EXCLUSIVE

Why Donald Graham Sold Kaplan University to Purdue for $1

Why Donald Graham Sold Kaplan University to Purdue for $1
Donald Graham, chairman of Graham Holdings Company, speaking during a Kaplan University commencement.

There are many unanswered questions about the unprecedented sale of Kaplan University, a for-profit institution with several online programs but falling enrollments, to Purdue University, one of the top public universities in the nation.

To try to get some answers, EdSurge recently sat down with Donald Graham, chairman of Graham Holdings Company, the group that sold the 15-campus Kaplan University to Purdue (for just $1). (Editor’s note, Graham Holdings is an investor in EdSurge.)

A look at some details of the deal revealed in an SEC filing suggest that Graham Holdings bears the bulk of the financial risk, and as one analyst notes, is potentially leaving money on the table. It hands off much of Kaplan University to Purdue in exchange for essentially a long-term business contract for Kaplan, Inc. (which remains in Graham Holdings). Under the agreement, Kaplan will provide technology, marketing, and other support services for the new campus of Purdue that will be formed from the former for-profit. And Purdue has the option of canceling that deal after six years (through a “buy-out”) if it feels that Kaplan’s services aren’t working out.

Graham, a former publisher of The Washington Post, knows how to skirt a journalist’s question, and even after half an hour of talking, I’m not sure he fully revealed the reasons for the sale. 

The reason he sold appears to boil down to his belief in the quality of Kaplan University (he even co-teaches a course for its business school) and his hope that making it part of Purdue will elevate its reputation and success in ways it could never achieve as a for-profit university. 

The conversation took place last week during the ASU+GSV Summit in Salt Lake City, as part of our  Thought Leader Interview series on the future of education. A video of the complete interview is below, or listen to an edited version on this week's EdSurge podcast (also below, or listen on iTunes). Or read on for an edited and condensed text version of the conversation, or watch the complete interview.

EdSurge: I see what Purdue gets from the arrangement—a jumpstart into providing online courses. But what does Graham Holdings get out of this deal?

Graham: A Purdue board of trustees will run this university, yet to be named. There will be one member of the Kaplan University board of trustees who will join them, but the academic faculty will all become Purdue people, and I presume Purdue will want to add courses and programs which we could never have. So this could become a really great institution.

You asked about when Graham Holdings shareholders might be rewarded. The only way we would be rewarded, the only way we would get a growing stream of revenue, would be if Purdue continued over the years to add students. In other words if the university became a big success under Purdue's leadership, we'll be part of that success. But we will not be a participant in any profits. We're out of the for-profit education business here. We will be paid for our services, and the profits if any will go to Purdue, and hopefully back into the whole educational system.

Why couldn't you have made this arrangement to essentially make a business deal with Purdue without giving away Kaplan University?

This is a very unusual deal. Purdue gets something it didn't have, which is a big online presence, a big online program. We get the opportunity to do it, we'll perform a prescribed set of functions.

Is Kaplan now essentially competing with companies like 2U and other so-called ‘enabler’ providers?

No. The main thing we bring to Purdue is Kaplan University, and we can only sell that once. So we're bringing 32,000 students, and that's a fair-sized college or university. And we're going to devote all our time and effort now to being, to performing well the jobs that Purdue's asked us to perform.

What are the functions that Kaplan will be providing?

Why did Purdue not start an online university of its own? You have to figure out, "How do we attract students in a world where if you Google online education or online bachelor's degrees, there's a lot of people out there?"

How do you recruit them, how do you offer them financial aid, how do you counsel them, how do you run a place that attracts lots of students, and explains the program to them? One very unusual thing about Kaplan University in the past—and it'll be up to Purdue whether it wants to continue this—is that we've had a trial period. I don't think any other university in the United States, online or on ground, for profit or not for profit, offers this. When we started it it was a five week trial period where you enrolled, you tried our courses, you went through one term, including exams, and then you could decide to drop if you wished for any reason, or for no reason, and you would be charged no tuition.

At most universities as you know, dropout rates in the first term are enormous. So that program cost us over five or six years about $175 million. And I am immensely proud of that. I didn't do that, the Kaplan people did it to make clear that as part of running this university, we went many extra miles to make sure that students were where they wanted to be. But running an online university means doing everything a university does. A faculty selected by Purdue board of trustees will now take over the academic part. But as you know there's a lot more to running a university and teaching the courses.

But what is the real difference between that and an enabler, such as 2U, which helps colleges run their online programs? I understand how you got there is different for sure, this is an unprecedented deal. But now that you're in this arrangement isn’t it very similar?

A quick answer is I don't fully understand everything that 2U does. They're neighbors in Washington, and I have great respect for them. The difference is we as part of our arrangement have contributed a full grown university, accredited, offering degrees, with 32,000 students. And so 2U does this with many partners. In our case we don't consider Purdue a partner. They are the owner of the university, but we are doing it with them, and with no one else.

Are you concerned at all about the recent Faculty Senate vote at Purdue that was against this deal? Largely I think on governance reasons about how it was done and how it was kind of a surprise for them.

I read accounts which stressed that the faculty senate was bothered that they felt they had not been fully informed or consulted before the deal was arranged, and obviously president Daniels expressed himself on that. I do not pretend to be an expert on the sentiments of the Purdue faculty senate.

Well let me ask a broader question because this deal does have to be approved by the accreditor. Are you concerned that it might not go through?

Not only that, it has to be approved by the accreditor, the state of Indiana, and the Department of Education. And the accreditor in this case is the same for both institutions, the Higher Learning Commission. We had just been fully reaccredited with an unqualified reaccreditation for 10 years. They're also the accreditors at Purdue, so they know both institutions well. The Department of Education knows both institutions well, and the state of Indiana we do not know, but Purdue knows. Outstanding people have to look at this and give it their approval. We think this is good. Their concern is primarily with students and with the reputation and the future of Purdue.

