravo. The changes are noted in the document, but the details are buried in a footnote and provided with no explanation of why these numbers changed, increasing forecast FCF up to $7 million per year. This information was not shared with other financial sponsors prior to Instructure signing the agreement with Bravo, at least based on the proxy statement. From the footnotes on p. 55:

Overall Thoughts

This proxy document offers considerable detail to the Instructure sales process and insight into the Canvas future (financial projections, efforts to become Rule of 40 company). We’ll have to wait and see, however, what happens in terms of potential new bids during the go-shop period (through January 8, 2020) or in terms of influencing shareholders before the official vote. I would note that while the document describes what happened in terms of interactions with potential acquirers, it does not describe the nature of those interactions. The Praesidium and Rivulet statements described claims that the process has been “designed to result in a sale to management’s chosen buyer at a low price…in order for management to save their jobs and enrich themselves in the years ahead”. The proxy seems to show that the process was not rushed, but it is not clear whether the interactions with financial sponsors were done in a manner leading to a chosen buyer that fit the interests of the executive team. There is much to watch in January and February before the sale is finalized.

What I do not see from Instructure in any official SEC filing or blog post since the sales process became public is a meaningful description of why the Thoma Bravo acquisition might benefit its customers. In the section “Reasons for the Merger” (starting p. 42), Instructure lists:

Attractive Value
Best Alternative for Maximizing Stockholder Value / Thorough and Well Publicized Sale Process
More Attractive Value Than Alternatives
Greater Certainty of Value
Likelihood of Completion
Opportunity to Receive Alternative Proposals and to Terminate the Transaction in Order to Accept a Superior Proposal

In a November press release when Instructure first went public with the sales process, it was all about maximizing shareholder value:

“Consistent with its duties and in response to interest from several parties, our board of directors has determined that it is prudent to undertake a review of alternatives to identify the best way to maximize shareholder value,” said Josh Coates, Chairman of the Board at Instructure.

A December letter to customers , however, comes the closest to addressing customer needs.

Reflecting this year on our goals and path forward revealed that operating in the public spotlight wasn’t fueling innovation and was starting to get in the way of customer success. Partnering with Thoma Bravo opens the opportunity for Instructure to focus even more on accelerated innovation and our customers.
Working with Thoma Bravo over the past weeks, it is apparent that they support our strategy for focus on continued investment in Canvas LMS, expanding our impact in education, positioning Bridge to be more successful, and being a well-run business. As a private company, we will be able to better control our future and execute on these strategic imperatives. That future looks bright and there is much work to do. However, I am more confident and excited than ever for the difference we will make together and the journey ahead.

I realize that the proxy statement is primarily driven by SEC rules, but Instructure is harming its brand by its consistent focus on monetization and shareholder value with no meaningful communication to customers or prospects (I do not consider the letter above meaningful). The academic LMS market deserves better from its market leader.

Insights from Thoma Bravo and Frontline Education for Instructure’s Possible Future

Author Phil Hill, Blog December 19, 2019/5 Comments/by Phil Hill

While the Thoma Bravo acquisition of Instructure ¹Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. is not a done deal, it would be useful to look at the relevant history of Thoma Bravo to get insight on likely behavior should the deal go through. Academics might not have a deep interest in public markets and private equity buyout firms, but they do tend to care about whether their favorite system will offer reduced services based on layoffs, whether prices will increase, and whether there will be additional EdTech buyouts affecting choices in the market. tl;dr – history probably answers the first and third questions much better than the second.

Profile of Bravo

Just two months ago Forbes ran a profile of Orlando Bravo, the leader of private equity firm (PE) Thoma Bravo, which provided some useful insight into the nature of this company’s buyout activity. First of all, Bravo is a successful and growing company.

