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K12, Inc. Message Board

  • Claim_Digger Claim_Digger May 19, 2011 9:32 AM Flag

    K12 Buys Kaplan Assets

    This looks like a small fill-in acquisition as Kaplan only services 6 states out west and all of them already overlap with K12 schools. This is more a sign of K12 becoming the dominant player in the space and crowding out weaker competitors.

    This is sure sign that they will have pricing power. The main competitor to K12 right now is not another virtual school provider but instead the fossilized public school systems. K12 has a big price advantage there and is on the cutting edge of technology. By comparison the public school systems with their sclerotic bureaucracies cannot hope to compete for students looking for an online education tailored to their needs, not those of the unions and school administrators. Look for K12 to continue to gain market share.


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    • I think that you are trying to be a cheerleader for the company, but I am not sure that your points are well-grounded. This deal does not give the Company any pricing power. They have said on numerous calls that they are price-takers. The state determines the student funding level and that is what K12 gets. There is no negotiation. Also, this deal presents a real challenge to K12. They have always been considered the best curriculum and took the higher ground on education. This is totally different than Insight which goes after the worst students. And what costs will be cut. If you market as one brand, won't you bring K12 down as a premier brand. It is not that these students don't deserve an education, but that they are a different market. They also will churn much faster.

      Finally, you have to ask yourself why University of Phx couldn't succeed with Insight and neither could Kaplan, what is K12 going to do different.

      They don't disclose how much they paid, but this seems to be a questionable deal to me.

      • 1 Reply to malvernj
      • You are correct that this deal is hard to evaluate when there is no information on what was paid and what the revenues, etc. were. However, I do still think it could potentially be positive as K12 is in a much better position to take advantage of economies of scale in their business model than is Kaplan. K12 is able to spread the cost of their curriculum across a much higher number of students than can its smaller competitors. That is why K12's operating margins have been gaining so rapidly over the past few year in their core business. Their overall operating margins were 5.8% in 2008, 7.1% in 2009 and 9.2% last year, all while they had significant revenue growth and were investing in new ventures. Their core business probably had much higher margins.

        As for pricing power, your contention that K12 has to simply take what the states give then is nonsense. If that were so then the states would simply say they were not going to pay anything and K12 would have to provide free education. Of course there is upfront negotiation. My main point on pricing power was that K12 is able to provide a quality education alternative to the normal bricks and mortar schools at a much lower price compared to both the public schools and to K12 competitors. That is pricing power in the same way that Wal-Mart is able to sell for less. As a lower cost provider they can make money on K-12 students where Kaplan cannot. My guess is that Kaplan saw K-12 students as a small unprofitable non-core side business and decided to sell.

        I do like this company a lot and think it has a stellar future but do realize that its valuation may have gotten ahead of itself when it approached 40 recently. That is why I sold 20% of my position. I may buy that portion back if the stock drops to 32 or 33 as that seems like a reasonable entry point. Over the long run they seem to have the right strategy and are investing in the right areas. The macro economic and political environment is also very much in their favor with more and more states removing caps and opening up charter schools. There is lots of room to grow here over the long run.


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