College Inc. Featured

7:00pm EDT February 1, 2004
The news out of Springfield last April was more of the same. Gov. Rod R. Blagojevich's 2004 state budget called for an 8.2 percent spending cut for all public universities, but a 5 percent cap on tuition and fee increases.

Universities were also asked to reserve $58.9 million in tuition revenue to help offset any cost increases above 5 percent, and the state of Illinois only volunteered to set aside $30 million for repair or renovation for all the buildings at the state's 12 public universities.

Across the nation, the picture is the same as state budget crunches have forced many legislatures to slash their higher education budgets. In 2002, there was only 1.2 percent increase in funding for public colleges and universities, the lowest increase in a decade, according to an Illinois State University study.

Private, nonprofit colleges don't fare much better. The lack of public funding and the skyrocketing cost of education have forced the average four-year private college to charge students $23,578 a year, more than twice the average cost of a public school.

Due to these economic pressures, presidents of both public and private nonprofit schools spend a large portion of their time trying to raise money from donors rather than running an efficient university, according to Richard Ruch, author of "Higher Ed, Inc.: The Rise of the For-Profit University."

"As an academic dean at DeVry (University), I have never been involved in fund-raising of any kind," writes Ruch. "But as an academic dean in nonprofit universities, I spent as much as a third of my time on fund-raising."

Likewise, Dennis Keller doesn't worry about state budget cuts or pestering alumni for donations. If the chairman and co-CEO of DeVry Inc. wants to add to the 24 nationwide campuses of the private, for-profit DeVry University, he consults with his management team and pulls the funds from his company's coffers.

"In the case of private investment capital, if you're filling a real need and make a compelling case that there will be a return on that capital, well, then, that capital is going to be available," Keller says. "That's a principle advantage over public and private not-for-profit."

Perhaps Ivy League schools with huge endowments will never have to face these issues, but going public and being profit-motivated could be the answer to out-of-control educational costs for the country's colleges and universities. For evidence, you need to look no further than the $23 billion private, for-profit post-secondary education market, and one of its leaders, Oakbrook Terrace-based DeVry.

Going public

DeVry Inc. owns and operates DeVry University, Ross University, Becker Professional Review and the Keller Graduate School of Management. The four schools together serve more than 85,000 students in 28 countries, either on campus or through online courses.

In 1987, DeVry was acquired by Keller and co-CEO Ronald Taylor from parent company Bell and Howell Education Group for $180 million. Four years later, they took the company public.

Keller, who worked for Bell and Howell with Taylor, left in the early 1970s and founded the Keller Graduate School of Management. Bell and Howell offered to help Keller and Taylor start the school, but the duo wanted to stay independent. They decided against it, Keller says, but they left the company on good terms.

"The idea behind the creation of this company was an idea that there should be a graduate business school program that was truly practitioner-oriented and practitioner-based," Keller says. "At the time, there was a real bias toward research-based in traditional universities."

The school started out only offering Certificate of Business Administration degrees, but three years after it launched in 1973, the state of Illinois granted it authority to offer a full MBA.

"A very important strategic decision was for us to be as convenient as we could," Keller says. "We had gone from being a full-time program to being an evening and weekend program for people. It became clear to us that we needed to be close to our customer, either to his or her place of work or place of residence.

"People didn't need another 45-minute commute once or twice a week to get to school."

As the graduate school grew around the Chicago and Milwaukee markets, Keller heard rumblings from his former Bell and Howell colleagues that the company was considering a sale of its DeVry division, which at that point had 11 campuses.

"We knew that the undergraduate school and the graduate school would be good together," Keller says. "We knew we could really help the undergraduate school a lot by taking the understanding of teaching of business that we had at Keller Graduate School and reflecting it through the undergraduate program at DeVry."

With the help of an investment banker, Keller and Taylor raised $180 million to acquire DeVry through a modified auction. The selling price turned out to be a steal; since its IPO in 1991, DeVry's growth in earnings per share has averaged more than 20 percent a year. DeVry closed its most recent fiscal year with $679.6 million in revenue, up 4.9 percent from the previous year, and a profit of $61.1 million, down from $67 million a year earlier.

Other than the availability of capital, one benefit of going public is that employees in for-profit education centers often have a different mindset than those in nonprofit higher education, Keller says.

"Even though typically they have very dedicated, wonderful people working in those universities, there's not the same drive to be efficient," he says. "When it's the investors' money that you're working with, there's a real incentive to be as careful as possible in the use of that money. Whereas, if it's everybody's money but it's nobody's money in a not-for-profit, you don't have the same controls."

