Mergers & Acquisitions identifies the sectors and predicts the trends that will drive dealmaking in 2021. This four-part series opens with a deep dive into the education tech sector, where deals are proliferating as online learning takes off during the pandemic.
After the extraordinary challenges of 2020 – which included the coronavirus pandemic, the polarizing presidential election and the increased awareness of racial injustice in the U.S. – dealmakers are eagerly embracing 2021 with open arms. It may turn out to be a spectacular year for M&A. The high level of activity experienced at the end of the old year is expected to continue in the new year. At Mergers & Acquisitions, the editorial team has identified four sectors in which we predict activity will be especially high in 2021: Logistics, Cryptocurrency, Telehealth and Education Technology.
Here’s Our Forecast for the Education Tech Sector
The education market has never seen a shake up quite like the one that Covid-19 caused. K-12 schools as well as colleges and universities all over the world shut down, forcing most institutions to move to a remote learning system. Laptops and tablets have all but replaced textbooks and live teaching models. This change has led many dealmakers to look more closely at technology companies that are fueling the education sector today.
In light of Covid-19 and the fact that the education sector has been in desperate need of upgrades, total global education expenditure is expected to reach $404 billion by 2025 representing a 16.3 percent compound annual growth rate, or 2.5x growth, between 2019 and 2025, according to Holon IQ, an education market data company.
Smaller startups are already seeing increased interest from users and investors. For example, Seesaw, an application that allows students to submit audio comments and drawings online to their teachers, saw demand for its product grow rapidly after the onset of Covid. The number of student posts on the Seesaw app increased 10-fold from February to May 2020 and the paid customer base has tripled from last year. The app is now used in more than three-quarters of American schools, including big districts like Dallas and Los Angeles. Founded in 2013 and backed by venture capital funds, startups like SeeSaw are popping up quickly today and will be ripe for private equity investors and strategic acquirers alike. Companies like Blackboard, Dreambox Learning and Unacademy are all in the same boat.
Leeds Equity Partners, which has been investing in the education space for more than 25 years, says that there is certainly a greater awareness of the sector today than there was decades ago. “There have been, and will continue to be, great opportunities in the education sector, but there is no question that the disruption to classroom education brought about by Covid has put a spotlight on the sector,” says Jeffery Leeds, founder of Leeds Equity Partners, which is invested in many ed tech companies in the higher learning space.
In July, Leeds Equity along with Veritas Capital combined education technology companies Campus Management, Campus Labs, and iModules. Rebranded as Anthology, the company helps the higher education marketplace by connecting colleges and universities with real-time, cross-departmental data to drive insights for better student success.
David Bainbridge, a managing director with VSS, agrees that the ed tech space is poised for growth. “Ed tech companies have had a very strong year. Pre-pandemic, these businesses were taking market share from traditional publishers but during Covid this growth has accelerated,” says Bainbridge. “Schools are using any available budget to buy digital solutions and online assessments to try and salvage this academic year.”
Startups in Favor
Because shrinking budgets are constantly an issue in the education space, schools tend to favor smaller, startup type tech companies over the high-priced, often less nimble offerings that come from traditional education companies.
This fact is not lost on VSS. In June of 2020, the New York-based private investment firm made an investment in Really Great Reading, a K-3 foundational literacy curriculum that uses a hybrid model of in person learning and technology-based learning. Although the company’s products always incorporated an online component along with in person teaching, the company still had to quickly reposition itself when Covid hit. The company’s sales model was an in-person model where they would demo the materials with teachers in classrooms. In addition to pivoting to an online sales model, the company quickly converted all their teaching materials to online materials as well.
“We were able to pivot quickly and get everything online including our implementation. This business had an even better year than we expected,” says Bainbridge, adding that the nimbleness of Really Great Reading was partly the reason for its success during Covid versus the larger traditional guys that can’t pivot as quickly.
“Our business model has always been 100% virtual. We didn’t need to change any of our internal processes during the work from home movement,” says Bainbridge.
Bainbridge sees growth for Really Great Reading in today’s environment, which hopes will make the company attractive to one of the larger players in the market. He expects the company to expand into additional subject areas and into higher grade levels over the next year.
The only real headwinds facing the ed tech industry is the continued stress on school budgets as they are forced to spend money on cleaning supplies, PPE and other Covid-related things. “School budgets are fixed and additional costs can take money away from what they will spend on materials,” says Bainbridge.
Overall spending in the education sector is up slightly. According to the U.S. Department of Education, K-12 and postsecondary spending was $81.2 billion in 2019, up from $70.2 billion in 2018. M&A transaction volume has also increased. According to Berkery Noyes, total transaction volume in the education space in Q3 2020 improved 51 percent over Q2 2020. Of note, strategic acquirers accounted for 76 percent of the industry’s total volume year-to-date. Total transaction value in Q3 2020 nearly quadrupled over Q2 2020, from $1.1 billion to $4.2 billion.
The smaller companies will likely be of interest to larger education companies like McGraw Hill, Pearson and Houghton Mifflin Harcourt, which are working to retool their offerings. Many are making acquisitions to help them innovate more quickly. For example, at the end of August 2020, Cambium Learning Group bought Rosetta Stone, a technology-based learning solution company best known for its language programs, for $735 million. In July, as schools prepared to go remote, Houghton Mifflin Harcourt acquired of Waggle, a web-based adaptive learning platform provides differentiated Math and ELA instruction for students in grades 2 through 8. In March, Weld North Education acquired Glynlyon, a digital curriculum company, from Linsalata Capital Partners.
“The larger education companies are trying to change their own business models on the fly, which is tough to do. We think there’s a long runway for ed tech companies offering better, less expensive solutions than traditional publishers,” says Bainbridge.
Investment in the sector, including online products, has been a long-time timing. “Online offerings for students have been available for a long time, and have gotten better and better as technology has improved, and as educators have come to understand how best to teach remotely. But we all tend to be nostalgic about schools; part of us wants them to look and feel like they did when we were students. But the role of the school has changed, demands on schools have changed, and Covid has helped us appreciate how underinvested we are in innovation,” says Leeds. “I don’t know anyone who believes that technology is a silver bullet in education, but I also don’t know anyone who doesn’t believe that we need to commit to a better and smarter deployment of technology in schools.”
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