In mid May I wrote a post “The Market Fall of EdTech Will Have Non-Financial Impacts” that included this observation:
I’m not a financial analyst, and I care more about company strategy and operational capabilities. One thing it means is that we should expect increased M&A activity, both from healthier companies buying others for a bargain and from the massive amounts of private equity looking for a place to invest. Your favorite EdTech vendor is much more likely to acquire (or be acquired) in the next few years than they had been. And for publicly-traded companies, there will be increased investor pressure to get finances in order to limit losses and avoid takeover offers. For earlier stage companies looking for investment, they may not succeed and may not survive. Less stability in EdTech markets overall.
Just before that post Bloomberg had a story that Indian EdTech giant Byju’s (giant in terms of its $22b market valuation, not in terms of its ~$1b revenue) was in talks to acquire either Chegg or 2U. Late yesterday came news that Byju’s made an offer to acquire 2U for just over $1 billion. Bloomberg further clarified:
The talks with 2U could still fall apart and a deal may not materialize if its board rejects the offer. 2U has a current market value of $717 million and about $1 billion in debt and other liabilities. A representative for 2U declined to comment. Byju’s and Chegg didn’t respond to requests for comment.
Byju’s has secured financing of more than $2.4 billion for whichever deal it finally pursues as it looks to step up its growth and global expansion, said the person. While debt financing is more expensive than just three months ago, assets are cheaper and deals are still looking attractive, the person said. Shares of 2U have declined more than 80% since a peak of $55.55 in early 2021.
Market Cap Context
While my main interest is in company strategy and operations – and not financials, per se – it is worth understanding the history of 2U’s public stock valuation and how it played a role in this potential acquisition. Put simply, for companies with money “assets are cheaper and deals are still looking attractive.” 2U would not even be a viable acquisition target if its market value had not collapsed recently.
2U had its IPO in March 2014 at a value of just over $500m. Three years later at the time of its announcement of the agreement to acquire GetSmarter, 2U was valued at $2.1b, and at its peak in June 2018, 2U was valued at $5.15b. When 2U announced its agreement to acquire Trilogy in April 2019, it was valued at $3.96b, but the stock fell quickly. In late July 2019, which I described in “July 30, 2019: The day the OPM market changed”, 2U dropped from $2.19b to $881m, but then the stock started rising again. When 2U announced its agreement to acquire edX in June 2021 for $800m, it was valued at $3.13b.
We don’t know if this deal will go through, but the fact that it is even under consideration is due to the drop in market valuation of 2U. Finances (potentially) affecting operations.
The edX Question
If this deal with Byju’s is accepted, edX will be another step removed from its nonprofit roots and university partner contributions. There was a lot of consternation about edX selling itself for cash to a for-profit company, but the concerns did not change strategic decisions for the most part as I described in November.
And yet . . . no institutions have left the edX program, and we’re already seeing 2U partners joining edX, and one edX partner (Boston University) leveraging 2U resources as well as edX to create a new program.
What I think helps explain this situation is the difference between individual and institutional perspectives. [snip]
Individuals still have the same philosophical issues with the deal, but institutions for the most part do not. From an institutional perspective, there is a net positive. edX with a strategy. edX with financial investment and without the dreaded membership fees.
Would a Byju’s acquisition change that dynamic?
In August 2021 I described the strategic moves of Coursera and of the new combination of 2U and edX.
I believe that we are seeing a fundamental shift in markets this year and that MOOC and OPM no longer adequately categorize vendors. 1 Coursera and 2U are attempting to define a new online education platform market that relies on network effects enabled by consumer-level flywheels (i.e., beyond the heavy digital marketing based primarily around institutional brands). This new market is about creating student demand and scale.
In May’s Q1 earnings call, 2U CEO Chip Paucek gave an update on how this strategy is progressing.
We are seeing run rates of 500,000 leads per year coming to the 2U prospect forms on edX in 2022. This represents nearly 10% of our lead volume company-wide, with no additional marketing costs involved. And better, we expect to be able to triple this amount over the next 18 months. The reality is a tiny fraction of the edX traffic were even seeing the 2U products. We have much, much wood to chop.
University of London and LSE Undergrad are an example of a 2U degree benefiting from this new lead flow. LSE Undergrad is a global brand, a high quality experience and a very affordable degree, roughly $26,000. Learners are coming from all over the globe.
We are seeing significant traction from edX. Over Q1 alone, edX already represents 20% of our lead volume and our largest non-paid channel for this degree. And those leads are submitting applications at a 30% plus better rate than leads from our paid channels. That is huge. The implications for this across our business is significant, particularly as we create more affordable pathways for people and improve our products fit with edX.
2U has also moved to make edX its consumer-facing brand. Investors have not been sold on the strategy, at least during the overall tech market crash, but perhaps a company with longer time horizons might be.
I don’t want to go too far into speculations upon speculations, but a big question is why Byju’s might be acquiring 2U. The Bloomberg story mentions its plans to “expand into the US”, but that is vague. Byju’s is primarily a K-12 online learning provider working directly with students (B2C), so this move would include more than just a geographic expansion. Byju’s acquired Great Learning from Singapore in July 2021 for $600m, and GL announced an agreement to acquire Northwest Executive Learning, a Singapore-based provider of executive education as described in IndiaTimes.
The Singapore-based Northwest has partnerships with universities like MIT, UC Berkeley, Yale, UCLA, University of Chicago, and others. Going forward, Northwest Executive Education and Great Learning would work on leveraging synergies to expand their offering across markets like India, Asia, US, Latin America and Europe.
When I was contacted by the press story on the acquisition, the promo material positioned Northwest against both Coursera and edX [emphasis in original email].
The news will additionally further align Great Learning with the top universities including MIT, UC Berkeley, Yale, and Stanford Graduate School of Business among others.
This acquisition will truly position Great Learning to become the premiere professional learning edtech platform, proportionate and above both Coursera and edX.
“premiere professional learning edtech platform” – this is interesting positioning for upskilling and executive education, but it is not based on degrees and higher education.
One way to view Byju’s interest is not just expaning into the US, but doing its own work to fill out a K-12 through higher ed through professional and executive education spectrum of offerings. However, the core Online Program Management (OPM) business of 2U is B2B in a difficult market with increasing regulations. How much interest would Byju’s have in the 2U degree business versus the more consumer-oriented MOOC-based edX business? I realize that 2U was working to integrate these pieces into a whole, but it is not clear if Byju’s would continue the same strategy, especially with the growing regulatory scrutiny of the OPM market.
And if the acquisition goes through, it will impact the OPM market beyond just Byju’s strategy.
I realize that this post is more about setting context and asking questions than it is about definitive analysis, but this is a developing story we’ll have to watch.