In February, the French business school HEC Paris, in conjunction with Dow Jones, named Thoma Bravo the best-performing buyout investor in the world after studying 898 funds raised between 2005 and 2014. According to public data analyzed by Forbes, its funds returned 30% net annually, far better than famous buyout firms like KKR, Blackstone and Apollo Global Management.

Thoma Bravo has a broad portfolio in different markets, but the firm only deals with enterprise software companies, as described in Forbes.

But the failure [of losing almost $100 million invested as the dot-com bubble popped] led to an epiphany that soon made Bravo and his partners billions. He realized his mistake was in backing startup entrepreneurs, an inherently risky move, when for the same money he could buy established companies selling niche software to loyal customers.

Frontline Education as Case Study

The closest comparison to Instructure in Thoma Bravo’s portfolio is Frontline Education, which has long provided K-12 HR school administration software. Frontline was founded in 1998, and their core product, originally known as Aesop, handles absence management and substitution replacement for teachers.

Frontline’s Aesop, now called Absence Management, is hugely popular in the US K-12 market, with more than 4,000 of the 14,000 school districts as users as of 2014. EdSurge described the company’s growth and subsequent acquisition by Thoma Bravo in a 2017 article.

After private equity group Insight Venture Partners acquired a controlling stake in 2014, Frontline has gone on a shopping spree for companies whose offerings range from hiring and recruiting tools (Teachers-Teachers) to professional development providers (School Improvement Network and Teachscape) and special-education software (The Centris Group).
Altogether the company says it serves more than 12,000 education organizations, with more than 5 million school employees and 1.2 million substitute teachers using its tools everyday. No doubt the acquisitions helped Frontline expand its footprint. Its revenue, according to Clifford, has been growing at 50 percent annually for the past several years.
Frontline currently numbers 650 employees in five offices across the U.S., a headcount will continue to grow. Insight Venture Partners will retain a minority stake in the company.

It should be pointed out that Frontline made some bold claims in that article, given the department of education’s estimate of ~3.6 million K-12 teachers in the US, for both public and private schools. I don’t know that it’s realistic to have “5 million school employees” in US & Canada K-12 schools, so take some of the corporate numbers with a grain of salt.

Months before the Bravo acquisition, Frontline introduced its Insights Platform as a data aggregation and insights play, as described in its press release in January 2017.

“Frontline Education continues to raise the bar in responding to the evolving needs of the education community,” says Tim Clifford, CEO, Frontline Education. “We’re driving industry innovation through both the Frontline Insights Platform and Frontline Central that will empower education leaders to use data and analytics like never before. The connectivity of technologies and processes in an intuitive and seamless way delivers the insights necessary to make informed decisions that have significant bearing on district outcomes.

In 2017 Thoma Bravo acquired Frontline from Insight Venture Partners in a deal reportedly worth $1.3 billion. Bravo viewed Frontline as the centerpiece in a platform buy-and-build, another name for an enterprise software roll-up strategy. In this strategy, a platform company with solid customer base in a particular vertical market (K-12 education in this case) is purchased (often for high price), enabling subsequent acquisitions of smaller companies that have lower price multiples, called tuck-in.

The Bravo acquisition, which the relatively new Frontline executive team actively started working on in early 2017, has not worked out as planned, however.

The forced upgrade caused by the Insights Platform appears to have caused significant customer pushback, according to comments on company review sites such as Glassdoor and Indeed, although it is not clear how much this was based on associated price increases.

What we do know, however, is that the company’s growth seems like it stopped. Prior to 2017 the company was growing 50% per year in revenue, but after the Bravo acquisition that growth seems to have stopped according to company interviews. 660 employees as of 2017, and 650 employees as of summer 2019, despite acquiring Prologic and its 60 employees in 2018. It remains to be seen how this past summer’s acquisition of Perennial EdTech and its 150 employees will change their business.

By summer 2019 the majority of the Frontline executive team, including its CEO, had turned over, with ex-Blackboard executive Mark Gruzin taking the helm in July.

