The University of Phoenix’s years-long bid to be acquired and shift to nonprofit status evokes images of driving through a construction site — complete with potholes and detours.
It makes sense that a for-profit institution like Phoenix would want to reconstruct itself, experts say. Bad press about deceptive marketing practices and poor postgraduate outcomes has largely soured public opinion of the sector. The regulatory environment is becoming increasingly hostile, too; on the horizon, for example, is a gainful employment rule that would hold for-profit colleges accountable for their graduates’ abilities to pay off debt.
Serving nontraditional adult learners in flexible online formats — the for-profit’s modus operandi — is also no longer a unique mission. And as pressure for consolidation in higher ed grows, there are nonprofit institutions eager to team up and share resources, rather than start from scratch. To be a part of something like a Phoenix 2.0.
Still, the actual reconstruction of Phoenix has been bumpy. Some two years into Phoenix’s search, a media leak first identified the University of Arkansas system as a possible affiliate, but a “no” vote from UA’s Board of Trustees blocked a clear path forward. Then, within weeks, the Board of Regents from another institution, the University of Idaho, swooped in to OK an affiliation — but is now earnestly batting back a lawsuit brought by the state’s attorney general.
So what is it, exactly, that has made the University of Phoenix, once the premier mega-university in the country, such a tricky asset?
Sources with deep expertise in mergers and acquisitions say some of the reasons are unique to the University of Phoenix: its size and “profile,” its potential liabilities, and its courting of state institutions. But they also note that some of the obstacles are indicative of the overall state of play in higher ed, citing a backlogged U.S. Education Department and the unresolved tensions between private business and public education, which often hamper public trust in such transactions.
“A change in ownership for anyone right now is generally a tricky and bumpy process,” said Aaron Lacey, a partner at Thompson Coburn LLP who chairs the law firm’s higher-education practice. “We are in a state of flux.”
A behemoth with liabilities — and a history
The first consideration is Phoenix’s size. It’s one of the largest online universities in the country, with roughly 85,000 actively enrolled students. And the purchase prices on the table haven’t been negligible.
In May, the University of Idaho’s Board of Regents approved the formation of a nonprofit corporation, now called Four Three Education Inc., to purchase the University of Phoenix for $550 million. According to the University of Idaho’s corresponding FAQ page, the nonprofit plans to issue bonds to finance the transaction, which — including additional costs, such as insurance — is estimated to require $685 million of capital.
The Arkansas Times had reported a similar price estimate back in January, when a nonprofit affiliated with the University of Arkansas system was considering purchasing Phoenix.
In both cases, the university itself isn’t the buyer; it isn’t ponying up funds for the purchase. Still, transactions like these — especially when the buyer is a newly minted nonprofit lacking audited financial statements — are likely to require partners with the willingness and capacity to assume debt and other liabilities. That can limit the pool of options.
The University of Idaho, for example, has agreed to provide up to $10 million annually to Four Three Education Inc. should it be unable to cover its bond payments, according to the Asset Purchase Agreement term sheet. It may also cosign the University of Phoenix’s Program Participation Agreement (PPA), a written contract with the Education Department that outlines conditions for a college receiving Title IV aid.
Cosigning a PPA is like when a parent cosigns their kid’s apartment lease or car loan. It means that should the primary entity (in this case, Four Three Education Inc.) owe any money to the department — such as for student borrower-defense claims or Title IV violations — and be unable to pay, the department could turn to the cosigner to collect payments.
To Lacey, the Board of Regents appears to be signaling, “‘Look, we’re not going to have the state legislature cosign this PPA,’” but the University of Idaho, another governmental entity, will, he said. “And if you’re the Department of Education … that’s probably good enough.”
Potential financial-aid liability is “among the most important concerns” to consider with any merger and acquisition, wrote Mark De Fusco, a senior consultant with Higher Ed Consolidation Solutions, in an email. And this is especially the case for Phoenix. Borrower-defense claims — where former students file to have their federal loans forgiven — are a looming risk to Phoenix’s future owner, given last year’s Sweet v. Cardona settlement and the department’s new (albeit stalled) borrower-defense regulation.
As of late January, there were 48,890 pending cases against Phoenix that had been filed between February 20, 2016, and January 26, 2023, according to data obtained through a public-records request by the Higher Education Inquirer and shared with The Chronicle. While the total value of those pending claims is unknown, the average debt of a Phoenix graduate was about $31,000 in the 2020-21 school year, according to the University of Idaho’s FAQ page.
A change in ownership for anyone right now is generally a tricky and bumpy process. We are in a state of flux.
(The Chronicle was unable to identify any approved borrower-defense claims against Phoenix. Lacey noted, too, that the $200 million in unrestricted cash that Phoenix is leaving to Four Three Education Inc. as part of the deal greatly mitigates the risk to the University of Idaho.)
