EDMC to sell schools to Calif. nonprofit
31 Art Institutes are included in proposal
After years of enduring government scrutiny and lawsuits, Pittsburgh-based Education Management Corp. is abandoning the forprofit business model and selling its operating schools to a Los Angeles-based nonprofit.
EDMC announced Friday it wants to sell 31 Art Institute schools, as well as the South University and Argosy University educational systems, to Dream Center Foundation, a philanthropic organization affiliated with a Pentecostal church that funds programs across the country for underprivileged people.
All told, the proposed deal will shift roughly 60,000 students and 15,000 employees at schools managed by EDMC to the Dream Center Foundation.
EDMC will remain as a for-profit corporate entity, with headquarters on Fifth Avenue, Downtown, to manage the winding down of nearly four dozen schools across its system that have stopped accepting new students.
Terms of the deal were not disclosed. Both sides hope it will close by the end of the summer. It will need the blessing of the U.S. Department of Education and accrediting agencies.
The sale is a remarkable turnabout for EDMC, which grew since its founding five decades ago to become one of the largest corporate providers of higher education in the country.
But the company, along with the for-profit education industry as a whole, has been battered in the last decade by government scrutiny and lawsuits over recruiting practices.
EDMC portrayed the deal as a “perfect fit” for current and future
students. “This is really a celebration,” said Mark McEachen, president and chief executive officer. “We believe that, finally, the cloud will be lifted.”
Mr. McEachen said the Dream Center Foundation had an “expertise, experience and passion that we didn’t see anywhere else — and frankly we can’t bring.”
The Dream Center Foundation — a church mission that funds programs ranging from hunger relief and human trafficking shelters to transitional housing and job training services for homeless families — had been interested in purchasing a higher education company for at least three years, said Randall Barton, its managing director.
The foundation received more than $11 million in grant and donation income in 2014, according to its tax filing, with most of that paid out in grants to specific programs. It reported $36 million in net assets.
While much of the foundation’s mission is tied to the education system, Mr. Barton said, it wanted an institution of its own.
“You get someone off the street and clean them up and help them transform their life, but if you don’t have education programs, you’re not really going to make the next difference in their life,” Mr. Barton said.
To lead the transition of the three EDMC schools into nonprofit universities, the foundation has created Dream Center Education Holdings, which will be entirely secular. Brent Richardson, the former chairman of for-profit education company Grand Canyon Education, was named chief executive.
Mr. Richardson resigned from the board of Grand Canyon in January, according to a company filing — two years after shareholders reportedly tried to remove him for not attending enough board meetings.
The rise and fall
EDMC’s sale shows the rise and fall of a once-profitable firm that rode the wave of for-profit education.
The company was formed in 1962 and bought the Art Institute of Pittsburgh, its first educational institution, in 1969. It grew over the years, buying up various schools. It went public in 1996 with a $45 million initial public offering, then shifted back to a private operation in 2006.
EDMC again became a publicly-traded company in 2009 and its stock price soared to a high of $27.99 a share on Dec. 30, 2011.
But lawsuits from the U.S. Department of Justice, along with attorneys general from 39 states, claimed EDMC illegally paid incentives to recruiters based on the number of students they enrolled. The suit demanded $11 billion in federal student loan money be returned and tarnished EDMC with allegations of fraud, deceptive marketing and steering students into debt they couldn’t pay back.
EDMC’s stock plummeted to $3.27 a share in August 2012. By 2014, when the stock was worth a few cents, the shares were delisted from the Nasdaq stock exchange.
Strict federal policies followed, including an Education Department rule finalized in 2015 that require forprofit institutions to meet minimum thresholds with respect to the debt-to-income rates of their graduates.
The measure crippled several for-profit school systems. Corinthian Colleges declared bankruptcy in 2015. ITT Technical Institute shuttered campuses nationwide, including two in the Pittsburgh area.
Calming things down
The first order of business for Mr. McEachen, who took the helm of the company in 2015, was to put an end to the legal nightmare, which he blamed for falling enrollment. In November 2015, EDMC settled the lawsuit, and other litigation involving numerous states, for about $100 million, admitting no wrongdoing.
The company has been fairly quiet since then — and that was by design. Mr. McEachen said the second step was to “calm everything down and operate.”
Still, several rounds of layoffs and closures came. Last May, EDMC laid off about 200 people, mostly administrative and support staff in its online division housed in the Strip District.
Mr. McEachen said he decided that some kind of sale, acquisition or partnership was the best course of action. With a permanent residence in Southern California, he knew the work of the Dream Center Foundation.
The foundation is a faith-based ministry founded by Pastor Matthew Barnett in 1994. It is affiliated with the Assemblies of God, a Pentecostal denomination that teaches that the gifts of the Holy Spirit described in the Bible, including the speaking of tongues, are available to believers today.
Dream Centers are also affiliated with a nationwide network of churches and faith-based social services, including one in Turtle Creek.
Before talking with EDMC, the Dream Center Foundation, which operates 61 centers across 41 states, had been in talks with another for-profit education company that had “too much baggage,” Mr. Barton said. EDMC had leaner operations and, Mr. McEachen said, a return to a “path of profitability.”
A shift to nonprofit
The most positive change for the organization could be in the business model, the executives said.
“I think the students and faculty and staff will all probably take a deep sigh of relief to be considered a nonprofit university because of the headwinds that have faced for-profits,” Mr. Barton said. He suggested, with nonprofit status, there could be more money to invest in academic offerings.
As the image of for-profit education took a hit, several companies have attempted to convert to nonprofit status or sell assets to nonprofit groups, said Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities in Washington, D.C.
In those cases, Mr. Nassirian said, the benefits seemed to lie with the owners of the companies, not the students.
“It is very unlikely that an outfit like EDMC and its really damaged assets can be redeployed for charitable purposes without continuing the practices that have gotten it in trouble in the first place,” he said.
“Being a nonprofit vs. a for-profit is not indicative as better for students,” he added. “I’d imagine this is mostly cosmetic, and the actual conduct of these campuses will not change.”
On Friday, at least one elected official promised to fight the deal.
Massachusetts Attorney General Maura Healey called the sale “a shameful attempt to avoid the rules put in place to stop its continued abuse of students and taxpayers.” Ms. Healey urged the Education Department, under Secretary Betsy DeVos, to “stop the transaction and protect students from this predatory enterprise.”
Business as usual, for now
EDMC, which informed its employees Friday of the sale, said the schools will continue to operate business as usual in the short term.
The corporate future of the Pittsburgh company, which is managing the 43 Brown Mackie and Art Institute schools it is winding down, remains uncertain. Those schools are expected to close by the end of this year.
“EDMC will still exist; the question is, what will it do?” Mr. McEachen said. “That’s going to be up to the board of directors.”