Growing public

Keller's DeVry is not the only major player in the for-profit postsecondary education market. In 2002, the sector saw growth of nearly 12 percent, to $23 billion, according to the most recent industry study by Eduventures, a Boston-based independent research firm.

"2002 was a year of strong performance for firms in the postsecondary sector," says Sean Gallagher, an Eduventures senior analyst. "Students' increased need to acquire new, marketable skills in the current economic environment, along with the proven value of higher education in today's knowledge economy, has helped to boost the estimated number of students attending for-profit postsecondary institutions to 1.5 million."

For-profit institutions attracted 84 percent of private investment dollars and represented 48 percent of all merger and acquisition activity across the entire postsecondary sector in 2002. Eduventures anticipates the market will continue to grow by 13 percent to 15 percent through 2005.

Other than DeVry, the largest companies active in the postsecondary education delivery market include Apollo Group, which owns the University of Phoenix; Career Education Corp.; and Education Management Corp.

"Companies that understand the market landscape within the postsecondary sector can expect the gold rush to continue, attracting new competitors and investors," Gallagher says.

The profit mentality, however, has many detractors, who believe that education and earnings shouldn't mix. Whenever Keller is asked how he balances the needs of his shareholders and those of his students, his response is usually a question.

"How does a company like Dell balance the needs of its shareholders and its customers?" Keller asks. "The answer is, if it doesn't do a good job for its customers, its shareholders are going to end up with nothing.

"Balancing the needs is simply a matter of helping our students find the success that they're looking for when they come to DeVry University. It doesn't mean giving them passing grades if they don't deserve passing grades, because that won't lead them to success. It isn't the right answer for the student or the school not to have high standards. What it does tell us to do is to work just as hard as we can to motivate our students to succeed and to continue their education, and that's in the student's best interest and in the shareholders best interest."

Author Richard Ruch, who worked at eight public universities before transferring to DeVry, agrees.

"I must confess that until a few years ago I thought that all (for-profit) institutions were the scum of the academic earth," Ruch writes. "Having now lived and studied the view from the other side, I see that I was wrong in my unexamined beliefs about the for-profits, nave about what it means to be in it for the money, and misinformed about the nature of the profit motive in higher education."

Dr. DeVry

After decades of focusing on technology and business education, DeVry diversified into the health care industry last year with the $310 million acquisition of Ross University, one of the largest medical and veterinary schools in the world.

Focused on professional medical and veterinary education, the university awards both doctor of medicine and doctor of veterinary medicine degrees. Students complete their basic science curriculum at the medical and veterinary school campuses in the Caribbean countries of Dominica and St. Kitts/Nevis, respectively, and complete their clinical rotations in teaching hospitals and veterinary schools throughout the United States.

Enrollment at the school was 2,852 students at the time of the acquisition and has since jumped to 3,174.

"The acquisition and integration of Ross University has been very successful and has exceeded our performance expectations," says Keller. "We look forward to continued growth as Ross helps to meet the strong demand for physicians and veterinarians in the United States."

The purchase of the medical school is part of Keller's mission to continue to diversify DeVry and offer the broadest course selection of any university of its kind.

"Diversification of our curricula in this manner will help us maintain our leadership position in career-focused education," Keller says. "Most importantly, Ross brings a strong institutional focus on educational quality."

The Council on Graduate Medical Education has estimated that by 2010, there will be a shortage in the United States of 50,000 physicians. The council reports that there are only 16,500 U.S. medical school graduates available for the 24,500 new residency positions in the country each year.

According to the Association of American Medical Colleges, medical school applications will grow by 4 percent to 6 percent in 2004.

"We view this as an excellent fit, as both DeVry and Ross provide career-focused education and share a fundamental commitment to quality education," says Timothy E. Foster, chairman and CEO of Ross University. "We believe our leading medical programs are very complementary to DeVry's focus, particularly its professional-level offerings in business, technology and management."

In addition, DeVry added degree programs in the fields of biomedical engineering technology, biomedical informatics and health information technology.

"There's lots of technology in health care, there's lots of business and management in health care as well," Keller says. "We're very pleased to be launched and we think this is going to keep us challenged for the next 15 years. Integrating business into the university has kept us going and challenged over the last 15 years."

And judging from DeVry's market outlook, one thing Keller won't be challenged with is raising money.

How to reach: DeVry Inc., (630) 571-7700 or www.devry.com