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For-profit educator EDMC gives employees a tough lesson in modern business

"Goldman [Sachs] has a very large position here. They have a big interest in keeping this stock price up."

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Education Management Corporation is one of Pittsburgh's most prominent employers. But not everyone was hurting when the for-profit educator, which owns the Art Institute of Pittsburgh and other schools around the country, laid off hundreds of workers last Thursday. 

Cabbies, at least, did well: During much of the day, Yellow Cabs were parked outside the company's Online Higher Education office in the Strip District. Periodically, employees were ushered into the cabs, which drove off into the rain.

EDMC was picking up the fare, one employee said while watching from a nearby bar, "because now they can afford it."  

Actually, EDMC wasn't lacking money before: The company had $400 million on hand last year, financial records show. But the firm has directed much of its cash elsewhere. Weeks before the layoffs, EDMC announced it would spend millions to buy back its own stock. 

That move, analysts say, will create another group of winners: the investors who own the vast majority of shares, including some EDMC board members.

Stock buybacks are not unusual. But they have become controversial, especially in an economy where Wall Street can seem hostile to Main Street.

"Using company revenues to re-purchase stock tends to resonate with people, particularly when you're cutting back and letting people go," says Paul Griffin, a professor of management at the University of California at Davis. 

That may prove especially true at EDMC, nearly half of which is owned by Goldman Sachs, the investment giant which became a lightning rod in the wake of the 2008 Wall Street bailout. 

EDMC did not respond to e-mailed questions or phone calls. In a statement last week, the company said that layoffs were designed to make it more efficient, and amounted to "fewer than 2 percent of its 20,000 employees."

But Griffin, like other observers, says EDMC's strategy "has Goldman Sachs written all over it. This company is an example of capitalism working in a very impressive way. ... That's the role of Goldman in our economic society."

Not everyone thinks it's a role worth playing.

"All I have seen is the company making strategic moves to save themselves and their shareholders money," said a current EDMC employee — who, like most employees City Paper spoke with, insisted on anonymity. "Everyone who was laid off is now a scapegoat, and the vicious circle continues."


Perhaps very few Americans understand the value of education better than Goldman Sachs.

In 2006, it joined with two other firms — Providence Equity Partners and Leeds Equity Partners — to purchase EDMC for $3.4 billion. Leeds is a private-equity firm that has built a portfolio investing in what it calls the "knowledge industry." The company's advisory board is chaired by Colin Powell, former Secretary of State under President George W. Bush. Providence is also a private-equity company with a wide array of investments — including the YES network, which is best known as the television home of the New York Yankees — totaling roughly $23 billion.

In January 2007, the company hired Todd S. Nelson as CEO; Nelson is the former CEO of Apollo Group, the parent company of online educator University of Phoenix.

Under Nelson's management, EDMC's profits have swelled. Between 2007 and 2009, the company's net revenues more than doubled, from $1.3 billion to nearly $2.9 billion. And in 2009, EDMC decided to "go public," selling 20 million shares to stock investors. The offering netted the company more than $300 million. 

"This is a successful business," says Anthony Catanach, a professor of accounting at Villanova University. "They've been extremely profitable in the past five years."

Arguably, EDMC may have had too much money: $400 million in cash by 2011. "Companies typically don't like to have a lot of cash on the balance sheet," says Catanach. "It can make them ripe for a takeover."

In such circumstances, he says, companies often do one of three things: reinvest their money back into operations, pay dividends to shareholders ... or repurchase stock. 

EDMC chose the last option. So in June 2010 — just one year after the company offered up stock for sale — it began buying shares back. 

At first, EDMC sought to spend $50 million on its share buyback. But the program has been extended repeatedly, and it has spent $291 million so far. It announced plans to buy back another $50 million in stock this past December — one month before the company carried out its layoffs.  

In a memo sent days before the layoffs, EDMC executive John Kline told employees that the company had to "better position ourselves for success within the current economic and regulatory environments."

Kline did not mention specifics, but the layoffs were heavy among employees recruiting students to EDMC's online programs, like Argosy University. In an October conference call, Nelson told investors that enrollment had dropped 4.5 percent over the previous year; enrollment in online programs — where January's layoffs were concentrated — dropped by 7.6 percent. 

Among the shifts in the "regulatory environment," meanwhile, was a lawsuit filed by the Obama administration's Justice Department, as well as ongoing congressional inquiries into the recruitment practices of EDMC and other for-profit educators. During the conference call, Nelson partly blamed "negative press" for faltering enrollment.


If the layoffs attract more bad press, EDMC won't be alone. In November, The New York Times ran a story highlighting companies — including pharmaceutical giant Pfizer — that laid off workers even as they spent money repurchasing their own stock. As the Times noted, "The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company's underlying growth is lackluster." But meanwhile, the paper added: "Liberal critics insist the trend is another example of top corporate executives raking in an inordinate share of the nation's wealth, even as their employees suffer."

Catanach says those criticisms can be sharpest for companies like EDMC, whose stock is largely held by the very board members, executives and institutional investors who chart its course.

Of EDMC's 10 directors, two are principals in Goldman Sachs, three either directly represent or have ties to Providence Equity Partners and one represents Leeds Equity Partners. Nelson is the only executive to serve on the board, though former CEO John McKenran Jr. serves as its chairman. (The remaining members are a former airline executive and a corporate lawyer.) Together, those 10 directors, as well as the private-equity firms tied to several of the directors, control 80 percent of EDMC's shares.

By contrast, according to financial documents, managers, directors and large investors at the Apollo Group, Nelson's former employer, hold only 14.4 percent of shares at that company. At for-profit educators Capella and Career Education Corporation those numbers are 9 percent and 3.8 percent of shares, respectively.

Such concentration among directors, says Catanach, "raises questions about an increased buyback, because what it's doing is really raising the value of the stock for the institutional shareholders" who own the firm.

"Goldman has a very large position here," agrees Griffin. "You've got two of Goldman's main players — Mick Beekhuizen and Adrian Jones — sitting on the board of directors. They have a big interest in keeping this stock price up."

Nelson, meanwhile, received stock-option bonuses worth $11.5 million last year, on top of a base salary of $630,000 and other bonuses.

"That's a lot to earn in stock bonuses," says Catanach. "He definitely has some incentive to get that stock price up."

 That's been a knock on Nelson at Apollo, where shareholders sued him in 2004, accusing him of withholding information to keep the stock price high. But at EDMC, Griffin says, "Goldman Sachs is here to monetize this investment and then move on to the next one."

"This company is good for Wall Street," allows Kevin O'Donnell, a spokesperson for labor union SEIU, which has launched a campaign to educate students about the perils of for-profit education (www.forprofitu.org). "But they're selling education, and they shouldn't be running their company like they're selling ketchup, or some other product that can be bought and sold without consequences."

"Look at their board of directors," O'Donnell adds. "There's not one educator there. It's all business people."

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