Virtual School Meanderings

May 20, 2021

Pearson to Buy Stride Inc. (K12, Inc.)???

So there was a rumour going around a couple of days ago…

Stride gains on report that Pearson may be preparing takeover bid

May 18, 2021 10:36 AM ET Stride, Inc. (LRN) By: Josh Fineman, SA News Editor
  • Stride Inc. (NYSE:LRN) rose 1.3% after a report that Pearson plc (NYSE:PSO) is said to be preparing a bid for the online education company. Pearson fell 1.5%.
  • Pearson is said to be working with advisors on a potential offer for Stride, which was previously known as K12, according to a StreetInsider report, which cites an unidentified source.
  • Stride was previously reported to be a potential takeover target about a month ago, according a Betaville report.
  • Stride short interest 9.1% of float.
  • Last month, Stride gained after earnings but Morgan Stanley sticks with cautious rating.

In less than four hours, the story was cleared up.

Pearson says it’s not preparing a bid for Stride Inc.

May 18, 2021 2:08 PM ET Pearson plc (PSO) By: Josh Fineman, SA News Editor
  • Pearson (NYSE:PSO) said it’s “not preparing a bid” for Stride Inc. (NYSE:LRN), a Pearson spokesman tells Seeking Alpha.
  • Earlier, Stride Inc. rose after a StreetInsider report that Pearson  is said to be preparing a bid for the online education company.
  • Stride, formerly known as K12, is paring earlier gain, now up 2%.
  • Stride was previously reported to be a potential takeover target about a month ago, according a Betaville report.
  • Stride didn’t immediately return Seeking Alpha request for comment.
  • Stride short interest 9.1% of float.

Two things I find interesting about this story.

  1. On the news that they might be buying Stride Inc/K12, Inc., Pearson stock actually decreased (i.e., the market thought it a bad purchase).
  2. What would the cyber charter school landscape have looked like with both Stride Inc./K12, Inc. and Connections Academy all under the same company?

March 23, 2021

NPE Report – Chartered For Profit: The Hidden World of Charter Schools Operated for Financial Gain

Last week I posted an entry entitled Breaking: NPE Releases New Report on Charters Run for Profit.  At the time I just posted the press release from the Network for Public Education, but today I wanted to focus in on some of the cyber charter school aspects of the report.  The report is available at:

https://networkforpubliceducation.org/wp-content/uploads/2021/03/Chartered-for-Profit.pdf

There are many references to cyber charter schools, for example

Despite the commonly held belief that families and teachers initiated the charter school movement, large for-profit management companies appeared and expanded from its earliest days. Within five years of the opening of the first charter school in Minnesota (1992), the four dominant brick and mortar for-profit chains—National Heritage Academy, The Leona Group, Charter Schools USA, and Academica began building their operations. These four corporations, plus the three largest for-profit online charter corporations (K12 Inc., Pansophic Learning/ACCEL, and Pearson/Connections Academy) manage 555 schools across the country; nearly half of our identified schools. Other large chains operate clusters of schools in only one state.

Of the 138 for-profit management corporations, a majority (73) run only one or two schools, a practice designed to get around state laws that prohibit for-profit charter schools, while ensuring that profit can go into the school manager’s pocket and that transactions and salaries can be hidden from public view. (pp. 4-5)

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Cost-cutting strategies designed to increase profit are a standard business practice. This is often achieved by reducing personnel costs. In education, that means either paying teachers less or paying fewer by increasing class size. In 2010, the Florida Center for Investigative Reporting released a confidential document from K12 Inc. that showed that in some of K12’s online high school courses, the student-teacher ratio was 275 to 1.11 (p. 10)

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Let there be no mistake. Non-profit charter management organizations have also found devious ways to eke out a profit from schooling via oversized salaries and nepotism, real estate deals, related for-profit companies, and sometimes outright fraud. Three of the four charter management organizations that have run a Cape Coral, Florida charter school, presently known as Heritage Academy Charter School, 14 were for-profits. However, a fourth, Celerity Education Management, was a nonprofit whose founder and CEO misappropriated and embezzled a total of $3.2 million.15 And the largest charter school scandal to date, one that funneled tens of millions of dollars into the owners pockets via kickbacks and falsified attendance records, involved an online nonprofit called A3. (p. 11)

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It has a full section on “Online and Other Chains” that includes the main cyber charter companies that begins on page 28 and continues to page 32.

