Company Analysis of Education Management Corporation

Running head: COMPANY ANALYSIS OF EDMC 1

Company Analysis of Education Management Corporation (EDMC)

Robin Holt McLaren

MGNT6920

Dr. Ericsson

July 24, 2012

COMPANY ANALYSIS OF EDMC 2

Table of Contents

Executive Summary

Company Description......................................................................................................................5

Products and Services..................................................................................................................5

Demand........................................................................................................................................6

Target Markets.............................................................................................................................8

Expectations/Values of Customers..............................................................................................9

Determining Factors for Strong Competitive Position..............................................................10

External Analysis...........................................................................................................................13

Industry/Competition – Five Forces..........................................................................................13

Current rivalry opportunities.................................................................................................13

Current rivalry threats............................................................................................................13

Potential entrants’ opportunities............................................................................................14

Potential entrants’ threats......................................................................................................15

Bargaining power of buyer opportunities..............................................................................15

Bargaining power of buyer threats........................................................................................15

Bargaining power of supplier opportunities..........................................................................16

Bargaining power of supplier threats.....................................................................................16

Substitute products opportunities..........................................................................................17

Substitute products threats.....................................................................................................17


General External Environment..................................................................................................18

Demographic opportunities...................................................................................................18

Demographic threats..............................................................................................................19

Political-legal opportunities...................................................................................................19

Political-legal threats.............................................................................................................21

Financial Analysis.........................................................................................................................27

Recommendations..........................................................................................................................31

References......................................................................................................................................32


Executive Summary

The for-profit college industry, once a viable and vibrant enterprise has become soured.

Education Management Corporation (EDMC) started 40 years ago, in 1962 as a for-profit

university system. Since, 1970 they have consistently climbed in revenue and enrollment, until

this year, 2012. The predicted expiration and downfall of EDMC is coming as a result of the

niche market they sought to serve from the beginning. The low-income, non-traditional student

needed a place to get a degree while still maintaining a job and family life. EDMC and its

colleges sought to fill this need through their career oriented college programing. Yet, after

Goldman Sachs bought 38% of EDMC in 2006 their business model changed and with it came

increased scrutiny (Hechinger, 2010). The scrutiny came from concerned citizens, the SEC, the

Department of Education, and Congress (Burd, 2011b). With the new regulations and pending

lawsuits EDMC and their financial future is perilous.

This report describes how EDMC can strategically position themselves in the market by

applying a competitive analysis. This company analysis is based upon business principals in

order to assess the scope of the competitive forces, which face EDMC today. This methodology

is also applied in developing a strategic plan for adapting to these forces. The five forces model

created by Michael Porter includes: current rivalry opportunities and threats; the potential

entrants’ opportunities and threats; the bargaining power of buyer opportunities and threats; the

bargaining power of supplier opportunities and threats; and substitute products threats and

opportunities (Coulter, 2010). Each competitive force is discussed within the framework of how

it exists in today’s for-profit college and university competitive setting, and of its implication in

the EDMC’s planning process.


Company Analysis of Education Management Corporation (EDMC)

Company Description

Education Management Corporation (EDMC) is a publicly traded provider of private for-

profit post-secondary education institutions (EDMC, 2012). The company is headquartered in

Pittsburgh, Pennsylvania and operates schools primarily in the United States. The schools are

focused on programs, which lead to a specific career and include job skills. EDMC carries the

school brands: Argosy University, The Art Institutes, Brown Mackie College, and South

University. EDMC started in 1962 and bought its first brand, The Art Institutes—art and design

school—in 1970 (Education Management Corporation, 2012). EDMC is now the second largest

for-profit school with a combined enrollment of 142,600 students (Belser, 2012).

Products and Services

Higher education is defined as education that follows high school and is obtained through

colleges, universities, or professional schools (Dictionary.com, 2012), (Robinson, Petrunich, &

McLaren, 2012). Education is a service industry that holds many responsibilities to society.

Higher education is expected to serve the overall greater good for the public (Mintz, Savage, &

Carter, 2010). Not only do students who attend expect they will earn more income after

graduation, but universities and colleges are to encourage critical thinking skills (Robinson,

Petrunich, & McLaren, 2012). Exposure to knowledge expands a student’s way of thinking

leading them to grow personally, intellectually, and academically (Moody's Investors Service,

2012).

The difference between a for-profit and a not-for-profit higher educational institution is

the college’s function (Lechuga, 2008). Although both are in the business of education, non-

profit colleges’ purpose is to educate for the greater good of society. For-profit colleges’


motivation is to operate in a manner that produces the most profit for its shareholders. This

information does not mean the for-profit colleges, like EDMC, do not care about the students’

education. It means the for-profit colleges must give the students’ the best customer service to

keep them enrolled (Radford, Tasoff, & Weko, 2009).

When a student successfully completes his or her program of study, the concrete element

he or she has from the university or college is a diploma (Robinson, Petrunich, & McLaren,

2012). The diploma is a sheet of paper with a name, the degree the student earned, the

university’s name, and the president’s signature (Robinson, Petrunich, & McLaren, 2012). No

value lies within a single sheet of paper. The value of the diploma is the education and skills the

student absorbs while earning the diploma (Radford, Tasoff, & Weko, 2009). EDMC’s model

emphasizes the practical job related application of its degree offerings. EDMC also includes

technical or trade specific training, which garners a certificate (Yahoo! Inc., 2012).

