A wave of consolidation is hitting the education market, as investors and strategic players react to newly challenging market conditions and what they see as an overcrowding of companies jostling to deliver similar products.
While merger and acquisition activity among education companies remains below pandemic-era highs, deals are being driven by a cluster of forces. Those include the expiration of federal stimulus dollars, a sharp drop in venture capital investments, stagnant interest rates, and a rush of smaller companies trying, with mixed success, to introduce products in AI and other areas.
As a result, many organizations are now looking for exit opportunities, such as getting bought by a private equity firm or a strategic investor that will allow the organization to remain viable.
Investors, bankers, and advisors who focus on the market say the upcoming expiration of federal stimulus dollars, sharp drop in venture capital investments, stubbornly high interest rates, and tech giants’ rollout of artificial intelligence tools for educational settings have made many K-12 organizations question their ability to meet their growth targets – or survive at all.
What you need to know about M&A and what may be coming next.
- Capital is looking for opportunities. There’s a significant amount of cash in the financial markets waiting on the sidelines for opportunities to invest in the K-12 space and large players are looking to make strategic acquisitions. But with a limited total addressable market, buyers need to be convinced that any companies they buy have a lengthy runway, large addressable market, and a unique value-add.
- Strategic investors are active. Consolidation is being driven in part by large companies in the space seeking to fill in gaps in their offerings, add specific capabilities to their products, and advance organizational goals.
- Different challenges, opportunities in Europe: Mergers and acquisitions are more common among small- and mid-sized education companies than they are in the U.S. The market on the continent is different, in that there’s a lower penetration of digital products in European schools, and in some countries, a skepticism surrounding the value of tech tools in classrooms. The region offers opportunities for companies and investors, given the nascent state of the industry there.
- A hotter second half? As deal activity is continuing, it has been at a slower pace compared to pandemic highs. It’s possible that the market will see a higher volume of M&A in the coming months and into 2025.
“In the past week alone, I’ve had five companies that raised $30 million or more reach out to me and [say,] ‘Basically, we’re done. We have nowhere to go. Can you sell us?’” said James Marciano, founder and CEO of Tuck Advisors, a firm that advises companies on M&A in the education space.
In those circumstances, the answer is no.
The acquisition process can take a year, he said, and many of these companies don’t have enough cash left to continue operating for that long.
He believes one of the overarching issues in the space is that there is a significant amount of capital that private equity firms, family offices, pension funds, and other investment vehicles are looking to deploy across the industry. But with a constrained total addressable market, investors question just how much room the K-12 industry has to sustain these organizations’ growth.
“You’ve got 50 startups all doing the exact same [learning management system] idea. Everyone thinks they have the winning team. Everyone has investors pile in, and they’re all saying ‘We’re going to get a billion dollars in revenue,’ but it’s just not true,” Marciano said.
“They’re all just falling off the cliff, one after the other.”
Acquisitions, and Pivots
One of the major questions investors and organizations in the space are confronting is how much growth is achievable in the K-12 space when companies are competing to provide products and services for a finite number of students, said Rilwan Meeran, vice president of mission impact investing for the nonprofit organization American Student Assistance.
Because of those limitations, he sees companies falling into two categories: Those that are able to consolidate and scale quickly after raising capital and gain a sizable foothold in the market, and those that can’t grow beyond their existing market penetration, and as a result of that stagnation are looking for an exit strategy.
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“Both of those things [are] really prevalent in the market,” Meeran said.
Another option that companies with static growth are taking is pivoting their business strategy and trying to differentiate themselves, such as by adding an AI component or cloud-based solution.
Investors are looking for places to park a significant amount of wealth, and when they do see a potential for profit, deals are still taking place.
“There is a lot of capital on the sidelines that is being opportunistic and that is still investing,” Meeran said. “A lot of the ed-tech funds and workforce funds are well-capitalized. They are putting capital to work and actively investing, and the ones with track records are able to raise new funds.”
Sam Shah, co-head of investment banking firm Macquarie Capital in the Americas and its global head of software and services, expects the industry will continue to see a significant amount of consolidation from private-equity backed platforms.
Those organizations will take small assets in fragmented markets and turn them into mid- to large-size assets, he said. But investors “writing checks into $10 billion companies have to have the conviction that $10 billion can become $20 billion,” he added.
The ability to make that type of a leap in valuation is much different than being able to turn a $100 million company into a $200 million one — which is a more common scenario in the K-12 market.
“The sector is, for the first time in a long time, facing those types of questions,” Shah said. “But I still expect a ton of activity to take place there.”
Justine Chiou, a managing director for investment banking firm William Blair and leader of its global education practice, said that she’s continuing to see interest in K-12 M&A.
The industry is operating in a “challenging environment,” however. One of the wildcards is that it’s a presidential election year, and political volatility brings means uncertainty for the market. There are 13 governors races on the ballot in November as well, according to the National Governors Association.
“The world is moving pretty quickly and taking some sharp turns” she said, “so people are being cautious.��
Investors and companies in the market are also still keeping a close eye on the fallout of federal stimulus funding expiring, as K-12 districts are required to commit the rest of their federal stimulus funding by September. (School systems need to spend it by January, though the federal government has offered options for extensions.)