An analysis of Glassdoor reviews includes consistent themes of corporate layoffs, company culture changes since the Bravo acquisition, and poor company performance in product integration. I’d like to avoid reading too much into these reviews, but I have found that you can find themes worth considering by looking at this feedback.

Similarities and Differences with Instructure

There are some interesting similarities between Frontline Education and Instructure worth considering, with Frontline:

Growing company with loyal customer base, at least until 2017;
Founders depart and new executive team takes over with few having education market experience, followed by formal sales process and Thoma Bravo acquisition under planned buy-and-build strategy;
Through acquisitions, company moves beyond best-of-breed product core to promise broad product suite, with associated rebranding; and
Company introduces a data platform as the core of its strategy at roughly the same time as it formally began soliciting and evaluating buyout offers, leading to an acquisition by Thoma Bravo.

But there are also some differences to keep in mind:

Frontline founded 10 years before Instructure and never went public; and
Frontline had longer history of acquiring companies prior to Insight Ventures Partners investment or Thoma Bravo acquisition.

Does this mean that Instructure’s fate will be directly tied to Thoma Bravo’s and Frontline Education’s past? No. But there are insights from this history that might inform what could happen with Instructure.

I’ll note that what follows is conjecture – more than I typically provide on this blog – based on research on Thoma Bravo and its holdings, as well as broader PE involvement in EdTech markets. If I find any of this analysis and conjecture are wrong, look for updates here.

Layoffs

The probability of a layoff within the first few months of the Instructure acquisition being complete is very high. This is part of what PE firms do, buying underperforming companies and making cuts to improve profitability – just ask Blackboard, Ellucian, McGraw-Hill Education, Cengage, University of Phoenix, etc. Even beyond Frontline Education, Thoma Bravo is well-known for having layoffs, as seen at Ellie Mae, Riverbed, Qlik, and Imperva. Significant layoffs. Further, Orlando Bravo makes no excuses for layoffs, as described in the Forbes profile.

There are also layoffs. Those can total as much as 10% of the workforce, for which Bravo doesn’t apologize. “In order to realign the business and set it up for big-time growth, you first need to take a step back before you take a step forward. It’s like boxing,” he says. “These are unbelievable assets with great innovators, and they are usually undermanaged.

While layoffs are almost a given, we don’t know yet how this would impact services and product delivery. Frontline’s experience is not encouraging, but perhaps Bravo has learned about the education market, and Instructure is a different company.

Price Increases

This section, unfortunately, will be short as there is no clear pattern in Thoma Bravo’s recent acquisitions with price increases. Frontline Education raised prices within a year of the Bravo acquisition, in combination with the Insights Platform required upgrade, but Riverbed seems to have waited three years for modest price increases.

It is worth noting that Bravo’s strategy relies on a loyal customer base. This should cause Instructure to be very cautious on price increases, but we just don’t know much.

M&A Strategy in 2020

Another point in the Forbes profile is that Thoma Bravo does not acquire a company and then figure out what other companies to tuck-in or combine [emphasis added].

Like a good tennis player who’s worked relentlessly on his ground strokes, Bravo has made private equity investing look simple. There are no complicated tricks. He figured out nearly two decades ago that software and private equity were an incredible combination. Since then, Bravo has never invested elsewhere, instead honing his strategy and technique deal after deal. He hunts for companies with novel software products, like Veracode, a Burlington, Massachusetts-based maker of security features for coders, or Pleasanton, California-based Ellie Mae, the default system among online mortgage lenders, which the firm picked up for $3.7 billion in April. His investments typically have at least $150 million in sales from repeat customers and are in markets that are too specialized to draw the interest of giants like Microsoft and Google. Bravo looks to triple their size with better operations, and by the time he strikes, he’s already mapped out an acquisition or turnaround strategy.