EDMC also offers employment placement opportunities as a service for their students.

Another service EDMC offers to their graduates is the alumni association. Part of the college

experience is meeting classmates and building relationships for personal and professional growth

(Moody's Investors Service, 2012). Networking with alumni is a potential benefit to students

when looking for employment (Robinson, Petrunich, & McLaren, 2012).

Demand

Total enrollment numbers since 1980, has more students enrolled in higher education

institutions in 2009 than in any year published since 1980 (Institute of Education Sciences: U.S.

Department of Education, 2011). In the past nine years, college enrollment in the United States

has increase by 33.4% (Institute of Education Sciences, 2011).


The increase of students above the age of 25 grew 43% between 2000 and 2009 (Institute

of Education Sciences, 2011). These students above the age of 25 are often classified as non-

traditional students. Many non-traditional students need the flexibility of online learning. Online

learning allows them to manage their educational responsibilities around family, career, and

community obligations (Deggs, 2011). Research found that in 2007 of the students older than 25,

more than 50% are enrolled in for-profit institutions, and between 25 to 33% are enrolled in

traditional non-profit public and private colleges (Bennett, Lucchesi, and Vedder, 2010). This

information shows a shift in the largest group enrolling in universities. Demand for the for-profit

programs like EDMC’s is increasing in the largest group of new students. Students want

practical education to aid in their overall career skills and in order to make them more

marketable to employers (Natale & Doran, 2011). Another advantage the for-profit universities

have over the non-profit universities is they are run efficiently like a business instead of being

run as an inflexible bureaucracy (Bennett, Lucchesi, and Vedder, 2010). Students now demand

more customer service than they have in the past from their schools. EDMC seeks ways to

address these needs of their students in order to retain and keep them from taking their business

elsewhere (Bennett, Lucchesi, & Vedder, 2010) (Natale & Doran, 2011), (Robinson, Petrunich,

& McLaren, 2012).

EDMC’s demand is served through its four distinctive institutional products; each has a

specialized spotlight on career training: the Art Institutes, Brown Mackie College, Argosy

University, and South University. The Art Institutes has a total enrollment of 80,300 students on

50 campuses making it 53% of the total enrollment at EDMC and the largest of their operations

(West, 2012). Graphic design, fashion, media arts and studies, and culinary training are the

degree programs offered at the Art Institute. With 29,000 students and 20 campus locations,


Argosy University is EDMC’s second largest school in the network (West, 2012). Argosy

University too concentrates on career skills with its offerings in education, healthcare, business,

and behavioral sciences from the Bachelor through the Doctorate levels (Yahoo! Inc., 2012).

Brown Mackie College and South University run right alongside Argosy in enrollment numbers

and degree programs (West, 2012). South University has 21,900 students in 10 locations and

Brown Mackie has 19,900 students in 27 locations (West, 2012).

Target Markets

EDMC has had successful and consistent growth in enrollment since they acquired the

Art Institutes in 1970 (Bennett, Lucchesi, & Vedder, 2010). This notable increase in students

can be attributed to the specific need their schools address, career focused degree programs.

Each brand has a different median age group. For instance, the Art Institute’s average age is 25

years old and for Argosy University—which offers doctorates—the average age is 36 (West,

2012). Yet, as a whole the population of enrollment for EDMC disproportionately serves the 25

and older, women, African Americans, Hispanics, and those with low incomes (Institute of

Education Sciences: U.S. Department of Education, 2011).

EDMC overall has a diversified model in which each school and its programs targets

nearly every segment of the addressable market (West, 2012). The range of degrees starts at

certificate programs and includes every degree in between the doctoral level. The disciplines

cross the job market spectrum from IT to education. Even the modality of the courses offered

include all three options: on-ground, online, and blended (West, 2012).

The main draw is from the non-traditional or older student body who are simultaneously

employed, in school, and usually taking care of a family. Therefore, EDMC targets this market

by offering services, such as child care (Bennett, Lucchesi, & Vedder, 2010). EDMC schools


also help those 73.7% of students who need financial aid by assisting them with the numerous

forms (Bennett, Lucchesi, & Vedder, 2010). There is also the incentive of generous transfer

credit given to student who began their Bachelor’s degree at other institutions (Bennett,

Lucchesi, & Vedder, 2010).

Expectations/Values of Customers

As the non-traditional student market grows EDMC caters their curriculum and teaching

practices to this large segment. The students choosing the for-profit university, such as, Argosy

University often value the convenience and practicality of the program over the pure cost of the

tuition (Bennett, Lucchesi, & Vedder, 2010). EDMC students expect financial aid or Title IV

funding to be available and to cover all college expenses. Online course offerings are not

exclusive to only one type of university. In today’s market, two-year, public, and technical

colleges all offer courses online. The online course offerings take away the geographical and

time restrictions enforced by the parameters on an on-ground campus. Due to the multitude of

online offerings, students in today’s market expect to have the option of taking all if not part of

their coursework online.

For all the good and idealistic development, which has been associated with the ivory

towers of postsecondary education there is a different expectation from the EDMC student.