Financial liabilities aren’t the only barrier to entry for prospective partners, said Ricardo Azziz, director of the Center for Higher Education Mergers and Acquisitions at the Foundation for Research & Education Excellence and founding president of Georgia Regents University, now Augusta University. An institution looking to affiliate with a behemoth like Phoenix needs to have the personnel to help manage a partnership as well. In Idaho’s case, the intent is for the two institutions to identify efforts to work on together, such as developing pathways between bachelor’s programs at Phoenix and master’s programs at Idaho.
Phoenix’s size — and its history of once enrolling nearly half a million learners — also makes it high profile. It’s on people’s radars. It attracts the national media’s attention.
And many of the headlines haven’t been particularly favorable. The university notoriously shelled out $191 million in 2019 to settle a Federal Trade Commission complaint for deceptive advertising. It’s faced accusations of shady veteran-recruitment practices. It’s attracted criticism for its low graduation rate, too; 27 percent of its students graduate within eight years of starting at the university for the first time, according to the Education Department’s College Scorecard.
The University of Idaho’s FAQ page says comparing Phoenix’s graduation rates to those of more-traditional colleges is like comparing apples to oranges, given that a large proportion of Phoenix’s students work full time and care for dependents — common risk factors to degree attainment. A University of Phoenix spokesperson also noted that the institution has a 100-percent acceptance rate.
A tarnished reputation, whether it’s warranted or not, naturally creates an extra hurdle to securing public (and faculty) buy-in, sources said. This was especially clear, for example, in a Faculty Senate letter sent to UA system president Donald R. Bobbitt back in March protesting a partnership. “Phoenix’s well-documented history of dishonest and predatory practices … are the defining features of the University of Phoenix brand, in opposition to ours,” the letter read. (Bobbitt subsequently responded with his own letter.)
Scrutiny is compounded when the prospective partner is a state-owned entity, Azziz added. A public institution has more stakeholders to answer to than a private college. There are reporters, using sunshine laws. Citizens who pay taxes. Elected representatives.
Indeed, the Idaho legislature’s Joint Finance-Appropriations Committee grilled the University of Idaho’s president, C. Scott Green, in mid-June, asking why it hadn’t been part of discussions. Then, days later, the state’s attorney general, Raúl Labrador, filed a lawsuit against the Idaho State Board of Education (which serves as the University of Idaho’s Board of Regents). The lawsuit, which was amended earlier this month, alleges that the state board, acting in its capacity as the Board of Regents, violated the state’s Open Meeting Law during two closed-door sessions, including one that was held just three days before Regents voted to approve the creation of Four Three Education Inc. The proposed remedy is to void that May 18 vote.
State board lawyers have submitted a slew of filings in efforts to dismiss the lawsuit, and to have Labrador disqualified from serving as counsel, citing conflicts of interest (the latter was successful). They continue to maintain that Idaho followed legal protocol, and was in competition with other interested buyers for the entirety of the process — including the UA system — necessitating ongoing confidentiality.
After the April 24 board vote, “a representative of Party A,” understood to be the UA system, informed Tyton Partners, which is serving as Phoenix’s financial adviser, that it “still wanted to pursue a potential acquisition of UoP” but would “need additional time to either: (i) build internal support from their trustees … or (ii) bring in external partners to support the acquisition of UoP,” Gregory Finkelstein, Tyton Partners’ managing director, wrote in a signed declaration filed in district court on August 14.
State board lawyers that same day also filed motions for summary judgment, instead of a trial, and a speedy hearing, stressing that the lawsuit poses a threat to the deal.
“The transaction must be approved by both institutions’ accreditors” in order to close, a corresponding memo read. “There is a real concern that the accreditation team will decline to approve the transaction, particularly while there is pending litigation over the legality of the transaction.”
Conflicting cultures
Earlier this month, the University of Idaho began promoting its new email account, phoenixquestions@uidaho.edu, where employees could send questions and “ideas” regarding the Phoenix partnership. One of the first emails that came in was from a mathematics professor. The subject line: “nonsense.”
“A chance for questions and clarifications would have been nice BEFORE you snuck this in under cover of darkness,” the professor wrote.
Initial secrecy around mergers or acquisitions, and subsequent faculty blowback, is common. A quick Google search, for example, can quickly surface dissent against well-known transactions, such as Purdue University’s acquisition of Kaplan University, and the University of Arizona’s now defunct deal with Zovio to acquire Ashford University.
The underlying problem, numerous sources told The Chronicle, is that business and public education are inherently in conflict. There’s an unresolved tension between colleges competing — to draw students, faculty, or research dollars — and being transparent with their communities. Azziz said he remembers feeling that tension himself, as a college president.