Instructure fits into this playbook, and I suspect that we won’t have to wait long to see the next move. It could be tuck-ins in the vein of Portfolium, Practice, or MasteryConnect, or it could be something bigger and market-changing. It is worth noting that Bravo raised $12.6 billion in January of this year – the stakes are getting higher.

The latest fund is two-thirds bigger than its $7.6 billion predecessor, Thoma Bravo Fund XII, which was raised in 2016, and more than three times the size of Thoma Bravo Fund XI, which totaled $3.65 billion when raised in 2014.

Forbes noted the higher stakes as well.

With a fresh $12.6 billion war chest for its 13th fund raised in 2018, Bravo is eyeing $10 billion-plus deals and expects to begin buying entire divisions from today’s technology giants. But thanks in part to the success of his firm, he now faces more competition. Heavyweights like Blackstone and KKR are increasingly sussing out software deals, not to mention his longtime rival Vista Equity. And he’s not immune to mistakes. Bravo’s $3.6 billion 2015 acquisition of San Francisco-based digital network tracker Riverbed Technology is currently struggling because of slowing sales and too much debt. He isn’t worried. “There are bigger and better companies to fix than there were ten years ago,” Bravo says.

Higher Ed to Follow K-12?

In the K-12 market, the Bravo-owned Frontline Education’s roll-up strategy is mirrored by the Vista Equity Partners-owned PowerSchool. Two PE-owned firms working to buy and consolidate around a data integration and insights platform play. We have seen PE activity in higher ed, but it looks as if the consolidation part of PE ownership might become an emerging theme into the future. I have already written about Ellucian’s possible sale and the wave of EdTech acquisitions, and the pending Instructure sale to Thoma Bravo, as well as the McGraw-Hill – Cengage merger, are signs of the future.

We’ll keep watching for news over the next few weeks and share it in the blog.

Exploring Recent OER Research and the Need to Address Experiences, Efficacy and Equity

Author Kevin Kelly, Blog December 15, 2019/7 Comments/by Kevin Kelly

Surveying the OER Scene

In the last couple of years, surveys and studies have uncovered key differences in what people know, believe, and actually do in relation to Open Educational Resources (OER). A number of these articles and studies use the Hewlett Foundation’s definition of OER: ”teaching, learning, and research materials that are free for people everywhere to use and repurpose.” UNESCO offers another common OER definition: “Open Educational Resources (OERs) are teaching, learning and research materials in any medium – digital or otherwise – that reside in the public domain or have been released under an open license” (Wiley, 2019, para. 8). With these definitions in mind, what do the surveys tell us?

First, the Babson 2017-2018 survey of over 4,000 faculty and chairs found that, while faculty awareness of OER has grown by ten percent in the past four years, “a majority (54%) reported that they were generally unaware of OER” (Seaman & Seaman, 2019, p. 7).

Next, it’s important to most faculty that students can afford textbooks, but they a) do not feel they can make that decision themselves (e.g., lecturers or adjuncts who do not select the course textbook), b) are not incentivized to allow a shift from commercial textbooks to OER even if desired, or c) do not want to give up control over course material selection:

From the Ithaka S+R 2018 survey of almost 11,000 faculty we learned that roughly 70% “indicated that reducing the cost that students pay for textbooks and other course materials is highly important; this is broadly consistent across institution types and disciplines” with the exception of medical faculty (Blankenstein & Wolff-Eisenberg, 2019). Wolff-Eisenberg provided an important caveat to this belief: “even with this attitude shift, traditional scholarly incentives – tenure and promotion, contract renewals or reappointments, for instance – influence faculty respondents’ decision-making around the use of a subscription-based publication model” (Pennamon, 2019, para. 5).
The 2018 Inside Higher Ed survey of over 2100 faculty confirmed the same contrast–having strong beliefs that do not lead to taking action (Lederman, 2018, para. 9):
Instructors and digital learning leaders alike overwhelmingly believe textbooks are too expensive and support the use of open educational resources and other low-cost alternatives. But their support only goes so far: professors generally reject the idea that saving students money justifies the loss of faculty control over course material selection or shifting to lower-quality options.

