"A fly before his own eye is bigger than an elephant in the next field." Anon. (Chinese)
It is tempting to watch the merry-go-round of dealmaking among education entrepreneurs and venture geeks and settle into the idea that one can just can invest into something quickly, build scale and dominate a particular corner of the education market--or, if that doesn't work, sell your company to the next fool. It might even be plausible if you're a financial investor with a seven year time horizon who can tap either strategic or public market exits without any longer-term considerations. But for leading education companies and University operators, with time horizons in the decades if not centuries, a few high-profile minority investments rarely provide the level of deep, strategic and durable market presence that is necessary to create a meaningful impact for both students and stakeholders.
Perhaps it is for this reason that M&A has long been the favored strategy for multinationals and other foreign competitors expanding into the Asian region, and the education sector will be no different. For despite serious challenges to acquirers in terms of less than permissive industry regulation; attitudes toward change of control and foreign majority ownership; skepticism toward private for-profit entities; limitations in deal size; and emerging local acquirers, the past decade has already witnessed a solid number of of strategic platform investments and add-on acquisitions across a range of educational institutions and service businesses. Moreover, with Asia's highly fragmented markets, scaled-up local competition, and the full impact of past venture and private equity investment into education companies now maturing, the years ahead are primed for an even larger wave of consolidation as existing education giants vye for market leadership and those still eyeing the region from the US and elsewhere begin to realize that their clock is ticking.
To understand this further, I collected a representative set of M&A transactions in Asia's education sector between 2004 and 2014. The data include predominantly control-based acquisitions and investments executed on a cross-border basis, with strategic minority investments and invested equity as part of joint ventures are intentionally excluded.
The results of this survey, as illustrated in Figure A, are drawn from thirty-three distinct education-related acquisitions across the region.
What does the data tell us?
Figure A: Selected Asia-Based M&A in the Education and Services Sector: 2004-2014
Geographic and Country Focus
First, in terms of geographic focus Australia and China were the most active areas for cross-border acquisitions accounting for 27 and 42 percent of total deals (by number). This should not be surprising. Australia is a relatively open, competitive marketplace as well as a global leader in attracting international students and a magnet for Asian immigration. As such there has been consistent investment into Australia from leading postsecondary companies such as Kaplan, Laureate, and Apollo both as a way to purchase initial scale in a vibrant English language higher education market and to tap rapidly growing cohorts of inbound international students. Foreign participation also fits with the Australian government's economic policies.
For its part, China has been the most active education market in Asia with M&A transactions spanning K12, tutoring, English language learning (ELL) and private higher education including through both private and public market transactions. Notable cases here include Pearson, Laureate, and Raffles Education in Singapore. Their wide range of activity is a function of many factors attributed to China's own economic rise but also to the particular demographics of higher education including a peak in the number of high school graduates (and potential pool for college), a wave of private minban colleges over the 2000s, surging levels of study abroad, and higher propensity to spend on cram schools and English language study.
But the concentration of deals in Australia and China also suggest a lack of activity elsewhere. Notably, there were relative few (6 per cent) of M&A transactions in India despite its massive need for education-related FDI; Singapore accounted for 9 per cent. While this low level of activity has no doubt been influenced by regulatory ambiguity and government aversion to for-profit tax status in the case of higher education, other education needs such as vocational skill investment have also lagged in terms of geographic distribution and quality. Outside of India, there are several markets in ASEAN--such as Vietnam and Indonesia--where M&A activity has been largely absent despite enormous development needs. Japan and Korea, among the toughest buyout markets to crack in education or any other industry, were also off the list but these markets offer less-defined growth opportunities.
The second observation is that M&A activity has been concentrated within three sub-sectors: higher education, professional and vocational education, and English training, accounting for 36, 30 and 12 per cent of total transactions, respectively.
