Details behind Purdue’s acquisition of Kaplan University, including a $20 million down payment to the newly formed Purdue University Global, have come to light after months of controversy shrouded the unprecedented deal.
Purdue negotiated the deal with Kaplan Higher Education, which was the direct owner and operator of Kaplan University. Kaplan Higher Education is a subsidiary of the publicly traded corporate conglomerate Graham Holdings Co.
As a public corporation, Graham Holdings is required to disclose information about its financial dealings to investors to remain in compliance with the Securities and Exchange Commission.
Questions about the arrangement circulated nationally at the outset because former state Sen. Brandt Hershman slipped an amendment into an unrelated bill during the last hours of 2017’s Indiana General Assembly session, meaning it lacked public input. The law shielded details of the Purdue-Kaplan deal from becoming public, beyond the $1 official sales price.
Other critics worried about taxpayers footing the bill for Kaplan’s liabilities after the Washington Post acquired a letter from the Department of Education expressly telling Purdue it must cover all debts and liabilities accrued by Kaplan before and after the deal.
Purdue President Mitch Daniels has consistently denied that taxpayers will be responsible for any costs associated with Purdue Global, but he has declined to provide concrete details of the purchase, even after the sale closed in March.
In May, Graham Holdings filed a document to the SEC detailing Purdue’s acquisition.
At closing, Purdue paid just $1 to Kaplan Higher Education. But according to the filing, that wasn’t the only money exchanged on March 22, closing day.
The May 2 SEC documents from Graham Holdings indicate that it paid Purdue $20 million at closing, representing two of five $10 million priority payments guaranteed to Purdue during Purdue Global’s first five years of operation, regardless of the operation’s success.
If revenue generated by Purdue Global is sufficient to cover the guaranteed $10 million annual payment to Purdue Global, KHE will not be responsible for producing that money.
According to the report, Purdue used the annual payment as an example to illustrate its focus on protecting Purdue’s financial standing when designing the deal while maintaining upside. But KHE, too, expects the deal to be profitable.
According to the May 2 SEC filing, Kaplan will assist PUG in areas including admissions support, technology support, marketing services and international and domestic student recruitment. The filing does not cite expected costs of those services, but according to a fact-finding team from the Higher Learning Commission, Purdue representatives estimated the cost of KHE’s “back office services” to be about $200 million in addition to an estimated $100 million to be spent on marketing. The Higher Learning Commission’s report was published earlier this year.
The for-profit company expects those services to be profitable, but much of that relies on its ability to comply with federal requirements in dispersing financial aid for Purdue Global.
“A substantial portion of Kaplan’s revenues are attributable to revenues it receives under its agreement with Purdue (the TOSA),” a May 21 filing read, “which are dependent upon revenues generated by Purdue Global and upon Purdue Global’s eligibility to participate in the Title IV federal student aid program.”
Title IV regulations require educational institutions to refund federal financial aid if a student withdraws before completing 60 percent of a semester.
The May 21 SEC documents revealed that the institution has experienced problems doing just that. In the fourth quarter of 2017, Kaplan officials discovered a “procedural change” that resulted in $8.4 million in Title IV funds not being refunded to the government. It self-reported the failure to the U.S. Department of Education.
The filing claims that steps have been taken to mitigate those organizational shortcomings: “Although the Company expects the above described remediation to be completed during 2018, there can be no assurance that management’s remediation measures will be sufficient to remedy the material weakness or that additional material weaknesses or other control or significant deficiencies will not be identified in the future.”
Purdue’s chief legal counsel, Steve Schultz, said in an email the University was aware of KHE’s Title IV deficiencies at the time of the deal’s closing. He directed The Exponent to Graham Holdings for further information about details in the filing.
Provided that the institution is financially successful, KHE will receive 12.5 percent of PUG’s revenue in exchange for its support services. That fee, according to the SEC filing, increases to 13 percent in 2023 before it returns to 12.5 percent in 2028.
The deal provides an exit for both parties if returns fail to meet expectations. If PUG’s operations produce $25 million in losses for three consecutive years, or total losses of more than $75 million at any point, either Purdue or KHE can terminate the deal.
The new non-profit university officially launched on April 2, and its first graduates were honored Sunday.