Most companies in the space are seeing binary outcomes from the end of ESSER aid, she said. Either the company is heavily dependent on the funding and is at a high risk for being on districts’ chopping blocks, or it’s minimally affected and what risk there is likely already priced into valuations and growth targets.
Strategic Investors Stepping In
Strategic investors, whether they’re large, publicly traded or privately backed companies, are also driving consolidation in the K-12 sector.
Instructure, for example, acquired credentialing platform Parchment for $835 million in February as part of its M&A efforts building out its work in upskilling and lifelong learning. At an investors conference this month, Instructure CFO Peter Walker said “M&A continues to be an opportunity” to expand the company and it’s focused on bringing companies on board that have specific capabilities.
While Instructure is traded on the public market, it is still majority owned by private equity firm Thoma Bravo. Reuters reported in May that the investment firm is exploring a sale of its stake in the company, which has a market cap of about $3 billion.
The area of credentialing drew additional M&A activity in May, when assessment giant ETS announced its acquisition of Mastery Transcript Consortium, a nonprofit organization and network of schools that focus on competency-based education. The deal came as ETS continues its work on the Skills for the Future initiative, a partnership with the Carnegie Foundation for the Advancement of Teaching to shift the K-12 and higher education systems from time-based learning to skills-based learning.
The world is moving pretty quickly and taking some sharp turns, so people are being cautious.
IXL Learning has been one of the more acquisitive companies in the K-12 space, having scooped up Dictionary.com, Thesaurus.com, Vocabulary.com, SpanishDictionary.com, Rosetta Stone, and TeachersPayTeachers in the past three years.
CEO Paul Mishkin said the company’s acquisition strategy is driven in part by a crisis it faced during the Dot-com bubble of the late 1990s when IXL, like many other digital companies at the time, relied on advertising revenue. When the ad market crashed and web-based startups began running out of money, the company, which Mishkin founded in 1998, quickly pivoted to a subscription model instead. The pivot worked, but the brush with financial danger left an impression on leaders of the young company.
“That was a very tough situation to go through,” he said. “It’s still affected how we like to run things today,” he said.
IXL is now a profitable company, Mishkin said, and it remains independently owned with no institutional investors.
As a result, it is focused on acquiring companies that may not necessarily be profitable when they’re acquired, yet the company envisions turning each one into “a business that makes sense,” he said.
In general, he views the “rule of 40” — which says a software-as-as-service company should have a combined year-over-year revenue growth rate and earnings before interest, taxes, depreciation and amortization margin of at least 40 percent — as a good guideline for its M&A strategy.
“That’s something we try to achieve with all of our acquisitions,” he said.
IXL also looks for unique strengths in any potential acquisition, he said. That’s what drove its interest in TeachersPayTeachers, a marketplace that allows educators to buy and sell lesson plans, resources, and instructional materials they’ve created.
“There’s got to be something really special about what they’re doing,” he said.
Chiou, of the investment banking firm William Blair, said some smaller companies that have been particularly successful in their growth and consolidation efforts have been focused on specific supplemental or core categories where companies are able to grow quickly enough in that niche and pick up similar platforms along the way. Those could include career and technical education and STEM resources.
Small- and Mid-size Deals in Focus
The European K-12 market has seen similar consolidation trends, but the challenges and opportunities are slightly different than those seen in the U.S., said Benoit Wirz, a partner at London-based ed-tech venture capital firm Brighteye Ventures.
In 2022 and 2023, expectations for buyers and sellers were far apart. But the recent drop in valuations has brought those expectations into closer alignment.
At the same time, there are also a fair number of education companies that have raised money in recent years that have yet to reach the scale their investors were hoping for, and are now looking for a buyer. The deals are smaller to mid-sized, usually in the sub-$100 million range, said Wirz.
“Where there’s less activity is the larger-end M&A,” he said. “That’s still pretty slow.”
The K-12 market in Europe, where Brighteye focuses its investments, differs in a major way from the U.S. in that schools in Europe did not see the massive funding increase that the U.S. did, through federal aid, in the wake of the pandemic.
The European economy also did not experience the same spikes in inflation that the U.S. has, and partially as a result, has seen more flexible interest rates, which make it more affordable for companies and investors to access debt to use as growth capital.
In addition, digital penetration is lower in European schools compared to the U.S., and most have not taken up the same number of digital applications that U.S. schools have. A U.S. school may have hundreds of products and software programs in use, Wirz said, while a European school may have a handful of custom-build, do-it-all applications.
“The market is still more nascent in K-12 in Europe,” he said.
A Second-Half Pickup?
To Adam Newman, founding partner at advising firm Tyton Partners, consolidation refers to two companies serving the same customers coming together and implies customers end up with fewer options when choosing a product. He hasn’t seen an uptick in that type of consolidation.
The deals taking place today fall into a slightly different bucket, he said. Organizations are trying to identify specific gaps or opportunity areas and then making strategic decision focused on addressing them.
“Larger companies are trying to fill out portfolios with assets that complement or extend what they’re doing for customers,” he said.
While he sees a lot of discipline in the market, he expects that overall activity will increase in the coming months.
“It’s been a solid first half of the year,” he said, “but I think people are expecting it to pick up a bit more [in the second half of 2024] and also as we accelerate into 2025.”