We now turn to the online or virtual charter market.

Although there are no real estate empires to be built, online charter schools provide enormous profit opportunities with their minimal overhead combined with the ease by which schools can “cook the books” on attendance.

The first for-profit online charter school emerged in 2000 when former banker Ron Packard founded K12 Inc. K12’s rival, online Connections Academy, began a year later in 2001.

K12

The first online provider of charter schooling to enter the marketplace was K12, Inc. Ron Packard founded K12 with a $10 million investment from Michael Milken and $30 million from other Wall Street investors. Previously, Packard had worked for Milken, the “junk bond king,”56 as Senior VP of Milken’s investment holding firm, Knowledge Universe Learning Group, and CEO of Knowledge Schools, a chain of pre-schools.57

Between 2009 and 2013, Packard was paid more than $19 million as the company’s CEO. The Center for Media and Democracy estimated that 86 percent of K12’s revenue came from taxpayers during that same period.58

In an interview, Packard describes how K12 scaled its business model quickly by creating a web of non-profit entities that K12 could “turnkey” into charter schools.59

K12 turned parents interested in an online school in their state into “entrepreneurs.” Packard explained, “they [parents] formed the not-for-profit entities, and they go through the process of getting legal permission for the school. Once they did that, we could turnkey for them.” K12 became a publicly-traded company in 2007.60 Five years later, a shareholder lawsuit61 and a front-page New York Times article accused K12 of lying to investors and putting profits over kids.62 To avoid the scrutiny that comes with a publicly-traded company, in 2014, K12 announced a new, yet-to-be-named company financed by Safanad Limited, an investment company located in Dubai. This company was to become Pansophic Learning, which we discuss below.

A summary of Packard’s career founding and leading for-profit charter management corporations can be found by clicking on the LittleSis map on the following page.

[unable to quickly re-produce image, so go to the top of page 29 of the report]

The controversy surrounding K12 did not end with Packard’s departure, however. In 2016, after an extensive investigation of the for-profit’s dealings in California, then-Attorney General Kamala Harris announced a $168.5 million settlement with K12 due to its misleading advertising to prospective students and the reporting of inflated attendance numbers.63

The California decision had a cascading effect on K12 operations. A few months later, the Farmington, New Mexico School Board voted to shut down K12’s New Mexico Virtual Academy, after the state’s Attorney General, Hector Balderas, said that he intended to investigate the school.64 Balderas’ predecessor, Gary King, had released an opinion two years prior, stating that he believed the school violated the New Mexico Charter Schools Act, prohibiting for-profits from operating charter schools. In 2019, the Georgia Cyber Academy broke off its relationship with K12, resulting in students bearing the brunt of a contentious separation.65

Nevertheless, K12 revenue topped one billion dollars that year as it expanded a new line of online vocational schools, Destination Career Academies. Presently the corporation operates 51 online charter schools in 20 states.66

Connections Academy

Connections Academy was founded in 2001, a year after K12. It is a subsidiary of the multinational testing and curriculum publication corporation Pearson, headquartered in the United Kingdom. It presently operates 33 online charters in 22 states.

In the Public Interest (ITPI) is a national non-profit research and policy organization located in California. It regularly issues reports on taxpayer-funded goods and services, highlighting when public funding is abused. In February of 2021, it issued a report on California’s online charter schools entitled, Costly Failure: California Is Overpaying for Online Charter Schools That Are Failing Students. 67 The report included a critique of Connections Academy, which operates eight charter schools in that state. Although for-profit operators are now banned by law in California, Connections formed a non-profit facade, CalOPS, to act as a CMO between the for-profit and its schools. A tweak in the model and the law loses its teeth.