EDMC students have evolved with the consumer culture and bring the capitalist ideals to the

footsteps of their colleges and universities (Natale & Doran, 2011). The change is seen not only

in the students’ perception of themselves as customers, but there is also a notable difference

between the for-profit institutions and the non-profit/public colleges.

There is an increased focus on how the degrees from an institution will relate to the

specific tasks and duties students will find in the job field. Many participants and critics of


higher education are looking for quantifiable measures and results limited to application in a job

description. The external forces are demanding higher education to answer questions couched in

the language of corporate viabilities. Institutions are required to graduate more students

(consumers) while maintaining the same standards of quality, becoming more productive, and

being more efficient (cost-effective) in processes (Natale & Doran, 2011). These endeavors of a

liberal arts education are old fashioned academic ones, which need to be replaced with more

‘useful knowledge’, like marketable skills (Natale & Doran, 2011). In the for-profit sector only

2.4% of the curriculum is in general studies and liberal arts (Deming, Goldin, & Katz, 2012).

The education, once seen as a process, has been condensed to career training. It is now a product

to invest in for the purpose of better job prospects and employment opportunities in business and

technology (Natale & Doran, 2011). EDMC understands this and is responsive to its market by

adding programs relevant to the job market. For instance, when the health profession fields

expanded so did the offerings in the discipline at EDMC institutions (Deming, Goldin, & Katz,

2012).

Determining Factors for Strong Competitive Position

Market reputation for a university or college is critical to its long term success and

overall value in the market place (Moody's Investors Service, 2012). “Students (customers) want

the best value for their tuition (money)” (Robinson, Petrunich, & McLaren, 2012, pg.12). The

stronger the university’s reputation is in the market place, the higher the value the student places

the degree from the university.

Students want a high quality education from a reputable university, but they do not want

to pay for services that they do not use. Many of the public universities charge student activity

fees, athletics fees, and other fees that both traditional and non-traditional students do not see the


value in. EDMC schools do not charge these fees to the student (Deming, Goldin, & Katz, 2012).

The tuition may be higher per credit hour, but the students do not feel they are being cheated out

of money by being charged mandatory fees for services that they do not utilize (Bennett,

Lucchesi, & Vedder, 2010). Overall cost is a consideration for students. Relating the costs back

to services that the students utilize will give the educational institution more creditability with

the cost discerning students.

A university or college holding regional accreditation is part of a strong competitive

position. There are different levels of accreditation. In the United States the base level

accreditation that allows for Title IV funding is national accreditation (Bennett, Lucchesi, &

Vedder, 2010). In the past, there was a problem with many of the diploma mills having national

accreditation. This element has tainted the value of a nationally accredited college. Therefore,

EDMC schools seek regional accreditation to boost their creditability (Bennett, Lucchesi, &

Vedder, 2010).

In the realm of higher education, regional accreditation is the academic standard and

pinnacle. Credits from these schools transfer to other regionally accredited schools and are

required by most employers (Council of Regional Accrediting Commissions, 2003). The best

graduate programs are found in regionally accredited schools and require an undergraduate

degree from a regionally accredited school. Students with bachelor degrees from nationally

accredited schools must find a graduate program at a nationally accredited university, which is

uncommon. Therefore, if the student ever hopes to be accepted by a regionally accredited school,

he/she must start his/her education from the beginning at a regionally accredited school. In the

United States there are six regional accreditation boards.

These regionally accreditation boards are:


1. Middle State Association of Colleges and Schools

2. New England Association of Schools and Colleges

3. North Central Association of Colleges and Schools

4. Northwest Association of Schools and Colleges

5. Southern Association of Colleges and Schools

6. Western Association of Schools and Colleges (Council for Higher Education

Accreditation, 2012)

EDMC has a unique method of allocating regional accreditation for its schools. There

are other for-profit organizations within the industry which seek accreditation from a single

source for every campus and institutions. However, EDMC uses multiple accreditors for regional

and national accreditation, even within a single brand (Education Management Corporation,

2011). The Art Institutes and Brown Mackie College use multiple accreditors, while Argosy

University—accredited by Western Association of Schools and Colleges—and South University

—accredited by Southern Association of Schools and colleges—each use a single accrediting

body (Education Management Corporation, 2011).

There are also programmatic accrediting organizations (Council for Higher Education

Accreditation, 2012). These organizations are program or trade specific. Argosy University has

accreditation from the American Psychological Association for its counseling programs and

Western State University College of Law is accredited by the American Bar Association

(Education Management Corporation, 2012).


External Analysis

Industry/Competition – Five Forces

In order to analyze the current state of EDMC and its brands, this analysis follows the

breakdown of Michael Porter’s five forces model. Management uses this model to examine the

existing environment and competition inside the industry (Coulter, 2010). After climbing out of

the recession of 2008, consumers in the United States continue to recognize the importance of a

good education, but they selectively seek education for the best price possible, which leads to an

increase in competition in the higher education for-profit industry.

Current rivalry opportunities. The growing trend of online education in a slowed

economy proves to be a key factor in giving certain schools and universities the competitive edge

not only in attracting students but in turning a profit as well. Universities with online programs

reap the benefits of having reduced fixed costs (Moody's Investors Service, 2012). The cost of

an online classroom’s web space is far lower than the cost of an on-campus classroom. The

school is responsible for additional costs such as heating/air conditioning, building and campus

maintenance, and other additional operating costs. Another opportunity in higher education

rivalry is current players in higher education are equally balanced and similar because these

organizations are all selling the same product: education. Many companies take advantage of

this fact and turn a profit, regardless of their accreditation or educational standards.

