Purdue’s Purchase of Kaplan Is a Big Bet — and a Sign of the Times

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With a surprise deal to acquire the for-profit Kaplan University, announced on Thursday, Purdue University has leapfrogged into the thick of the competitive online-education market. Purdue plans to oversee the institution as a new piece of its public-university system — a free-standing arm that will cater to working adults and other nontraditional students.

The purchase, conceived and executed in just five and a half months, puts Purdue in position to become a major force in an online landscape increasingly dominated by nonprofit institutions. Until now, said Purdue’s president, Mitch Daniels, the university “has basically been a spectator to this growth” in distance education, with just a few online graduate programs. Mr. Daniels, a former Republican governor of Indiana, described the acquisition as adding a “third dimension” to Purdue, along with its research-rich flagship in West Lafayette, Ind., and its regional campuses.

For Kaplan and its parent company, Graham Holdings, the deal offers a potentially profitable exit strategy for an operation that has seen its bottom line battered for several years by falling enrollments. (Kaplan now has 32,000 students.)

The contrast between the typical Purdue student and the military veterans, lower-income students, and members of minority groups who make up much of the enrollment at the open-access Kaplan is “stark,” said Mr. Daniels. But he said the university has a responsibility to serve such students. Millions of Americans have some or no college credits, and Purdue can’t fulfill its land-grant mission “while ignoring a need so plainly in sight,” he noted while unveiling the deal at a Board of Trustees meeting on Thursday.

The potential financial upsides were also clearly a factor. In an interview with The Chronicle, Mr. Daniels said it was “too soon” to talk about revenue projections. “We have hope and reason for hope” that Purdue’s new acquisition will do well, he said, alluding to the fast pace of online growth at other nonprofit institutions, like Western Governors and Southern New Hampshire Universities. “If the new entity gets an even modest version of that growth path, we’ll do very well financially.”

Paul LeBlanc, president of Southern New Hampshire, said the online-education market was big enough for a number of new entrants, and he expects Purdue will be a formidable competitor. He also noted some potential pitfalls in absorbing a new entity. “Purdue enjoys a far better brand than Kaplan,” said Mr. LeBlanc, and the Kaplan legacy might be a dealbreaker for some students.

Still, he acknowledged that most students searching on the web for an online degree program may not know or care about a university’s origins. If a search turns up Purdue as an option, he said, “you might get pretty excited pretty quick.”

Merging university cultures also could be challenging. Value systems, reward structures, and budgeting priorities are not easily changed on a dime just because ownership changes, Mr. LeBlanc said. (Kaplan’s current president, Betty Vandenbosch, who worked previously at Case Western Reserve University, will remain as president when Purdue receives the necessary approvals and takes control.)

Still, Mr. LeBlanc sees the Purdue deal as a sign of the times: “not-for-profit higher ed coming to re-own the space that they ceded” to for-profit colleges.

An Intricate Deal

The new institution has no name as yet, but it will no doubt carry the Purdue name in some form for its brand value. It will receive no state funds, relying solely on tuition and donations for its operations.

It will also rely heavily on Kaplan personnel to keep it running. Under the deal, Kaplan’s students, academic programs, 15 campuses and learning centers, and academic staff of about 3,000 are to become part of Purdue.

Kaplan Inc., the university’s parent company, will continue to provide the technology, marketing, admissions and financial-aid, and other back-office services for the more than 100 certificate and degree programs that it currently offers.

In return for those services, Purdue will pay Kaplan 12.5 percent of the new institution’s total revenue a year. But Kaplan will get its money only if there are funds remaining once Purdue and Kaplan have both recovered their direct costs.

For the first five years of what could be a 30-year deal, Purdue is to be paid a guaranteed minimum of $10 million annually by Kaplan before Kaplan can be reimbursed for its direct costs or gets its 12.5 percent of revenue. After six years, Purdue has an option: It can buy out Kaplan and take the back-office functions in-house, or it can contract with another online-program manager.

Graham Holdings does not break out the profits of Kaplan University on its financial disclosures.

“The risk seems all on the Kaplan side,” said Trace Urdan, an independent financial analyst who has studied for-profit higher education and online-education companies for 18 years. Given the tenor of the times and the market, he said, the deal makes sense.

Today, he said, being nonprofit “is a huge marketing benefit.” That’s frustrating to for-profit-college executives like Andy Rosen, chief executive of Kaplan, said Mr. Urdan. “It burns him to see Southern New Hampshire basically doing the same stuff. But they continue to hammer at the point of being nonprofit and therefore ‘trustworthy.’”

Mr. Urdan said the same motivation lies behind the recent announcement by the Education Management Corporation, which wants to sell its for-profit colleges to a nonprofit called the Dream Center Foundation.

‘A Dirty Window’

Kaplan Inc., which was once known primarily as a test-prep company, began expanding its profile in the for-profit-college market in the late 1990s. It created Kaplan University in 2000, when it was still owned by the Washington Post Company. While several of Kaplan’s other college holdings have been cited by government regulators and in lawsuits for misleading students, Kaplan University has remained largely unscathed.

It has been clear to many observers that Kaplan was looking to get out of the business of owning for-profit colleges in the United States: The company sold some three dozen of its other colleges in 2015. But Mr. Rosen, in an interview, said Kaplan didn’t do the deal with Purdue out of frustration or because it had no other choices. Instead, he said, “we thought it was a great alternative” that will ultimately prove profitable to the company.

Mr. Rosen said that by measures including the income of its graduates, Kaplan outperforms many institutions serving a similar market. But, he said, “we are viewed through a dirty window.”

With the acquisition, Kaplan will no longer be subject to federal rules like the “gainful employment” regulation, which penalizes career-focused programs whose graduates end up with too much federal student-loan debt relative to the income they earn. According to U.S. Education Department data released in January, five of Kaplan’s programs failed that test and 16 others were in the warning zone. Two of the five that failed have been discontinued, and the three others are not enrolling new students. Four of the 16 in danger are active, seven are not enrolling new students, and five have been discontinued.

Mr. Daniels defended Kaplan’s response to the regulations, even while noting that they’ll now be moot. “Kaplan’s doing the best job of anybody we could find,” he said. He also brushed off concerns that the purchase of Kaplan would diminish Purdue’s reputation. “It didn’t damage Purdue’s brand 50 years ago when we opened regional campuses,” he said.

Mr. Daniels said the deal grew out conversations with Donald E. Graham, chairman of Graham Holdings, the first of which took place by telephone in November. The two had been connected by a mutual friend who was aware of the company’s interest in a new plan for Kaplan and of Purdue’s months of campus discussions over how to pursue online education.

To take effect, the deal requires the approval of the Indiana Commission for Higher Education, the U.S. Department of Education, and the Higher Learning Commission, the accrediting body for both Purdue and Kaplan. A spokesman for the accreditor said the commission had met with both institutions, and expected to receive their Change of Control application shortly. “We’ll look carefully at all aspects of the proposal, which takes several months for review and due diligence,” he said.

That review could raise some interesting questions. A few months ago, the same accreditor rejected a proposal from the for-profit Grand Canyon University, which was seeking to spin off its academic arm into a nonprofit university and to outsource much of the back-office operations to its parent company, Grand Canyon Education Inc.

But based on the initial discussions, Mr. Daniels said he was not worried. “We haven’t seen any concern or resistance,” he said.

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.