So Kaplan Inc, which is still part of Graham Holdings, will continue to offer services to this new Purdue online institution. But do you think over time that might evolve so that Kaplan might sell those services to other universities as well?

I suppose that's conceivable, but I will guarantee you there's not any plan on any scrap of paper in Graham Holdings or at Kaplan to do that. The job of helping Purdue is going to be our job for the foreseeable future. If way down the road it turns out this is a great arrangement and the university flourishes, I suppose we could turn to that, but that is not in anyone's current plans at Kaplan or Graham Holdings, I promise you. We're focused.

Kaplan University's enrollment was falling, and the for-profit university sector as a whole has been under immense public scrutiny and government scrutiny over the last several years. And I think some people look at this deal and wonder, was there something bad about to happen with Kaplan U that made you need to unload it?

No. There has been eight years of unbroken controversy about for profit colleges, and we have been strongly on one side of that debate. The debate started when president Obama became president, started when Arne Duncan was Secretary of Education. Each of them, whenever they talked about this issue they were careful to say that there are for profits that do a good job but they were interested in regulating and limiting the bad actors. And we feel that we were one of the for-profit educators whose outcomes were the best. We're certainly not the only one that can claim very good outcomes. The debate is about how well do these universities serve students? And I would respectfully say we serve them pretty well.

So then I’m curious about the timing here, since with President Trump in office there are now some signals that there will be a more favorable regulatory environment for for-profit universities. Why do this now?

You are right. And we certainly knew that we had a future in this business, and the regulations were likely to change. I would say for the good of the country we need new entrants in higher education. The current regulations are an inhibitor. I've had founders of famous education startups who you think would be offering university degrees tell me they don't want any part of it because they say "We don't want to be part of these regulations." That's bad for the country and bad for students. However, I have to believe it when decades of regulators and Senators and whatnot tell me they are very bad actors in this space. If the regulations are going to change, it would be good to get thoughtful people together and say, "How do we move away from some of the more extreme regulations, open up the space to new innovators, but make sure that people who don't perform well for students don't continue to operate.”

So why the timing now?

Because Purdue wanted to do it. And that is just 100 percent of the reason for the timing. We saw a unique opportunity to sell Kaplan University to a great university.

Did you shop it around anywhere else, so to speak?

It would have been Andy Rosen, not me, who was talking to anybody that was interested. But I think Purdue is one of the top universities in the United States, and that alone made this a unique arrangement. And again, as I've said before, if Graham Holding gets anything out of this, if Kaplan gets anything out of this, it can only be because the university succeeds. It can only succeed if students say, "This is a good place, I want to go there," and they get results and their friends ask them about it and they say, "Yeah, that was a good place, I really like it." Word of mouth is everything.

So are you going to keep teaching there?

Well that would be up to Purdue. I'd be honored to continue to be an unpaid member of the faculty, but that's their choice.

You were here at the ASU+GSV Summit talking about the organization you co-founded called, TheDream.US that gives scholarships to undocumented college students in the U.S. Tell us a bit about that?

I got to know a little more about undocumented kids starting to school and found how impossibly frustrating their situation is. I met a particular young woman who was the salutatorian of a good Washington public high school. She could not get a Pell Grant, could not borrow a cent, could get any Federal or State aid of any kind because she was undocumented. I can't remember when she came to this country, but the average student came here when they were six years old.

It is easy to get mad at someone for quote, "Breaking the law." But it's pretty hard to get mad at a six-year old. They grow up, usually the children do not know their family is undocumented. So it's not known to the children until perhaps they turn 16 and the oldest one wants to get a driver's license and finds they cannot. And then, as high school seniors, the college counselor comes to talk to the class, and says, great news, your all eligible for college so you all get a Pell Grant and you get state aid and you may get institutional aid. And the young man or woman goes up to talk to them about this aid [and finds they can’t get it because of their immigration status].

So, we set up the world's simplest scholarship program. We set out to raise a couple of million bucks, and we raised considerably more. We now have 1,600 members in two or four year colleges. Our program offers them a total of $25,000. We partner with institutions so that pretty much pays the full cost of tuition. The dreamers obviously have to pay some on their bill in college. Not too much because of the low-cost nature of these institutions. And their retention rates and academic performance are unbelievable.

The politics around immigration seems to be changing now that Donald Trump took office. How concerned are you about that, and is there anything your organization is doing on the political front?

As an organization we just give scholarships to students—our charter says that's what we do. We do depend on an executive order issued by President Obama called DACA. There was considerable fear that President Trump, when elected, was going to rescind the order. He has not done so. Indeed, when asked, he has spoken up [for dreamers]. There's some terrific students among them, and it's complicated from the point of law, but he has left the DACA alone.

I have one other question, which is actually about the Washington Post because right now it’s getting a flood of subscriptions with its coverage of Trump. Do you have any seller’s remorse?

I deal with the Post now as a reader. I'm so proud of the place. And a lot of it is people have been hired since we sold it. The editor, Marty Baron, who was hired by my niece Katharine Weymouth, is a great editor. Other people running the business are mostly people who worked with us, but what Jeff [Bezos] has done is what three years in is what I what I hoped he'd do. He's adding tech resources in particular.

You're not itching to get back in the newsroom yourself?

I'm proud of what the Washington Post is doing. I can do a lot, but I'm never going to be the technology expert that Jeff Bezos is. There's no question about that, and that is not the only problem in newspapers. Jeff is a businessman, not a magician. And if you asked him, "Have you solved the problem of news for the future," his answer would be no I think, but you should ask him. And you have to be impressed by the approach he's taken.


Disclosure: Graham Holdings Company is an investor in EdSurge.

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