Current rivalry threats. Though the number of students in the higher education grows

each year, the rate of enrollment slows in the current economic climate. Due to a copious

amount of competitors in the higher education arena, this deceleration creates increased

competition and rivalry. Currently, EDMC is facing enrollment challenges. The online

programs grew at an average of 90% from 2002 to 2010 (Belser, 2012). However, starting in


May 2011 EDMC saw its first decline in online student enrollment with a drop of 7.6% (Belser,

2012). The current decline in online enrollment is 18.5%; as reported in 2012’s third quarter

(Belser, 2012). What were 42,300 students in 2010 are now 35,800 students in the fully online

programs (Belser, 2012).

Another factor attributing to rivalry, particularly in EDMC’s traditional campus setting, is

when the schools need to grow, they add additional wings to current structures or create new

buildings entirely to attract and accommodate more students. This type of addition is expensive

during a time when the schools look to cut costs in every possible area. Maintaining a school is

costly, both monetarily and emotionally. Schools that have existed for hundreds of years feel

compelled to stay in the industry. Therefore, rivalry increases due to the barriers to exit the

industry (Robinson, Petrunich, & McLaren, 2012). More schools remain in the industry not

having a profit (Collis, 1999). Since the market is so saturated with competitors and there is

little or no cost for a student to withdraw and attend a different school, decision makers for these

schools have to constantly stay aware of this threat.

Potential entrants’ opportunities. Current competitors in higher education have the

opportunity of an established and significant economies of scale since their fixed costs are spread

out over the many students already attending the school. Companies who seek to enter the

higher education market have a cost disadvantage to current competitors because established

schools have already procured name recognition, they have purchased prime locations, and they

already employ reputable professors and staff. Schools currently in the market do not fear a

flood of potential entrants. Opening a school, regardless of accreditation, requires a large

investment of capital to which many companies or individuals do not have access. The

government highly regulates the higher education market, which creates a high barrier for


potential entrants (Fried, 2011). For example, to gain regional accreditation is a lengthy process

that takes five years (Council for Higher Education Accreditation, 2012). Some competitors

have found a way around this process. ITT Educational Services strategically purchased the

regionally accredited school, Daniel Webster University, in 2010 in order to skip the

accreditation process (Bloomberg News, 2010). However, this technique is the exception, not

the rule, but decision makers should keep this situation in mind.

Potential entrants’ threats. Potential entrants do pose some threat to EDMC. In higher

education, product differentiation barely exists between the institutions. Despite the format,

education is education. As with switching between current rivals, there is little cost for a student

to switch to a potential entrant. Potential entrants have access to the same distributors of

educational products. Though current competitors have a special pricing plan with distributors,

potential entrants have the ability to gain exclusive contracts with distributors as well.

Bargaining power of buyer opportunities. Though the students in higher education

hold much bargaining power over the EDMC, current schools do have certain opportunities of

bargaining power over the students. One student’s tuition does not make or break a school’s

budget; therefore a school is not concerned to lose one or two students to a competitor. Schools

also have the advantage over students because students cannot produce their own education.

They must seek the knowledge from high education institutions to receive the credentials needed

for job promotion or qualifications when seeking new employment (Robinson, Petrunich, &

McLaren, 2012).

Bargaining power of buyer threats. Despite the few opportunities that current schools

have over their consumers, students hold more bargaining power against the schools. The

current economic climate makes students more of a threat to schools now than in a booming


economy. As the price of higher education has been driven up and the economy has gone down,

educational costs now takes larger portions of students’ budgets, meaning they are shopping

around to find the best deal for their education (Bankston, 2011). Education is a rather standard

product in a saturated market, which give students the power to choose from many options with

low switching costs if they are unsatisfied with their first choice. Consumers have access to

most if not all information needed thanks to the Internet, and this information is a large driver of

increased student bargaining power. Students find out the information they want about every

school they consider attending.

Bargaining power of supplier opportunities. EDMC and other higher education

institutions have the biggest opportunity over their suppliers in bargaining power. Suppliers,

such as publishing companies for books and leasing companies for buildings, cannot provide

education and the credentials that schools are able to provide (Robinson, Petrunich, & McLaren,

2012). Therefore, suppliers to higher education do not pose a threat to offering what schools

offer consumers. Schools shop around for the best deal on their supplies, just as students shop to

compare schools.

Bargaining power of supplier threats. Suppliers have bargaining power against

competitors in higher education. The inputs needed for higher education, particularly in the way

of professors and books, must be of a certain level, which puts the bargaining power on the side

of the suppliers (Robinson, Petrunich, & McLaren, 2012). These products are invaluable to an

institution because they cannot exist without them. In order to teach at a regionally accredited

school, professors must hold a degree from regionally accredited schools. Some subjects are

studied more than others in graduate programs. Professors in the less studied areas, such as math

and science, are scarcer and highly valuable to an institution (Robinson, Petrunich, & McLaren,


2012). Book publishers control which books they release; therefore, the book publishers control

the prices of these publications. It is a major threat to schools because this expense passes

directly down to their consumers. A substitute for quality professors does not exist (Bankston,

2011). Few options exist for to substitute textbooks. Electronic books and additional content are

available online; however, the supplying publishers provide these resources.