It should be noted that it’s not clear from the Ithaka S+R or Inside Higher Ed surveys how much the faculty respondents knew about OER, other than reading the definition of OER while completing those surveys. Therefore, some faculty may have answered questions about their interest in using OER without really knowing what they are.

Last, some of the Ithaka S+R statistics show differences of opinion about OER, according to faculty age and faculty rank:

“Younger faculty display much more enthusiasm towards OER than older faculty, and are interested in both adopting them into their teaching pedagogies and creating them.”
“…faculty in professor and associate professor roles are relatively less likely to be interested in creation and use [of OER]” (Blankenstein & Wolff-Eisenberg, 2019, p. 48).

On a personal note, I map to one of the two groups Ithaka S+R identified. In rank I’m considered a lecturer (aka non-tenure-track) faculty member, but I fall into the third age bracket (45-54 years old). When it comes to OER, I’ll admit that the cost of course materials was a key driver for me to create or find free learning resources for my online students, starting back in 2008. While my class is not officially recognized as Zero Textbook Cost, students in my classes pay nothing for course materials. And I know the need is real for the students at San Francisco State University, where I teach online courses. Almost four of five SF State students recently reported feeling stressed by the cost of learning materials.

OER Need to Address Experiences, Efficacy and Equity

John Hilton III synthesized four years–2015 through 2018–of OER research, looking at faculty and student perceptions of their experiences with OER, as well as the efficacy of OER. Related to the OER experience, “the majority of faculty and students who have used OER had a positive experience and would do so again” (Hilton, 2019, p. 1). Conducting a single study in a community college context, Bliss, Hilton, Wiley and Thanos (2013) researched courses taught by 27 faculty as part of Project Kaleidoscope. They concluded that “If primary instructional materials can in fact be made available to students at no or very low cost, without harming learning outcomes, there appears to be a significant opportunity for disruption and innovation in higher education” (para. 36).

Related to efficacy, “studies suggest students achieve the same or better learning outcomes when using OER while saving significant amounts of money” (p. 1). Overall, Hilton found that researchers are studying OER efficacy more often and more rigorously–earlier studies had issues with their methodology, later studies had improved–and yet “much more work remains to be done” (p. 17).

Leading discussions about OER and equity, Ursula Pike from Austin Community College shared that “equity is about more than saving money.” While cutting costs for students is important–a feeling shared by almost three-quarters of faculty (see above)–Pike (2018) raised two equity issues that OER proponents must address:

if one promotes using OER to serve students and communities that are poor, then the OER quality must be the same or better than the textbooks students cannot afford (para. 4); and
those who create OER must take responsibility to manage issues of image and representation bias found in commercial textbooks, so that students can see themselves represented, period, and represented accurately.

Pike’s second point echoes work I have been doing with Peralta Community College District around its Equity Rubric. ¹Disclosure: Kevin works as a consultant with Peralta Community College District. The Peralta team (2019) recommends that instructors 1) “Find images and media that represent the diversity of your institution” and 2) “Encourage students to analyze the accuracy or stereotypes related to how specific groups are represented in images and media related to course topics.” To support Peralta’s efforts, I created a list of image galleries to promote accurate and equitable representation, available as a free, Creative Commons document.

Calls for Future Research (and Action)

Let’s summarize some of the most salient facts from all of these studies. On the positive end of the spectrum, faculty and campus leaders agree that it’s important to lower the costs of learning materials for students, and see using OER as one pathway to do that. Further, a meta-analysis of studies about OER efficacy found that for the most part students performed as well using OER as they did using commercial or standard course materials. On the flip side, fewer than half of faculty know about OER, they want the ability to decide which course materials to use, or they do not feel incentivized to use OER. The elements comprising the negative end of the spectrum partly imply that while OER is powerful in and of itself, there may not be enough choice of OER for specific fields, and/or faculty may be reluctant to create their own OER without compensation.

