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- Zovio Sells For-profit Ashford University to University of Arizona for $1 and Massive OPM Contract
Zovio Sells For-profit Ashford University to University of Arizona for $1 and Massive OPM Contract
Phil Hill
August 03, 2020
Zovio (formerly Bridgepoint Education), the parent company of Ashford University, has been working for the past two years to spin off the for-profit school into some form of nonprofit conversion. The goal is to get out of the challenging for-profit sector and get into the growing Online Program Management (OPM) market, as CEO Andrew Clark described on the company’s quarterly earnings call this morning.
This is a monumental day for Zovio in our transition to a world class education technology services company. Two years ago we announced our intent to return Ashford to its historical nonprofit status the institution held in 2005. Since then, we have been steadfast in the advancement of this process.
The Deal
This morning, the University of Arizona announced its agreement to acquire Ashford University in a deal remarkably similar to the Purdue University’s 2017 deal to acquire Kaplan University, even down to the resulting name. University of Arizona Global Campus, meet Purdue University Global (and that’s leaving aside the rebranding of the University of Maryland Global Campus).
U Arizona buys 35,000-student Ashford U for $1. Well, that plus a 15-year OPM contract. If you’d like to read more of the details, see the Inside Higher Ed coverage for the best description, or the Chronicle coverage that includes descriptions of Ashford University’s challenges, or the Street Insider coverage for the general reaction of financial markets.
Inside Higher Ed’s article positions the move from Arizona’s perspective.
When Robert C. Robbins became president of the University of Arizona in 2017, he says he found it “curious” that ASU had amassed tens of thousands of online students, but the University of Arizona had not.
“It’s like a baseball team. You can either build a professional team through your farm system in-house, or you can go to the free-agent market and bring in a star player. The problem is that now, few institutions have the money to invest internally.”
From my perspective, Zovio is making a smart move with this deal, addressing real problems, but the University of Arizona seems to be distracted and solving the wrong problems. UA might be signing a free agent, but that new player won’t even play for the professional team despite wearing a similar uniform, when the actual team is playing in an elimination tournament and needs help.
Pandemic. What Pandemic?
What is missing in the comparisons to Purdue Global, or ASU, or building a baseball team, is that little nuisance of a pandemic. Nearly every higher education institution moved online in the spring, and the vast majority will remain in online or hybrid mode at least through the fall, while confronting an existential crisis. Every school is or should be scrambling to figure out its value proposition to its student population, and figuring out how to improve the quality of its online and hybrid course delivery and student services.
The Ashford University acquisition and creation of the University of Arizona Global Campus does little to improve Arizona’s current online offerings, yet the University of Arizona senior administration has chosen to spend its time and resources with this deal and not investing in the farm system that is being asked to serve its actual students today.
The University of Arizona took an aggressive move in early April with faculty and staff furloughs and pay cuts, as reported at Tuscon.com.
The unprecedented steps, made as the UA braces for “extreme” economic fallout from the coronavirus pandemic, go into effect on May 11 and require employees making $150,001 or more to take at least a 17% pay cut, while those making less to take unpaid work days resulting in at least a 5% salary reduction.
Those cost-saving efforts come as the UA has already seen $66 million in losses — and is projected to lose as much as $250 million — as a result of the coronavirus, according to UA president Robert C. Robbins, who told the Arizona Daily Star on Friday that the furloughs will be reviewed each month to ensure they’re hitting their savings goals.
“This is incredibly, incredibly difficult and painful to do. I have great empathy for everyone. At the same time, we’re not firing anybody. We’re just asking people to take reduction in time at work,” Robbins said. “My hope is itdoesn’t last the year. We’re fully expecting our students to come back on campus. If we have to go to all digital, remote learning like we are now, the number will be dramatically higher because the tuition that we would offer would probably reduced.”
The UA Global Campus deal will not be complete until at least the end of the year, and even then it will be a separate organization, with a separate student body with very different demographic profile, separate accreditation, and will leverage the existing Ashford University management team and staff. From the Chronicle:
Ashford has 35,000 students, most of them working adults: 87 percent of its undergraduates are 25 and older, according to federal data. Among Arizona’s 35,000 undergraduates, about the same proportion is 24 and under.
I suspect this news of UA Global Campus will not go down well in Arizona, when the school is actually cutting its budget for support of existing students and faculty and staff.
Update 8/4: Indeed, the backlash has already begun.
OPM Contract
The real payoff for Zovio is two-fold: it gets rid of the problematic Ashford University while keeping the OPM services that can be leveraged to sell to other schools.
Ashford University has lost more than half of its student population since its 2011 peak, although the recent losses have slowed somewhat. The chart below shows fully-online enrollments for both Ashford University and the University of Arizona since 2012.
The enrollment decline is not the only problem, however, as described by the Chronicle.