Many of ITPI’s findings regarding how much profit Connections extracts from its schools are significant. For example, ITPI estimates that the excess profit rate (profit rate of Connections compared with brick and mortar schools in California) is likely between 35 and 40 percent. Also, what Pearson charges appears not to be dependent upon actual cost, but rather, to put it bluntly, what they can get away with depending on the state. According to the report: “

Californians pay significantly more per-pupil than some other states. Some portion of this difference may reflect differential pay rates for school staff. But the gap between California and other states’ funding rates cannot be wholly attributed to teachers’ salaries.

For instance, each Connections Academy school pays 11-11.5 percent of its total revenue to Connections Education in return for treasury, marketing, and school administration services. These payments are sent to Pearson’s corporate offices in Maryland. However, even though administrative or treasury services performed in Maryland should cost the same no matter which school they are serving, schools based in different states pay very different rates for these services. In Oklahoma, Connections Academy pays $720 per pupil for these services; in California, Connections Academies pay $1,143 for the same services.”

In the Public Interest obtained fee schedules and invoices for Connections Academies via public information requests. They found nearly a $10,000 difference between the per-pupil funding that Connections takes in Pennsylvania as compared with Oklahoma. Profits like these have allowed the corporation to run television ads on major cable networks throughout the ongoing novel coronavirus pandemic.68 In short, taxpayers in some states subsidized the online school’s marketing in other states, including states like New York, where Connections Academy charter schools do not exist presently.

Pansophic Learning and ACCEL

In 2014, K12 announced a new, yet-to-be-named company financed by Safanad Limited, an investment company located in Dubai. Safanad would be the majority investor, and K12 would be the minority investor. This corporation would develop a portfolio of brick and mortar and online schools, plucking established chains that failed.

When Ron Packard and Safanad announced the rollout, Packard was identified as being in charge. The new corporation acquired licenses for K12 curriculum and technology, as well as “an international brick and mortar private school, a higher education platform business and the K12 business in the Middle East.” Pansophic Learning’s name and address were used to register a new Ohio for-profit, ACCEL Schools, LLC.

Seven months later, Pansophic took over the contracts of 12 charter schools managed by the controversial White Hat Management. 69 In July 2015, another large for-profit education management organization operating schools in Ohio, Mosaica, ran into financial trouble and sold its assets to Pansophic Learning.70 The deal added another 15 charters to ACCEL’s growing portfolio.

Packard was clear about the business strategy behind his purchase of these distressed charter chains. “By purchasing both of these entities, it gave us a base business to build off of. It’s just very hard to start from nothing. We will open a lot of new schools, but this gave us a critical operating mass from which to build on.”71

Packard continued to build a “critical operating mass” for his new venture. He took over the contracts for 12 I CAN charter schools, 72 and also the Ohio Distance Learning Academy (OhDELA), the last of the White Hat schools.73

The OhDela contract is a sweeps contract that funnels 97 percent of the school’s revenue to ACCEL. We looked at several other contracts for ACCEL charters in Ohio and found that schools pay ACCEL either a 12.5 percent or an 18 percent management fee.

While ACCEL’s model of taking over distressed assets may not include real estate, their charter contracts do stipulate that ACCEL will “identify a suitable facility…and arrange for a lease to be entered into by the Governing Authority for the operation of the School,” thus providing the opportunity to profit from the building leases.

