What U Arizona Executives Are Not Addressing About the UAGC Merger

Author

Phil Hill
February 16, 2022

The next chapter in the long-running University of Arizona Global Campus (UAGC) saga is becoming clear, as described by Kathryn Palmer at Tucson.com.

The University of Arizona’s recent announcement of its plans to absorb the UA Global Campus, an online school with a troubled past, is causing a stir among the faculty — but the deal will go forward, the university president says.

In the two weeks since the Arizona Board of Regents publicly endorsed UA President Robert Robbins’ plan for the UA to fold UA Global Campus, formerly known as the for-profit online school Ashford University, into its operation, the UA Faculty Senate has held two meetings about the deal.

Initially U Arizona planned to keep UAGC a separate entity for at least three years, but the US Department of Education (ED) forced their hand.

It’s happening right now in part because the U.S. Department of Education sent a letter to UA Global Campus last November alerting the school that because it underwent a change in ownership, it and the UA Foundation would have to either immediately provide the education department a financial audit or a 25% letter of credit valued at $103 million to continue to be eligible to receive Title IV funds, which include Pell Grants and federal student loans.

But after further communication between Robbins and the education department, a new option was agreed upon earlier this month: The UA signed a temporary provisional agreement along with UA Global Campus and the UA Foundation in which the UA is now liable for UA Global Campus’ performance requirements that maintain its eligibility to receive Title IV funds.

Unlike the initial move to acquire Ashford University and create UAGC, this time the U Arizona leadership is being more open, sharing developing plans with the faculty senate and allowing debate. But the decision has been made. During the faculty senate meetings this month, UA President Robbins described that UA cannot just walk away from UAGC as it would incur a $1 billion liability. Further, the UA Foundation that technically owns UAGC does not have the ability to put up a $103 million letter of credit, and UA is contractually prevented from doing that for the Foundation. The only other viable option as presented by the ED would be “a consolidated audit from UA Global Campus and the UA Foundation.”

Schrödinger’s Lawsuit Risk

At the same time as this merger, UAGC faces indirect risks from a lawsuit against Zovio, the previous owner of Ashford University and current OPM partner for UAGC. Again from Tucson.com:

A California judge is currently deliberating how to rule after a trial recently concluded in a lawsuit the state attorney general filed against Zovio and Ashford. It alleged the defendants misled students about the cost and quality of an Ashford education.

According to court documents filed one day after Robbins announced the merger, the state of California has asked for both a $100 million settlement as well as an injunction against Zovio “and all of its officers, directors, employees, representatives, agents, affiliates, assigns and successors, in connection with Zovio’s communications to prospective or current (UA Global Campus) students located in California and/or to communications made by Zovio employees located in California to UAGC Students.”

It’s not clear how quickly the California court’s decision will come — it could be weeks or months. Nonetheless, Zovio, which is still in a 15-year contract to provide operations services to UA Global Campus, is central to the UA Faculty Senate’s misgivings about the merger.

U Arizona executives addressed this lawsuit during the faculty senate meeting, consistently taking the same line as described to Tucson.com.

According to UA spokeswoman Pam Scott, that $100 million would be a liability of the defendants in the litigation, Zovio and Ashford University, not the UA or UA Global Campus.

If you don’t look inside the box, is there any risk for UA?

The Ignored Elephant in the Room

It is accurate that the legal liability rests with Zovio and Ashford, but it is entirely naive or misleading to also claim that UAGC therefore faces no risk from the lawsuit, as President Robbins has implied.

“It’ll be interesting to see what happens in the California case, but regardless of what happens there this is about Zovio. It is not about UAGC. It’s not about the University of Arizona.”

First of all, the judge may grant the injunction limiting what Zovio can communicate with prospective UAGC students. But more importantly, UAGC needs an investment to help turn around the schools rapidly declining enrollments, and it is not clear who can pay for this investment, with the lawsuit potentially making the problem much worse.

During the buildup to the UAGC acquisition, UA officials stated often that they had learned from the Purdue University deal to acquire Kaplan University and create Purdue Global (PG) in 2018. One clever piece of negotiations that they described is that Zovio is on the hook to invest in case there are enrollment challenges, as described in 2020.

UAGC struggling with recruitment following rebranding. UArizona is financially insulated from fluctuating UAGC enrollment.

A Zovio source described the situation to me more directly.

The difference is that UAGC has a residual guarantee from Zovio so it can’t be negatively impacted if there’s a need to spend $100M to turn around marketing and enrollment. Effectively their net income is protected and can’t go negative. So the risk is entirely on Zovio. Financially, it’s all upside for UAGC.

Zovio is a financial mess, unfortunately. The company’s market valuation is a mere $39m, and its total assets as of their last quarterly earnings release is $158m with liabilities of $115m. This is not a rich company that can jump in and easily invest tens of millions of dollars of additional marketing spending, especially if they end up with a $100m legal liability.

By way of comparison, Purdue Global spent huge sums in marketing ($130m) and admissions ($58m) expenses in its first year post acquisition, with slightly reduced expenses in the second year ($117m and $49m). Purdue Global has turned around its enrollment decline, largely based on this investment. I do not have access to UAGC financials, but they are not turning around their enrollment decline and clearly need to increase marketing. At the time of UAGC acquisition, they had roughly 31,000 students based on IPEDS fall enrollment snapshot data, and today UAGC has roughly 28k students on a snapshot basis.

To help visualize this problem, I aligned the PG and UAGC enrollments based on the year of acquisition, with Y0 being 2018 for PG and 2020 for UAGC.

Comparing UAGC and PG enrollments aligned to year of acquisition

Somebody is going to have to ramp up expenses to at least stabilize the UAGC enrollments, and the scale of investment is large. Zovio is already in a weak financial position, making it unlikely they are able to increase these expenses on the scale needed, and if Zovio loses the California lawsuit, its problem will be even more severe. It is not credible to imply that UAGC and the University of Arizona (due to the merger) have no risk from the California lawsuit.

There is the option to just not invest and accept the continuing enrollment declines, but that is not what UA executives promised when they acquired UAGC. Might this option be a temporary solution while UA finds a way to get out of the Zovio contract? I wouldn’t rule that scenario out based on President Robbins’ statement to the faculty senate.

And Zovio, which saw a 39% drop in its 2021 third-quarter earnings compared to the same period in 2020, may not remain in the picture at all. Robbins said UA Global Campus would have to agree to terminate its contract with Zovio, but that “I think we would all agree that would be the best course of action.”

This is the elephant in the room. UAGC is not a healthy organization, and it is not clear how the enrollment and financial health issues will be solved. I commend UA leadership for being more open with faculty now than in 2020, but no one that I have seen is publicly addressing this existential problem.