Ashford, which is owned by the publicly held company Zovio (formerly Bridgepoint Education), has had a rocky history, of which Arizona’s administrators said they were “certainly aware.” Ashford was the subject of a Chronicle investigation that examined how it had avoided California’s tough regulatory oversight of eligibility for GI Bill money by designating the state of Arizona as its headquarters. The U.S. Department of Veterans Affairs threatened to cut off Ashford’s GI Bill funding unless it obtained proper approval in California or moved its entire operation to Arizona. When Ashford requested approval from California for GI Bill eligibility, the state rejected the bid.
Ashford’s most recent accreditation, in 2019, by the WASC Senior College and University Commission, came with a “notice of concern,” largely regarding the persistence and completion rates of its students. Absent significant improvements, the accreditor warned that Ashford risked being found out of compliance with standards relating to “core functions of teaching and learning, scholarship and creative activity, and support for student learning and success.” But the commission also lauded the “authentic and enthusiastic commitment” of Ashford “to enacting its mission of serving students from underserved groups.”
Put another way, Ashford University may have 35,000 online students, but it is a school in need of a turnaround that requires investment. Simply attaching to a public-university brand name will not solve the problem by itself, as Purdue University has found. Purdue Global spent more than $132 million on marketing and student recruitment alone in fiscal year 2019 while losing $43 million, in its efforts to stop the Kaplan-inherited enrollment decline. And Kaplan University’s accreditation status and market reputation were arguably in much better shape than Ashford University’s.
At the same time as losing a challenging school, Zovio picks up a long-term initial OPM client worth hundreds of millions of dollars per year, although with some contractual terms based on revenue and profit. From Zovio’s 8-K SEC filing this morning:
In return for providing services under the Strategic Services Agreement, University of Arizona Global Campus, after covering its direct costs of operations (which may not be increased by more than 2% per year), will pay to the Company services fees equal to the Company’s direct costs to provide the services plus an additional amount equal to 19.5% of University of Arizona Global Campus’s tuition and fees revenue. If, in year seven or later, University of Arizona Global Campus’s tuition and fees revenue is $440.0 million or less, then the Company’s revenue share percentage is subject to decrease on a sliding scale to between 18.1% and 15.5%, subject to increase back up to 19.5% if, in any subsequent year, University of Arizona Global Campus’s tuition and fee revenue again exceeds $440.0 million. In addition, the parties have agreed on certain minimum profit levels to be achieved by University of Arizona Global Campus after payment of the Company’s services fees of $12.5 million in the second year of the agreement, $25.0 million in years 3-5, and $10.0 million in years 6-15; subject to certain limitations, the Company is required to adjust its fees in any year to the extent necessary for University of Arizona Global Campus to achieve such minimum levels.
After the seventh year of the Strategic Services Agreement, either party may terminate the agreement if University of Arizona Global Campus achieves tuition and fees revenue of $400.0 million or less. Each party also has certain termination rights in connection with a material breach of the agreement by the other party and upon certain other defined events.
What services will Zovio provide? According to Inside Higher Ed:
Under the arrangement, Zovio will be deeply involved in running the new institution’s online programs — managing marketing, student recruitment and retention, student success, coaching, financial services, instructional design, and technology.
For these OPM services, Zovio gets fee-for-service payments plus 19.5% revenue share.
And Zovio, like Kaplan Higher Ed, is now positioned to sell its OPM services to other schools. Keep in mind that Kaplan Higher Ed subsequently signed a deal to become the default OPM provider across the entire Purdue University system and not just for Purdue Global. I would not be surprised to see a secondary University of Arizona-wide agreement emerge in 2021 or 2022.
The Arizona Angle
What does the University of Arizona gain? It appears to be a mix of reach and prestige and potential revenue.
The joint press release issued today described the primary goal of reach.
Through acquisition of Ashford University, the non-profit University of Arizona Global Campus will expand University of Arizona’s reach and ability to provide access to more underrepresented and nontraditional students and new populations of students across the United States and around the world.
What I mean by prestige is that it is clear that Arizona president Robbins was motivated and inspired by both Purdue University’s deal and with ASU’s online footprint. Call it a case of Mitch Daniels envy, or Mitch and Michael envy. If the deal goes through, the University of Arizona will “get to be a major player” in online education, even though the student populations for UA and UA Global Campus are different, and the schools are different. But the school’s name will be mentioned along with Purdue and ASU.
The terms of the OPM contract shed light on Arizona’s revenue expectations. Revenue of at least $400 million per year (although I suspect the vast majority of that will go to Zovio), with remaining profits of $10 – $12.5 million per year. And those are the minimum expectations.
In 2020, are expanded reach, and prestige, and potential future revenue the right problems to solve? I can think of a few problems in the area of online and hybrid education with current students that should be higher on the priority list.
The stock market, for what it’s worth, is giddy with Zovio’s earnings release that included the Arizona news. Its stock price is up almost 30% near the end of the day of trading. I will keep looking to see if current Arizona students, faculty, or staff show similar signs of pleasure with this agreement.