Substitute products opportunities. The largest opportunity for current competitors in

higher education is that there is not a substitute for regionally accredited education aside from

other regionally accredited schools (Robinson, Petrunich, & McLaren, 2012). Regional

accreditation is the gold standard for higher educational credit. Students who earn their degrees

and class credit from a regionally accredited school are able to take their education to any

institution (Council for Higher Education Accreditation, 2012). Regionally accredited schools

must monitor the student trends to ensure they offer programs that suit the needs of their

students.

Substitute products threats. The slowed economy drove the creation of substitutes to

regionally accredited education. Though these schools are not true substitutes to regional

accreditation, less credible substitutes are available to students in their endeavor for academic

achievement (Robinson, Petrunich, & McLaren, 2012). Diploma mills that provide students with

a “degree” for attending little to no classes for a certain fee, trade schools that provide technical,

vocational training, and nationally accredited schools that provide similar training but of a lower

approval than regional accreditation, and employers that provide on the job training and

certification for programs such as Six Sigma are threats to regionally accredited, higher

education institutions (Bloomberg News, 2010).


General External Environment

In order to inform the company analysis of EDMC an overview of the external

environment must be taken into account. This overview will include the demographic, political-

legal, and technological opportunities and threats. The higher education industry is unique

because not only is it a business, it is also given a broader responsibility of shaping the future

through education.

Demographic opportunities. The enrollment of students into the higher education

sector has grown from 300,000 students in 1986 to 1.8 million in 2008 (Bennett, Lucchesi, &

Vedder, 2010). It is the for-profit establishments, which sees the largest consistent growth at an

annualized rate of 8.4%, while non-profit and public institutions have grown only 1.5% per year

within the same 22 year period (Bennett, Lucchesi, & Vedder, 2010). At EDMC enrollment

doubled from 2007 to 2011 to 160,000 students (Burd, The transformation of EDMC, 2011a).

The total share of for-profit students is 11% of the entire group of post-secondary enrollments

(Adams, 2011). The main contributing fact to this boom in growth at the for-profit level is the

type of students these institutions attract. EDMC provides educational opportunities for the

historically underserved students in the higher education sector (Bennett, Lucchesi, & Vedder,

2010). More than half of all the students enrolled at EDMC are older than 25, 40% are

minorities, and 64% are female (Bennett, Lucchesi, & Vedder, 2010). The students who are over

the age of 25 are considered ‘non-traditional’ students. It is these non-traditional students who

not only make up almost the entire student population at EDMC, but also, obtain the greatest

proportion of federal student aid. These demographic trends affect the institution and the

students at every level (Robinson, Petrunich, & McLaren, 2012).


Demographic threats. The opportunity to serve the underrepresented market within

EDMC is a positive development for the non-traditional students looking to enhance their

careers. However, the demographic population also carries with it a threat to the institution’s

viability and sustainability over the long run. These non-traditional students are usually from

low income backgrounds and require the greatest number of government funds and grants

(Education Management Corporation, 2011). This in turn requires EDMC to wholly depend on

government dollars. The dependency on Title IV funding introduces the threat of violating the

90/10 rule. The 90/10 rule mandates that revenue derived from the government must not go over

90% and if it does that school will no longer receive federal financial aid. Currently, EDMC

received 89.3% of its revenues from federal financial funds and this percentage does not include

military benefits like the GI Bill (Lewin, Education Management Corporation accused of

widespread fraud, 2011a). With this alarming statistic of 89.3% EDMC has landed in trouble

with the courts and is very close to the edge of the proverbial cliff. Even though EDMC seeks to

educate low-income students the 90/10 rule assumes there are other financial resources available

to the students and incentivizes institutions to raise tuition above Title IV funds in order to

generate ‘other’ revenues (EDMC, 2012). If the 90/10 rule changes and military funds are

included in the 90% EDMC and several other for-profit institutions, like Apollo Group Inc. will

lose federal funding and thus students/revenue.

Political-legal opportunities. The notion that the nation needs a more highly educated

and sophisticated workforce has been advanced and subsidized by the federal government

(Bankston, 2011). These subsidies bring about significant profits to the higher education

industry. Immediately after Barack Obama was elected president, he stressed his commitment to


guaranteeing access to a higher education for all (Bankston, 2011). In January 2010 Pell Grants

were made available to an additional one million students (Bankston, 2011).

The opportunities offered from political and legal issues began with the GI Bill in 1944,

otherwise known as the Servicemen’s Readjustment Act (Bankston, 2011). The GI Bill

following World War II expanded enrollment in colleges and universities and set a precedent for

even greater governmental subsidies of postsecondary education (Bankston, 2011). In 1958, the

National Defense Education Act was put in place for college students who were identified as

having talents and for primary and secondary schools to prepare pupils for college at the tune of

$900 million dollars in four years (Bankston, 2011). Further federal subsidies for college came

into place in 1965 in the form of the Higher Education Act (HEA); it was instituted by President

Lyndon B. Johnson during the War on Poverty (Bankston, 2011). In 1972, the pool of

entitlement grew as a result of the Pell Grants, which were issued to those seen as having the

greatest financial need (Bankston, 2011). On top of the continuous influx of funds from the

federal government there are also tax cuts, loans and scholarships awarded at the state level

government (Bankston, 2011), (Fried, 2011).