Since most research studies end with calls for future research, I’ll do the same here:

Study the ‘R’ in OER more thoroughly: While studies have been done about OER usage and the impact of OER on student outcomes, I did not see as many studies comparing the quality of OER compared to commercial course materials. If Pike and others are right that some faculty question the quality of OER before they get to know it, then the community needs to analyze the differences and show what David Wiley claimed back in 2013 (para. 3): “quality is not necessarily a function of copyright status.”
Study the factors that go into successful OER initiatives: Educational technology initiatives require certain ingredients to take off at any organization. To light up the runway for campuses deciding how to support OER use and creation, ed tech and OER practitioners should identify and study the most successful OER initiatives in higher education, and then outline and disseminate things like funding levels, staffing levels, expertise required, marketing strategies, strategies to reduce time to create OER, and other factors common to those efforts.

Since I believe strongly in a cycle of first gaining awareness, then taking action, and last conducting analysis, I’ll add calls for action to follow the awareness the research generates.

All higher ed institutions should do more a) to educate faculty and students about OER and b) to provide support for creating OER: The Ithaka S+R study showed that while over 70% of faculty are interested in reducing students’ costs and almost 60% of faculty are interested in using OER in their teaching, under 15% feel their institution offers excellent training and support for OER use and roughly 15% feel their institution recognizes or rewards faculty for integrating OER. It should not be a surprise, then, that faculty are reluctant to go further than expressing support for lower costs to students. University of Central Florida, Penn State and others employ open education librarians or affordable content librarians (Young & Johnson, 2019, para. 8). Schools like College of the Canyons in California promote OER and ZTC to faculty–e.g., how to create ZTC with OER–and to students–e.g., OER for Administration of Justice courses.
Arguments to promote creating OER should go beyond cost to include improving pedagogy and increasing equity: EdSurge recently interviewed Nicole Allen from SPARC, “a global coalition committed to making Open the default for research and education” (sparcopen.org). Allen argued that “the true value of open isn’t about reducing costs, but it’s about creating the ability for people to make content better” (Young & Johnson, 2019, para. 11). As noted above, Ursula Pike includes making content more representative and equitable as a part of “better.” In my own work with faculty creating OER, they have expressed a desire to create alternatives to textbooks that do not support their course goals. For example, two language instructors feel standard textbooks use a grammar-driven approach, while they want to focus on communication–students making sense of the message rather than the rules. Creating OER is how they plan not only to make content better, but also to make better content from the start.

This post on the state of OER today scratches the surface at best. As Hilton and others have noted, OER awareness is increasing and OER research is taking off. With that in mind, the MindWires team will definitely come back to this topic next year as the landscape continues to morph. In the meantime, you can do your part by making colleagues more aware of OER, OER initiatives, and OER research; and when appropriate, take action and encourage your colleagues to do the same.

Disclosure: Kevin works as a consultant with Peralta Community College District.

Instructure Sale: Two large investors against deal and claiming conflicts of interest (update – Three)

Author Phil Hill, Blog December 13, 2019/3 Comments/by Phil Hill

Most corporate acquisitions, particularly when a company is taken private (acquired off public market by private equity or strategic acquirer), lead to multiple complaints from shareholders about whether the deal is fair. But what is happening with Instructure ¹Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. seems much more serious based on recent SEC filings from two investors with a combined 12.7% position, where they both come out against the deal and complain about conflicts of interest and inconsistent public statements. The sale is not a done deal, and these filings also give useful insight on Instructure value and strategy.

Rivulet Capital 13D

For quick background, Rivulet Capital, a hedge fund that owns more than 5% of Instructure’s outstanding shares, filed a 13D SEC form with their position on Dec 5th, as reported by Reuters.

