Schafer: Merger is a good fit for Capella, Strayer

Some awfully entertaining reading can usually be found in the background of the merger section of the securities filings that companies prepare for shareholders when they need approval of a proposed deal.

You can read all about the brinkmanship and posturing in these detailed narratives, all the back-and-forth of negotiations. And in this section you can see why the board of directors started thinking of selling in the first place, for sometimes when a deal is first announced it's not clear why the board would want to sell.

Shareholders will have no need to wait for a good explanation in the filings for the merger that Capella Education Co. of Minneapolis and Virginia-based Strayer Education Inc. announced Monday. The case for bringing these two together, after only a quick read of the news release, is obvious.

The fit is clear, as the two companies don't overlap much in the market, serving different segments and through largely complementary delivery methods.

More importantly, Capella has been going sideways for a long time. One conclusion from this deal is that looking ahead, management must have seen only more of the same. Instead of that, Capella shareholders already received a big pop in stock price and will end up with nearly half of a larger, more efficient company.

To be fair to Capella, given the state of the for-profit education industry, "sideways" should be considered a pretty good performance.

In fact it's remarkable how stable the financial results of Capella have been, given its industry's volatility. Capella year after year reports annual revenue of just more than $400 million, last year with revenue coming in at $429 million. Its operating margin is consistent, too.

Meanwhile, a chart of the past 10 years of annual revenue of one of the greatest success stories in the history of for-profit education, the parent company of the University of Phoenix, produces a profile that looks a little like the outline of Mount Rainier.

By the time that company struck a deal to get acquired by private equity investors, its enrollment had slid dramatically. Management was warning shareholders of more trouble if the shareholders failed to approve the transaction.

It was the kind of quick collapse of a market leader that isn't often seen in business. Some of its problems were clearly of its own making, but it was far from alone in its decline.

The troubles in the industry couldn't have done Capella's marketing any good, but this company isn't much like its industry's high-profile flame outs. Rather than vocational training through a big network of brick-and-mortar campuses, Capella has been an innovator in the segment of the industry that taught students online.

Online learning is actually growing in popularity, particularly as providers have gotten better at both providing opportunities for collaboration with other students as well as tailoring programs to individual students.

Big public universities have been market share gainers. And importantly, total enrollment for schools in the private nonprofit segment that includes well-known brands like Southern New Hampshire University has passed the number of students in the for-profit segment, as of the most recent data.

There's no reason to think it's going to get any easier to capture profitable growth for companies like Capella. When that's the case, a merger or sale can make a lot of sense.

One appeal of Strayer, far better known for undergraduate education in business, is its network of 73 facilities that can be used by Capella to teach students with a mixture of in-person and online instruction.

When looking at Capella, Strayer's CEO talked about how both organizations are trying to make education less costly. So one appeal here was Capella's methodology of creating an individual learning program where the most dedicated students can zip through quicker, cutting their costs.

And for the combined companies, there's the classic case for bringing companies together just to take out a lot of duplicate administrative cost, in this case $50 million a year once the two companies are fully integrated in 18 months or so.

It flagship brand will remain alive in the market and, at least for a while, it will keep a big presence in downtown Minneapolis.

Capella shareholders may grumble that even with a 30 percent surge in share price on Monday on the merger news, at $85.45 per share the price isn't even back to its 52-week high. True, but it sure beats last Friday's closing price.