All these different forms of federal subsidies make higher education in the realms of for-

profit and non-profit a higher for profit education. EDMC reported a 45.20% gross profit margin

in the 4th quarter of 2011 (The Street Wire, 2011). Non-profits actually have an even higher

profit margin, but the profits are reported as expenses (Fried, 2011). Therefore, operationally,

higher education and specifically EDMC is inundated with opportunities for profit and growth

granted to them from the boon of the federal and state subsidies (Robinson, Petrunich, &

McLaren, 2012).


Political-legal threats. Although these subsidies are good for EDMC’s bottom line,

there are other consequences, which are in many ways considered a negative. In the political and

legal arena EDMC has been in hot water since 2010. “The for-profit postsecondary education

industry has the distinction of being regulated as both a profit-seeking business and as a provider

of educational services” (Bennett, Lucchesi, & Vedder, 2010, p. 35). Therefore, EDMC is

subjected to licensure and consumer protection laws and the certification process of inspection of

educational quality as is applied to its non-profit counterparts (Bennett, Lucchesi, & Vedder,

2010). The growth EDMC experienced from 1998 and 2008 has not come unrestricted, and

instead a plethora of federal agencies such as the Federal Trade Commission, General

Accountability Office, the Securities and Exchange Commission, and the Department of

Education have come knocking at EDMC’s door (Bennett, Lucchesi, & Vedder, 2010). EDMC

faces an ominous and multifarious regulatory environment to navigate. Politically the regulatory

challenges fit into two general categories: consumer protections and use of public funds.

Consumer protections. Government has consumer protections in order to minimize

certain types of predatory or unsafe behaviors. In the for-profit education sector consumer

advocates are upset about the increasing student loan debt and the default rates on those loans.

Advocates point to the mishmash of corporate greed, slipshod regulations, misleading marketing

and recruiting pressures (Bennett, Lucchesi, & Vedder, 2010).

Gainful employment. The Higher Education Act (HEA) requires EDMC to provide, “an

eligible program of training to prepare students for gainful employment in a recognized

occupation” (Ledderman, 2011). This vague qualification must be met in order for EDMC to

receive Title IV funds. In 2010 President Obama increased the pressure on the for-profit

schools, lauding that the students receive debt they cannot afford for a degree they cannot use


(Cook, 2010). Obama proposed new regulations in order to force universities to quantify the

vague statement about “gainful employment” (Cook, 2010). The new regulations sought to

require for-profits to meet two conditions. “Graduates must successfully pay down their student

debt and enjoy loan-to-income ratios under a specified threshold” (Cook, 2010, para. 8). In 2011

the DOE issued policies to restrict debt-to-income ratios to “12 %, on average, for students in a

given program or school and discretionary-income-to-debt ratios to 30 %” (Burke, 2012). The

DOE also included a rule stating schools or programs with a debt repayment rate of less than

35% will no longer have access to federal student aid (Burke, 2012). The Association of Private

Colleges and Universities sued the U.S. Department of Education and the Education Secretary

charging that the modifications to the HEA unfairly discriminate against for-profit institutions

(Burke, 2012). In regards to the 35% debt repayment regulation, “the court concluded that this

decision ‘was not based upon any facts at all…[and] was chosen arbitrarily” (Burke, 2012, para.

9). Thus the entire debt repayment measure rule has been made null and void. However, EDMC

and other for-profits are not out of it yet because the Education Secretary may still appeal the

district court’s decision (Burke, 2012). If all three of the rules were to be enforced—the

Department of Education will make certain of it—only a third of the for-profit programs would

pass and the rest will fail, including EDMC (Lewin, 2012b).

Incentive compensation. The federal law in the HEA bans the payment of incentives to

enrollment recruiters contingent upon the number of students they enroll (Simba Information,

2011). This ban used to include 12 safe harbors which were enacted in November 2002. The

exception to the incentive pay includes:

1. Adjustments to employee compensation—restricted to twice a year

2. Recruitment into programs not eligible for Title IV funds


3. Payments for securing contracts with employers

4. Profit-sharing or bonus payments

5. Compensation based on program completion

6. Payments to employees for pre-enrollment programs

7. Compensation paid to managerial and supervisory employees not involved in

admissions of financial aid

8. Token gifts

9. Profit distributions

10. Internet-based recruiting activities

11. Payments to third parties for non-recruitment activities

12. Payments to third parties for recruitment activities (Bennett, Lucchesi, & Vedder,

2010, p. 44)

It was then in July 2011 that the Education Department eliminated the 12 safe harbor rules and

opened up for-profit and non-profits alike for litigation (Jaeger, 2011). EDMC is now a target

for a multibillion dollar lawsuit from the U.S. Department of Justice and six other states (Burd,

The transformation of EDMC, 2011a). Enrollment at EDMC doubled from 2007 to 2011 after

Goldman Sachs bought EDMC for $3.4 billion (Burd, The transformation of EDMC, 2011a). It

was the methods used by EDMC’s governing body to accomplish this hyper-charged increase in

student enrollment, which has brought the lawsuits and damaged reputation to EDMC’s door.