We “strongly oppose the proposed going-private transaction” where Thoma Bravo would pay $47.60 a share for the company, the filing said, adding that it “significantly undervalues the Company.
Moreover it was wrong to run a “rushed, 3-week strategic alternatives process over the Thanksgiving holiday” and have a proposed 35-day go shop period that would include more holidays, Christmas and New Year’s, the hedge fund wrote in the filing.

Instructure 8K

Instructure then filed with the SEC on Dec 6th an 8-K form about their acquisition process, in an apparent effort to refute these Rivulet claims, describing that the process started on January 20, 2019. In that filing, Instructure described that it has been formally working with an investment banker and considering buy-out options since January.

Instructure initially signed JP Morgan as its formal advisor in January, entertained 19 separate financial firms or strategic companies “that expressed interest in a possible acquisition of, or investment in, the Company”, and received several offers before announcing the agreement with Thoma Bravo.

The Company conducted a comprehensive and deliberate process, lasting eleven months and ultimately involving 40 parties, 19 of which signed non-disclosure agreements and engaged with the Company, before entering into the Merger Agreement. In order to ensure that the transactions contemplated by the Merger Agreement maximizes value for its stockholders, during the period that began on December 4 and will continue until 11:59 PM (Pacific Time) on January 8, 2020 (the “Go-Shop Period”), the Company will be actively soliciting acquisition proposals and will consider any proposal that the Board determines in good faith, would, if consummated, be more favorable, from a financial point of view (after considering all legal, regulatory and financing aspects of the proposal), to the stockholders of the Company (in their capacity as such) than the transactions contemplated by the Merger Agreement.

This filing, however, seems to have made matters worse with at least two large investors, not better.

Rivulet Capital 13D/A

On Dec 9th Rivulet sent a letter to the Instructure board (also filed with SEC), pointing out that they are not activist investors and have never filed a 13D before in their eight-year history. In addition, Rivulet calls out how unique Instructure was with its “compelling alternative” in the market.

We invested in Instructure because we admire the company, and we see plenty of opportunity for continued growth and success. With Canvas, Instructure has developed the market-leading learning management software product for the higher education market. The Canvas story has provided an incredible lesson about the success that comes from a focus on innovation, putting students first, and offering a compelling alternative to a greedy incumbent that was run for the enrichment of management and shareholders. Unfortunately, with the announced sale of the company to Thoma Bravo, Instructure is providing a different sort of lesson to its customers and shareholders. Here, it appears that the company has run a rushed strategic review process that was designed to result in a sale to management’s chosen buyer at a low price…in order for management to save their jobs and enrich themselves in the years ahead. It is outrageous.

Rivulet then argues that Instructure does not have an “urgent need to sell” and could be patient, even questioning the motives for a quick sales process.

Instructure does not need additional capital. There is no urgent need to sell to private equity unless they are willing to pay a particularly attractive price. And yet, the proposed take-private transaction appears to be a wonderful deal for Thoma Bravo. They are buying a great company, at an attractive price, and they will spend the next few years focusing the business on the education vertical, growing market share, and increasing margins. It is likely to be an even better deal for senior executives. These executives will be executing the exact same strategic plan that many shareholders have been encouraging the company to pursue in the public markets. However, they could personally end up making substantially more money executing this plan ‘in partnership’ with their chosen private equity sponsor, depending on the terms of their future employment agreements.

Praesidium 13D/A

Late yesterday (Dec 12th), activist investor Praesidium wrote a letter to the Instructure board (also filed with SEC) that they, like Rivulet, plan to oppose the proposed sale and have serious concerns with the process and potential conflicts of interest. They first pointed out that they own approximately 7.5% of outstanding shares, then described the Instructure potential.