Why these deals have been aggregated as such can be explained in a few ways:
- Higher education IPOs are highly restricted across much of Asia which creates a natural path to M&A activity as a viable alternative. This is especially true as financially-oriented owners of higher education properties often do not often have the option to go public and must sell to strategic investors (or other financial investors). Proprietary college acquisitions, such as those undertaken by Laureate, are typical examples.
- Professional and vocational education products and services may have a greater ability to go public than colleges but they often rely on some sort or credible badge or certification--if not accreditation--that draws upon international standards and entities which represent them. This favors foreign buyers. Moreover, some companies that take the IPO path may have significant cash on the balance sheet but remain need of strategic direction and be more amenable to a sale, such as Pearson's "take-private" acquisition of GEDU.
- By contrast, Asia's tutoring-based and supplementary education companies are by nature consumer-facing, less regulated businesses and often more attractive and understandable to pure financial investors. They also present a clearer path to IPO and, being less encumbered by regulators, have the ability to scale quickly. Since many tutoring companies often serve local curriculum and testing standards, the argument to bring in foreign expertise is often less compelling.
- In a similar vein English training companies are not accredited and have lower barriers to entry which, as with many tutoring companies, offer a range of exit options. This also rings true for many online services and education technology platforms. But English language is an area where a strategic tie-up with a multinational leader can create substantial value and synergies and thus we have witnessed more activity in this area than other tutoring businesses across Asia.
As noted previously, it is often what is missing that is more important. Within education sub-sectors, activity in the K12 and international school area sector is on the rise in terms of venture and equity investment but less so on the M&A front. The roll-up of schools under Nord Anglia is one exception; other school "chains" such as Maple Leaf and Dulwich in China are being built organically. But the speed at which demand for K12 assets is increasing, with operators looking to build scalable presence across the region, may invite more multinational strategic activity with heavier capital commitments in future.
A Few Active Acquirers
Third, there has been a small cluster of buyers with over 79 per cent of acquisitions led by four highly acquisitive companies: Laureate, Kaplan, Pearson and Raffles (with some late activity from Apollo). In cases where other multinational groups with education interests were active in Asia-- publishers such as McGraw Hill, Wiley and Bertelsmann are examples--market entry has usually been in the form of opportunistic minority equity holdings or revenue partnerships rather than acquisitions. There are a few companies such as EF (English First) which have used a build rather than buy strategy, but these are the exception. In the case of China, EF began with a joint venture and but later opted for a wholly-owned build-out model which has proven successful in maintaining control over its country strategy. Yet its success was also in no small measure due to significant prior international experience as well as the nature of the English language sector, which is less regulated than more formal, accredited education.
How long will this concentration of acquirers last? US for-profits such as Kaplan have been active internationally for decades and several, such as Laureate, have been acquisitive from inception. Through shrewd M&A strategies they have developed specific platforms in Asia and will continue to grow organically as well as through selected acquisitions. But the future will be different.
The past decade in Asia has opened up the M&A field and we have only begun to see the presence of large, domestic players placing bids as part of formal investment banking auctions. If the historical experience of other industries such as TMT are any indication, then domestic education competitors in Asia will become much more acquisitive over time, both inside and outside the region, in a race to consolidate locally fragmented markets and develop more globally integrated platforms.
At the same time, competitors such as Apollo Education Group, who only recently became an owner of Open Colleges in Australia, will need to build a much deeper presence in the region to make its international diversification efforts meaningful to shareholders. Still other market participants, from educational publishers to leading Edtech platforms, may currently have some presence in Asia but will realize, if they haven't already, that their positioning is relatively non-material in terms worldwide profit contribution.
I have written frequently here about Asia being at the epicenter of education market development over the coming decades. If I am correct, the pressure to own assets in Asia will only rise as education markets consolidate, localize and expand far beyond current levels. Companies with coherent and well-executed M&A strategies will be on the inside rail to take advantage of higher growth through strong local commitments and knowledge if they have skin in the game; many others, relying on a hodge-podge of joint ventures and smaller "opportunistic" investments, may no longer be in the position to effectively compete at all.