“The Department of Education investigators found that promotion and higher salaries depended

entirely on how many students the recruiters enrolled and not the multiple factors in the ‘matrix’

document. One recruiter told an investigator that “the matrix is a way to deceive the Department

of Education.” ” (Malloy, 2011, para.16).


Misleading advertising. EDMC is estimated to spend 22% of revenues on sales and

marketing and more than half goes directly to advertising (Education Management Corporation,

2012). The criticisms from the public about EDMC is that they and other for-profits use ‘high

pressure sales tactics’ and misleading advertising in order to gain their overrepresented

population of unqualified, low-income, minority students and the financial aid funds that follow

them (Bennett, Lucchesi, & Vedder, 2010). Specifically, one critic named Steve Eisman pointed

out that the for-profit billboards are lining the poorest neighborhoods and recruiters are pitching

to the homeless and the gamblers in order to promise a better life to those who are most

vulnerable (Kroll, 2010) as cited in (Bennett, Lucchesi, & Vedder, 2010). The Education

Department in 2011 included more rules concerning misrepresentation in order to give the

department more power to come down on the institutions that use deceiving advertising and

recruiting practices (Bennett, Lucchesi, & Vedder, 2010).

Use of public funds. For-profit institutions like EDMC receive a larger share of the Title

IV funds than any of their counterparts in the industry, such as, non-profit and public universities

(Deming, Goldin, & Katz, 2012). In 2009 when 8% of the student enrollment belonged to for-

profit institutions 26% of the loan disbursements were going to these institutions (Deming,

Goldin, & Katz, 2012). It further points to the fact that the tuition is high and the majority of the

students enrolled are either financially independent or from low-income families. These facts

have caught the attention of the government and citizens alike. Two of the regulatory challenges

facing EDMC is the 90/10 and the cohort default rate rules (Bennett, Lucchesi, & Vedder, 2010).

The 90/10 rule. EDMC, as a for-profit company, is not allowed to receive more than 90%

of its revenue from federal grants and loans (Bennett, Lucchesi, & Vedder, 2010). In order to

continue to get Title IV funding 10% of revenue must come from other sources (Bennett,


Lucchesi, & Vedder, 2010). Currently, EDMC gains 89.3% of its revenue from Title IV funds

and the other 10% also comes from government aid (Burd, The transformation of EDMC,

2011a). However, the other 10%, which comes in the form of federal funds is the military

educational benefits, like the GI Bill (Bennett, Lucchesi, & Vedder, 2010) , (Education

Management Corporation, 2012). Even though the 90/10 rule is in direct opposition with the

goal of educating low-income students it is a very viable threat. New regulations seek to remove

the military funds from the 10% allocation pool and deem them a part of the 90%. Anthony

Guida Jr. and David Figuli point out that:

Since proprietary institutions have no authority to limit student use of Title IV

federal student aid, their main tool for 90/10 compliance is increasing institutional

charges beyond the maximum amount of federal aid to force students to fill the

“gap” thus created with non-Title IV funds (2012).

EDMC’s main demographic is low-income students and therefore they have a higher 90/10

score. This score should not reflect the quality of education, but the detractors like Obama and

the Department of Education disagree (Cook, 2010), (Conte, 2012).

Cohort default rates (CDR). A CDR is the ratio which indicates how many students

default on their loans within a given period juxtaposed to the number of students who enter

repayment during the same period of time (Bennett, Lucchesi, & Vedder, 2010). A student is

considered in default when they do not make a loan payment for 270 days (Bennett, Lucchesi, &

Vedder, 2010). Even though this is a considerable amount of time to make a payment the default

rates are rising. An institution which has a ratio above 40% in a given year or above 25% three

years in a row is placed on probation by the Department of Education and the federal

government (Bennett, Lucchesi, & Vedder, 2010). Right now, as of a statistic from May 2012,


for-profit colleges “make up 11 % of the nation’s 11 million full-time undergrads but account for

26 % of borrowers and 43 % of defaulters, according to the Department of Education” (Conte,

2012, para.10). The unfortunate statistics for EDMC make it a posibility they may lose federal

funding and inevitably, students.


Financial Analysis

EDMC is barely treading water; it might actually be considered drowning as its stock

price plummets into the depths of despair. As of July 17, 2012 EDMC stock was trading for a

meager $4.96 (Bloomberg L.P., 2012). This is a disparaging view for an education company,

which only three years ago in September 2009, commenced its initial public offering (IPO) of

20,000,000 shares at $20 per share (Education Management Corporation, 2012). In 2006

Goldman Sachs and two other private equity firms acquired EDMC for $3.4 billion and changed

EDMC’s business model (Burd, 2011b). A new CEO was brought in, Todd S. Nelson, the

former CEO of the largest for-profit institution, Apollo Group to carry out the ambitious plans

for growth (Burd, 2011b). Anytime a private equity group buys a company the goal is always to

grow it and sell it at a higher price, through any means possible. These types of deals are not

interested in the long term health and growth of the company purchased. The way things are

going this is looking like a deal about to go sour.

