Market dynamics are creating huge pressure on the revenue lines at traditional publishers. Because of these dynamics Desilva + Phillips expects to see an accelerated range of efforts to pursue acquisitions of newer startups in the education sector.
Recent transactions in the education market have involved both the wholesale purchase and refinancing of major industry players (e.g. the sale of Blackboard, and McGraw-Hill Education, the Sungard/Datatel merger, and the refinancing of Houghton Mifflin Harcourt) and the pursuit of new educational software and servicing businesses by both traditional publishers and growth equity investors (e.g Compass Embanet, Deltak, Moodle Rooms, Archipelago Group, and Psychological Software Solutions).
There are some market trends that will lead the types of transactions we expect in 2013. First, in the K-12 market 45+ states are adopting the Common Core Standards, an initiative to bring the diverse state curricula into alignment with each other by following the principles of standards-based education reform. Implementation of this reform is barreling down on teachers and administrators. Professional Development that has proven results, as reflected in students’ standardized assessment tests, will be in demand.
In higher education, major market disruptions in the traditional model are leading to new business models (e.g. rental, heightened customization); new distributors (e.g Inkling and Kno); new device arrangements (e.g.i pads and Nooks;) and various deals involving new learning software. Massive open online courses (MOOCs) are also leading the use of open source content to rival the use of open course software.
In both K-12 and higher ed, new tech offerings racing to market include adaptive instruction and support packages for teachers/schools. These technologies will represent strong acquisition opportunities in 2013. In particular, technology enables a much wider and more granular collection and use of data about student outcomes, learning habits, content usage and other relevant workflow information. Companies with robust means for collecting and analyzing data about student learning will be particularly attractive acquisition targets.
And in both K-!2 and higher ed, adaptive learning, where technology “adapts” the educational content according to each student’s needs is emerging as a key approach in the delivery of better instruction and the pursuit of more outcomes-based education. A number of new technologies that enable the powerful feedback loop between content delivery, instruction and assessment will become increasingly attractive.
M&A activity remains active in 2013 with the continued acquisition of tech content, technology, consolidation of companies, the continued implementation of new forms of learning (e.g. online learning, adaptive learning) and the entry of new companies and investors from outside the traditional education sector [e.g. IAC recent purchase of Tutor.com].
In the more traditional publishing sector, investors will find ongoing industry consolidation to produce deals that combine operations, consolidate lists or otherwise provide ways to enhance operating income in an industry where traditional print book revenue is flat or shrinking, but eBooks, both simple and those dynamically enhanced, are having a material impact on this sector.
Robin Warner is a managing director with DeSilva & Phillips. Hendrik Kranenburg, industry partner at Desilva + Phillips contributed to this report.
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