“We want our schools and our public entities to be the best they can be. But to be the best they can be, to be competitive … they have to compete,” he said. “Yet we tell them they can’t compete. It doesn’t make sense.”
Haven Ladd, a partner at EY-Parthenon’s Education practice, has also observed this discrepancy. In business, he said, the top consideration for a deal is the financial strategy — Is the price right? — followed by the strategic fit and cultural fit. In the nonprofit higher-ed sector, that’s inverted.
“You have very misaligned incentives, and that creates real challenges,” he said, especially when it comes to getting faculty on board. “If you don’t get the cultural fit right” with a partnership like this, “faculties will vote against it.”
The University of Idaho committed a full section on its FAQ page to focus on “fit,” noting that Idaho and Phoenix boast “complementary” programs and “a mutual desire to reach first-generation and underserved students,” among other things. But faculty members like Leontina Hormel, a sociology professor, remain unconvinced.
“There have definitely been faculty who are trying to be measured about this and are trying to trust that the best interests of the university are being represented,” Hormel said. But she recalled how during an August 14 panel discussion with faculty members, Phoenix leadership was asked what made the University of Idaho a good fit. “It was a very long, convoluted answer that never said anything specific about University of Idaho,” she said. “It felt like very much like they didn’t have any sense of University of Idaho and its own culture and its own pursuits.”
We want our schools and our public entities to be the best they can be. But to be the best they can be, to be competitive … they have to compete. Yet we tell them they can’t compete. It doesn’t make sense.
Asked to provide further clarity on why the University of Idaho is the best partner, a Phoenix spokesperson wrote in an email that the state of Idaho is “experiencing some of the same national trends that other states are — such as needs to upskill or reskill their work force due to technological advances and changing demographics.” It’s “something U of I is highly attuned to, and University of Phoenix is fully focused on. Partnering will allow us to learn from each other in service to these goals.”
It’s unclear whether anyone’s cracked the code on how to balance public and private interests. With the University of Idaho, at least, Green has told faculty members that the institution intends to assemble working groups this fall to brainstorm how best to leverage an affiliation with Phoenix.
Even as the partnership starts to take shape, though, Phoenix’s transformation may run into further roadblocks: A taxed Education Department and an “in flux” regulatory environment.
While the Education Department isn’t the one to OK such deals — that’s up to accrediting agencies — it conducts change-in-ownership reviews after transactions officially close. Those reviews determine whether an institution, under new ownership, will continue to be eligible for Title IV funding. (This almost always goes through, Lacey said). In the case of a for-profit institution transitioning to nonprofit status through the IRS, the Education Department also uses this review to determine whether it’ll actually agree to regulate that institution as a nonprofit. There’s no guarantee; the department in 2019 refused to recognize Grand Canyon University’s nonprofit status, prompting an unsuccessful lawsuit from the institution.
It’s an increasingly lengthy process that lawyers like Lacey and Emily Wang Murphy, also a partner at Thompson Coburn, attribute to expanding requirements and capacity issues. Lacey estimates reviews now typically take one to three years; he recalled a recent change-in-ownership review that wrapped up two years and eight months after the transaction closed.
“We used to be able to tell clients that the regulatory approvals would take six to nine months or so. But the regulatory framework has gotten so complex … it has become like threading a needle,” Murphy wrote in an email. And while the lawyers there are “highly skilled,” she continued, the department is “extremely understaffed.”
Phoenix, then, could presumably be waiting a bit for its reconstruction to be fully complete — well after its purchase and affiliation with Idaho go through. (Barring any legal complications stemming from the lawsuit, closing is expected in early 2024.)
Asked the average time it takes to complete a change-in-ownership review, an Education Department spokesperson wrote in an email that the department “is committed to reviewing complete change-in-ownership applications in a timely manner. As the time to review an application depends on a variety of factors, the department does not calculate an average.”
Any near-term reviews are also playing out amid changing department regulations, Lacey noted, leaving uncertainty about the types of conditions the Education Department may ultimately impose in exchange for granting continued Title IV eligibility.
Proposed rules that could go into effect as early as July 1, 2024, would let the department take certain metrics, like the debt-to-earnings ratios of institutional programs, into account when considering continued eligibility, for example. The rules would require PPA cosignatures from “all entities with direct or indirect ownership and that exercise control over a proprietary or nonprofit institution.” The rules would exact new reporting requirements for institutions converting to nonprofit status.
Those like Lacey and Murphy are watching intently.
“Right now is the point in my career, 23 years doing this, where I am least able to predict what the U.S. Department of Higher Education is going to do,” Lacey said.