As you are aware, Praesidium has been an investor in Instructure and has been constructively engaged with the Company and the Board for almost a year. Prior to and during this period, the Praesidium team spent countless hours analyzing Instructure’s financials, its competitive positioning and the broader education market. Our original and ongoing work has led us to believe, and we continue to believe, that the Company’s education business is a unique and valuable asset. Canvas’ technology is best-in-class resulting in high competitive win rates and near-perfect customer retention. This has allowed Canvas to garner close to 38% share in the US higher education market. The continued runway in the US and abroad should allow Canvas to grow in the mid-teens for the next few years. In addition, Canvas’ positioning as a trusted partner presents a tremendous opportunity to create an unrivalled [sic] education platform with the opportunity to expand into adjacent areas organically and roll-up smaller companies in what is a currently fragmented market. As we have presented to you in the past, this dominant position in a single vertical should allow for the business to be run very profitably and generate significant free cash flow.

Praesidium then called out that Instructure publicly claimed they had commenced the sales process in November, which directly contradicts the 13K filing that they started in January, and that Instructure “rebuffed” several large PE firms with claims of no process.

The Company recently filed an 8-K (described in more detail below) in which it claims to have “conducted a comprehensive and deliberate process, lasting eleven months” (emphasis added). We believe this is inconsistent with certain public statements made and actions taken by the Company over the past year, which cast doubt on the validity of such claims. On November 14th, the Company stated in a press release that “[t]he previously scheduled financial analyst day on December 3 has been canceled to allow management and the board to explore these strategic alternatives for the company.” However, if the Company felt the need to cancel the analyst day in order to focus on running a process, why would it have even scheduled an analyst day in the first place if it was actually engaged in a process since January? Casting additional doubt on the validity of the Company’s claimed timeline, Praesidium has learned that multiple interested firms were rebuffed by the Company during this purported review period, including three large, reputable private equity firms. Praesidium understands these firms reached out to the Company only to be turned away under the guise that no process was being conducted by Instructure at that time.

Much of the letter described the process to separate the Bridge product line and business line, with shareholders not getting a chance to see the details of that strategy. But the core argument was about conflicts of interest with the team chosen to conduct negotiations.

Perhaps even more alarming, we have heard deeply concerning reports that CEO Dan Goldsmith has expressed to shareholders his unwillingness to work for certain potential acquirers, which means he may have put his own interests ahead of Instructure shareholders. This is not the first time we have seen this type of behavior from Dan. He hired his own sister as Chief Strategy Officer and may have additional motivation to enrich and protect her as well.
Clearly, the composition of this [core negotiating] team is highly inappropriate and considerably undermines the integrity and fairness of the sales process. Each member of the “core team” had a potential conflict of interest in running this process that the Board should have recognized. We believe these conflicting relationships represent a severe misalignment of interests with Instructure shareholders and interfered with the team’s ability to objectively oversee the review process. By its own admission, the Board rejected at least one bid for Instructure in the past year at a price higher than the $47.60 offered by Thoma Bravo. If the Board were truly interested in running a full and fair process to obtain the best price for the benefit of the Company and its shareholders, it should have formed an independent committee of the Board tasked with overseeing this process.

Keep Watching

Note that Instructure has not responded to these letters yet, and we will share any updates as they occur – there are at least two sides to this story.

I realize this might seem like a lot of inside baseball about financial transactions, but this situation is about much more than share price and could get into a legal issue. I am not a financial or legal expert, but the Instructure sale to Thoma Bravo is not a done deal. There is more to come before we see resolution on the possible acquisition.

And Another One

Update 12/19: Another investor with large holding, Oberndorf Enterprises (OEL) with a 5.9% stake in Instructure, came out against the sale with a letter to the board and public release.

OEL has recommended the appointment of an independent special committee with newly chosen legal and financial advisors. The committee should thoroughly review the details of the sale process to date, fully disclose to shareholders all the “clear milestones and target dates focused on profitability and growth” which the management team referenced on its October 28th earnings call, and devote full time and attention to all the Company’s strategic alternatives. We believe these steps may help shareholders make an informed decision as they vote on any proposed merger agreement.

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