Changing competition, technology pushed Capella and Strayer together

Capella Education Co. merged with another for-profit education firm, Strayer Education Inc., last week for all the normal reasons companies get together, including saving costs and expanding their services.

But as technology changes education and a growing number of traditional universities try to serve the young adults and midcareer workers who study at Capella and Strayer universities, leaders of the two companies decided they needed to bulk up.

"In a world where there is increasing intensity, it made a lot of sense to look for a partner that could enable us to reach a level of scale and increase the pace of innovation," Karl McDonnell, the Strayer veteran who became chief executive of the combined firm, said after the merger closed Wednesday.

Now called Strategic Education Inc., the combined company brought together two of the most successful for-profit education companies. Strayer is more than a century old and the bulk of its 46,000 students are adults who are already in the workplace looking to finish their undergraduate degree. Capella formed in Minneapolis 25 years ago and is a pioneer in internet-based teaching. Most of its 38,000 students are pursuing graduate degrees in professional fields like business, health sciences and information technology.

When it was announced in October, the deal appeared to be another sign of upheaval in an industry that's frequently controversial. Stung by poor performance, several other big names in for-profit education — the University of Phoenix, DeVry University and Kaplan — also went through ownership changes last year.

But with their focus on business education and other professional programs, Capella and Strayer have long been on solid economic ground. They have also fared well in the evaluations of federal regulators who compare the fees their students pay with the money they earn after graduating.

Capella's undergraduates, for instance, spend less than the national median annual cost for all colleges and universities and get an average salary well above the median when they finish, the U.S. Department of Education reported last year.

"They are pro-cyclical in a strong economy," Peter Appert, a Piper Jaffray analyst in San Francisco, said. "That's when companies are much more focused on recruiting and retaining talent. And that's the market they are seeking to address."

Strayer in recent years has worked directly with dozens of companies to develop personalized courses for existing employees that take advantage of corporate-tax incentives on financial aid. "That has been an important driver of their enrollment growth," Appert said.

The broad notion that secondary education is a one-time event for 18- to 24-year-olds is also changing. More adults go back to college at some point in their career to get new skills or credentials. And the pressure is on education institutions of all stripes to deliver for those midcareer adults without burdening them with years of debt.

"The consumer is going to demand more affordability, more flexibility ... and a high degree of relevance because they are going to want it to pay off," said Kevin Gilligan, Capella's chief executive since 2009 and vice chairman of the combined firm. "There's going to be innovation around that."

McDonnell said executives of the two firms discovered their faculty and technical staffers were innovating along different lines. Capella built competency-oriented teaching methods that provide students enormous flexibility while Strayer focused more heavily on classroom technology, including artificial intelligence.

As a combined enterprise, he said Capella and Strayer can increase the pace of innovation. "Our company needs to be at the tip of the spear of any and all technologies that can improve learning and outcomes," McDonnell said.

The companies estimate that, within 18 months, they can save $50 million out of their combined annual expense base of about $800 million. Part of that savings will come from consolidating some corporate jobs, with Strayer's base in Herndon, Va., becoming the headquarters and Capella's office in Minneapolis shrinking some. Capella University will remain based in Minneapolis as will the IT operations of the combined firm.

The educational operations will remain separate because they serve different types of students, are accredited differently and have well-established brands. "The portfolios were complementary but the overhead structures were redundant," Gilligan said.

The Trump administration eased some of the regulations imposed on for-profit education companies during the Obama years. It has maintained the so-called "gainful employment" rule that compares the amount of debt students of for-profit programs take on with the salaries they make after completing a program. But it no longer requires colleges to disclose that data.

Students at both Capella and Strayer universities fared better by such measures than those at many for-profit outlets. Executives said that, no matter what the Trump administration does with the rule, the company will continue to feel pressure from students on affordability and employers on quality.