We searched the Ohio “Community Schools Documents” database and found that Global School Properties Ohio, LLC holds the leases for many ACCEL charter schools.74 The lessor is at the same 1650 Tysons Blvd. address in McLean, Virginia, as Pansophic and ACCEL Schools.75

The charter contracts indicate that there are numerous other opportunities to realize profits. By contract, ACCEL oversees all of the following areas of school operations: talent acquisition; human resources administration; financial management; payroll and benefits; grants management; executive leadership; curriculum, instructional design and educational philosophy; marketing and community outreach; food service management; professional development for all staff, centralized purchasing, board governance services, transportation management, building-level leadership training and supervision, fundraising and technology administration.

The employee reviews of ACCEL on the Indeed job search website are scathing, with many accusing ACCEL of cutting corners on staff and students to increase profits. The reviews, which are mostly one or two stars, are best summed up by this comment:

The emphasis is on the “state tests” not on the students. Staff is told what they will do, not asked. Then, the next day, it is changed. Everything here is about getting money or saving money instead of providing quality education and fair wages. Most of the employees quit when Accel took over the schools, now we know why. Half the teachers are already looking for other jobs, and it’s only March. Most of the teachers are long-term substitutes that are new to teaching, many are unqualified to teach.

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56 Thebault, Reis. (2020, February 18). “Who is Michael Milken, the ‘junk-bond king’ Trump just pardoned?” The Washington Post. Retrieved from https://www.washingtonpost.com/business/2020/02/18/michael-milken-pardon/

57 “Ronald J. Packard, ‘89” (n.d.) Chicago Booth, a journal of the University of Chicago Booth School of Business. Retrieved from https://www.chicagobooth.edu/daa/honorees/ronald-packard

58 PRWatch Editors. (2014, February 19). “New Report Exposes America’s Highest Paid Government Workers.” Center for Media and Democracy. Retrieved from https://www.prwatch.org/ news/2014/02/12393/new-report-exposes-america%e2%80%99s-highest-paid-government-workers

59 “A Scalable K-12 Education Solution: K12 CEO Ron Packard (Part 4). (2009, November 21). One Million by One Million blog. Retrieved from https://www.sramanamitra.com/2009/11/21/a-scalablek-12-education-solution-k12-ceo-ron-packard-part-4/

60 Tomassini, Jason. (2012, February 21). “K12 Inc.’s Public Status and Growth Attract Scrutiny.” Education Week. Retrieved from https://www.edweek.org/technology/k12-inc-s-public-status-and-growthattract-scrutiny/2012/02

61 Brown, Emma. (2012, January 31). “Shareholder lawsuit accuses K12 Inc. of misleading investors.” The Washington Post. Retrieved from https://www.washingtonpost.com/blogs/virginia-schools-insider/post/shareholder-lawsuit-accuses-k12-inc-of-lying-about-student-test-grades/2012/01/31/gIQAGOXRfQ_blog.html

62 Saul, Stephanie. Ibid.

63 California Department of Justice. (2016, July 8). “Attorney General Kamala D. Harris Announces $168.5 Million Settlement with K12 Inc., a For-Profit Online Charter School Operator.” Retrieved from https://oag.ca.gov/news/press-releases/attorney-general-kamala-d-harris-announces-1685-million-settlement-k12-inc

64 Kellogg, Joshua. (2016, December 16). “Board votes to close New Mexico Virtual Academy.” Farmington Daily Times. Retrieved from https://www.daily-times.com/story/news/education/2016/12/16/ board-votes-close-new-mexico-virtual-academy/95516964/

65 Tagami, Ty. (2019, August 28). “Petition for new online charter schools with K12 Inc. denied.” Atlanta Journal-Constitution. Retrieved from https://www.ajc.com/news/local-education/petition-for-newonline-charter-school-with-k12-inc-denied/u0jSCflNWGCHh8kgvvkkAM/

66 Molnar, Michele. (2019, August 7). “K12 Inc. Tops $1 Billion in Revenues, Even as Georgia Charter School Fight Looms.” EdWeek Market Brief. Retrieved from https://marketbrief.edweek.org/marketplace-k-12/k12-inc-tops-1-billion-revenues-fiscal-2019-even-georgia-charter-school-fight-looms/

