Education

Early Troubles In The Purdue, Kaplan Marriage


A little more than two years ago, a very odd education couple got hitched.

Joined in union were Purdue University, one of Indiana’s flagship public universities, and Kaplan University, the large, for-profit, mostly online college. They were one when Purdue announced a deal to buy Kaplan University.   

They were an odd couple because Kaplan University, like many for-profit, online schools, was a profiteering bad boy. It had been called out, sued and sanctioned by regulators and others for some disturbing practices and suspect quality. And Purdue was a public, highly-regarded research university. Together they would create Purdue Global.

The reasons for the union were straight forward. For-profit colleges were collapsing, and in Purdue, Kaplan found an exit from that gloomy, nearly certain future. They also found what they anticipated to be a viable revenue path in the form of a 30-year deal to run just about everything at the new school except teaching. The arrangement could also allow a Kaplan company to split some student tuition revenue and cash out some other incentives.  

On the Purdue side of the aisle, they knew that online college education offerings can be profitable because they can be larger and cheaper than traditional, in-person ones. Purdue must have noticed too that some state schools such as Arizona State and University of Central Florida had large online programs and were expanding their reach, growing their profile and scooping up cash. Purdue wanted in. But they had decided that building a large online program of their own could take too long and cost too much. So, they said, it seemed like a good idea to just buy one.

But it looks like the marriage may not be going well.  

Purdue Global is losing money. First reported by College Meltdown blog, Purdue University’s 2018 financial report showed it had a net operating loss of $38.4 million last year.

The news prompted a public back-and-forth in the local news between teachers and the administration. There is some misreading and misleading in both accounts. And Purdue has been very reluctant to discuss the finances, repeatedly declining on-the-record interview requests.

Last year’s losses at Purdue Global were actually closer to $16 million, still a significant deficit for a venture that was supposed to be self-sustaining and profitable.

The shortfall is probably worse than a single number though because Purdue Global has already collected $30 million in payments from Kaplan – part of a series of agreed-to payments totaling $50 million. The loss also comes at a time when Purdue leadership is actively trimming acquisition-related expenses such as canceling leases on property. But more significantly, according to the published piece from Purdue’s Treasurer Bill Sullivan, the losses are likely to continue another year, maybe two.

The losses are driven heavily, but not exclusively, by marketing and advertising spending. And the outflow has already started to ding Kaplan’s bottom line. Kaplan recently told shareholders the money from the Purdue deal isn’t coming in. “This significant marketing spend, which the Company supports, impacts the cash generated by Purdue Global and its current ability to fully pay the [Kaplan] service fee…” Kaplan also reported a major drop in year-over-year six-month profit – down from $12 million in 2018 to $4 million in 2019.

In theory, Purdue Global could manage its bottom line by adjusting its marketing spending. The more serious concern though is that the operation just isn’t growing. Mitch Daniels, President of Purdue, conceded the issue, saying in an interview, “We’re not achieving the growth that we thought we might.”

That’s a major problem on a number of fronts. The obvious reason is that lack of growth is unlikely to be altered by cutting advertising. The inverse is even more troubling, that the school is not growing even with the “significant marketing spend.”

A number of factors are likely contributing to the disappointing growth, some demographics, some related to reputation, others related to slowing online enrollment growth overall.

Whatever the reasons, it’s difficult to overstate what a problem that could be because the entire Kaplan/Purdue marriage was based on a presumption of growth. Moreover, Purdue is legally barred from supplementing Purdue Global finances, which are separate. And Kaplan is only obligated to chip in another $20 million.

There is a built-in opt-out clause in the deal after six years. It involves a buyout, but it’s not clear how much or in which direction or what would happen to Purdue Global students in the event of divorce.  Don’t be too surprised if one party or the other bails out.

If that does happen, of the partners, Kaplan likely stands to lose the most, having traded their assets, their students and their revenue stream for a single dollar while agreeing to pay Purdue $50 million – money being used to sell a school named Purdue. They’ve made some money, but not nearly what they probably expected over 30 years of selling their wares under the credible Purdue name.

In putting their reputation and brand on the line, Purdue arguably risked even more and if Purdue Global does not take off, or if there is a divorce, questions will be forthcoming as to whether the sizeable risk was worth the marginal reward. On the other hand, scooping up 30,000 students and $50 million in brand advertising doesn’t sound like an awful deal, even if that’s all Purdue gets.

The big lesson is probably that education marriages that seem odd, are. A bigger one may be that online education is not the business promise land it’s assumed to be. Just having a big online program, even if you buy it, doesn’t guarantee success. And maybe schools are better off building their programs the way they build their reputations, on their own, slowly and with purpose.

There’s no guarantee Purdue Global won’t be a success, even though it’s off to a poor start. If it fails, though, or even if it just sputters along, there will be more lessons. And a ton more questions.



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