In the beginning Goldman and its private equity partners appeared to be well on their way

to pulling off a fantastic coup. In the five years after the purchase enrollments doubled and

annual earning tripled to $2.8 billion (Burd, 2011b). There was an entire decade of explosive

growth, especially for the fully online programs, which increased 90% (Belser, 2012). Yet, in

May 2011 EDMC saw its first decline in student enrollment with 7.6% fewer students and at the

end of the third quarter in 2011 there was 18.5% fewer students in the online programs (Belser,

2012). EDMC is under attack from Congress, the Obama Administration, the Department of

Education, and dissatisfied students.

As of June 30, 2011 EDMC has $3.7 billion in property and equipment, goodwill and

other intangible assets (Education Management Corporation, 2011).


Table 1

Financial Ratios for EDMC

Ratio TTM 2011 2010 2009 Comment

Current 1.56 1.745 1.342 1.142 Increase before TTM, liquidity has

increased

Inventory Turnover 137.6 154.4 120.62 119.67 Decrease before TTM, higher than

the industry average

Days Sales Outstanding 16.18 20.58 21.11 18.95 Decline, receivables being

collected at a faster rate

Total Assets Turnover .64 .64 .57 .48 Increase

Total Debt to Total

Assets

.86 .69 .76 1.33 Decrease until TTM

Profit Margin on Sales ------- 8.56% 12.66% 4.12% Decrease, becoming less profitable

Return on Common

Equity

-

15.2%

11% `9.5% `7.3% Increase before TTM

P/E -2.3 18.7 10.2 27.2 Increase before TTM, way below

industry average

Source: (Morningstar Inc., 2012)

The ratio analysis for EDMC indicates poor performance and a loss of financial growth

as a result of the trailing twelve months (TTM) indicators. EDMC is positioning itself to become

more liquid and functional by decreasing turnover time for receivables and inventory. The


company has increased its current ratio which indicates that they are increasingly able meet its

short term obligations.

EDMC increased its return on assets which indicates that management is striving to

become more efficient in utilizing its assets base for generating profit before the plummet this

year. An increase in the return on equity before TTM also indicates how efficient the company

has become utilizing it equity base. The shareholders are earning more on their investment.

Total debt to assets has decreased for EDMC for the last couple of years which indicate

that they are less dependent on leverage as they were previously. With this ratio going up and

being rather high, it can be easily assumed that this company is considered risky. The added risk

of debt on its books can easily hurt EDMC if they are ever in the position where they are unable

to generate returns over the cost of capital. However, if the corporation manages to generate

returns over their cost of capital, investors will benefit.

Before the 2012 year when EDMC’s market capitalization plummeted they were doing

well financially. In December 2011 EDMC had a market capitalization of $3.4 billion and

currently, July 2012 they have a market capitalization of $648 million (Bloomberg L.P., 2012).

The pending litigations and judgments, if successful, from the U.S. government are enough to

wipe EDMC and all their previous profits away. Xignite Inc. reporting on Seeking Alpha

summarizes EDMC’s current financial predicament poignantly when they say:

The current suit against EDMC stands the possibility of bankrupting the company.

Worst-case liability for the company exceeds several times EDMC's market

capitalization and is at least an order of magnitude greater than the company's

TTM earnings. Even a comparatively benign outcome for EDMC could see

several years of earnings wiped away in a judgment. As always, the lengthy


nature of litigation and the fact that the suit is still in the very earliest stages could

force EDMC shorts to wait awhile before they see any gains (Xignite Inc., 2011,

para. 12).

EDMC’s stock’s P/E ratio is currently negative, making its value useless in the assessment of

premium or discount valuation, but its price-to-book ratio of .39 indicates a significant discount

versus the S&P 500 average of 2.15 and a significant discount versus the industry average of

3.90 (Morningstar Inc., 2012). Their stock is volatile and so is the regulatory environment

EDMC operates in.


Recommendations

Despite the former growth EDMC experienced over the previous decade their current

state of affairs is in shambles. They are facing controversy and criticism. Many are questioning

the tactics they use for growth and this is making EDMC’s future certainly rocky. Based upon

the high default rates, the high pressure recruiting, and misrepresentation of information for the

SEC reports, critics are questioning the quality of EDMC’s educational services. Educational

services are EDMC’s bread and butter and without a positive reputation they will lose out to their

rivals in the industry.

The criticisms from civilians are only a part of the reign of fire being heaped on EDMC’s

head. The relationship with the federal government is becoming increasingly more antagonistic

and will continue to pose a risk to EDMC and other for-profits. In order to comply with these

numerous regulations EDMC will need to change strategies and revamp its recruiting practices.

Under the gainful employment guidelines EDMC will need to start being more selective in the

students who are admitted. These regulations will also mean EDMC will need to invest more in

their programs, spending more on the faculty and physical facilities in order to raise their value.

EDMC must rise above and be more of an authority in the education sector and not its blemish.

The most unfortunate part is that EDMC does fill a gap that traditional universities have ignored

since the beginning; the non-traditional, low-income, minority students that have been neglected

by the traditional colleges. When EDMC came along 40 years ago they found a niche market

and have grown more than any other institution in the industry, but this has come at the heavy

price of their reputation. In education, reputation is everything.


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Documents

Company Analysis of Education Management Corporation