67 Lafer, Gordon; Crawford, Clare; Petrucci, Larissa; Smith, Jennifer. (2021, February). “Costly Failure: California Is Overpaying for Online Charter Schools That Are Failing Students.” In the Public Interest. Retrieved from https://secureservercdn.net/45.40.148.234/q9w.d4d.myftpupload.com/wp-content/uploads/2021/02/ITPI_CostlyFailure_Feb2021_FINAL.pdf

68 Connections Academy TV Commercials. (n.d.) iSpot.TV. Retrieved from https://www.ispot.tv/ brands/ZxC/connections-academy

69 O’Donnell, Patrick. (2015, June 9). “White Hat charter school operator may sell off management of 12 schools.” Cleveland Plain Dealer. Retrieved from https://www.cleveland.com/metro/2015/06/ white_hat_charter_school_opera.html. For more information on White Hat Management, see “Education Empire: David Brennan’s White Hat Management, Inc.” a report by the Food and Allied Service Trades Division of the AFL-CIO in cooperation with the Ohio Federation of Teachers. (2006, May). Available at: http://oh.aft.org/files/article_assets/E0B509E4-04D7-1131-E6AC03D0698CD6DC.pdf

70 Huron Consulting Group. (2017). Mosaica Education. Retrieved from https://drive.google. com/file/d/1pUzhU6rhpGjFk9vi2rffRbqOUtmijcfr/view

71 Strauss, Valerie. (2016, September 10). “If this guy is elected, you can kiss public schools goodbye.” The Washington Post. Retrieved from https://www.washingtonpost.com/news/answer-sheet/ wp/2016/09/10/critics-of-trumps-education-policy-kiss-public-schools-goodbye-if-he-wins/

72 O’Donnell, Patrick. (2019, January 11). “I Can charter schools turned over to Accel network run by former CEO of K12 Inc.” Cleveland Plain Dealer. Retrieved from https://www.cleveland.com/ metro/2017/03/i_can_charter_schools_turned_o.html

73 O’Donnell, Patrick. (2019, January 30). “White Hat charter schools shrink again: turn e-school over to K12 Inc. founder.” Cleveland Plain Dealer. Retrieved from https://www.cleveland.com/metro/2018/07/white_hat_charter_school_decline_continues_ohdela_e-school_given_to_former_k12_inc_executive_ron_packard.html

74 Ohio Department of Education. Retrieved from http://education.ohio.gov/Topics/Community-Schools/Community-Schools-Documents

75 Registration of Foreign For Profit LLC. (2015, June 30). Global Schools Properties Ohio LLC. Ohio Secretary of State. Retrieved from http://education.ohio.gov/Topics/Community-Schools/Commu- Chartered for Profit: The Hidden World of Charter Schools Operated for Financial Gain 51 nity-Schools-Documents

[live links available on pages 49-50 of the report]

I encourage you to read the full report at:

https://networkforpubliceducation.org/wp-content/uploads/2021/03/Chartered-for-Profit.pdf

May 20, 2020

MarketBeat Daily: Headlines and Analysts’ Updates for 05/19/2020

The MarketBeat update for K12, Inc. and Pearson Education from yesterday.

MarketBeat Daily Ratings
May 19th, 2020
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May 19, 2020

MarketBeat Daily: Headlines and Analysts’ Updates for 05/18/2020

The MarketBeat update for K12, Inc. and Pearson Education from yesterday.

MarketBeat Daily Ratings
May 18th, 2020
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© 2006-2020 American Consumer News, LLC dba MarketBeat. 326 E 8th St #108, Sioux Falls, SD 57103. United States.

May 18, 2020

MarketBeat Daily: Headlines and Analysts’ Updates for 05/15/2020

The MarketBeat update for K12, Inc. and Pearson Education from this past Friday.

MarketBeat Daily Ratings
May 15th, 2020
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