Sylvan's choice: bigger isn't better

Decision: An appraisal of options last year led to fundamental change for the education services company.

March 05, 2000|By Sean Somerville | Sean Somerville,SUN STAFF

A funny thing happened to Sylvan Learning Systems Inc. on the way to becoming a big company: The Baltimore-based education services company decided not to be one.

After an appraisal that started last year while investors pounded Sylvan stock, three options occurred to Douglas Becker, the company's chairman and chief executive officer.

Sylvan could commit to being a conventional, large company, putting it under endless pressure to increase earnings every year; go private, removing it from Wall Street's demands; or, make a more radical shift by selling some assets and becoming an investor itself. Sylvan chose the latter.

FOR THE RECORD - In an article in Sunday's Business section about Sylvan Learning Systems Inc., the name of Bear Stearns analyst David Nadel was misspelled. The Sun regrets the error.

The company agreed to sell its Sylvan Prometric computerized testing division for $775 million to Thomson Corp. of Canada in January. Then, last month, it said it would use $500 million to launch an "incubator" to invest in education-focused Internet companies.

"Instead of becoming a bigger, slower growing company, or taking the company private with a lot of debt, we decided to lean into our entrepreneurial roots," said Becker. "We are a big believer in the bricks-and-clicks economy." That is shorthand for a company that combines its existing operation and a strong Internet presence.

He acknowledged that Sylvan's "bricks-and-clicks" plan has a trendy ring. It involves pulling away from the old economy, where investors focus relentlessly on earnings growth; and staking a claim on the Internet, where a company can get a sky-high stock price without any profits at all. But Becker, along with analysts and an investment group that is putting up $200 million, said there's a lot more to Sylvan's e-story.

Larry Berg, a partner at New York-based Apollo Advisors, which is investing $100 million in Sylvan and $100 million in the company's incubator, said his firm has been studying Internet education companies for a few years.

"There are just dozens of educational Internet companies," Berg said. "But there are no blockbusters yet. What I love about Sylvan is that they are very targeted. They have one of the best brands in the business and an entrepreneurial culture."

Becker said that's the same conclusion Sylvan reached during deliberations over the past six months. "We were really getting ready to become big," he said. "At the same time the stock market was really starting to turn its back on us."

Sylvan, which had $47.2 million in sales in 1994, its first full-year as a publicly traded company, reported sales of $508.7 million last year. But earnings fell, from 87 cents per share in 1998 to 2 cents per share last year. Investors fled, driving the price down from a 52-week high of $33.25 a year ago to a low of $10.6875 in November. The stock closed Friday at $16.0625, down 62.5 cents.

The prospect of a large Sylvan having to produce predictable and strong profit growth seemed problematic to Becker. What came to mind was a tale about a farmer who picked up his calf every day in preparation for the day he would have to lift it as a full-grown cow.

"One day is going to come when you can't lift the calf anymore," Becker said.

At the same time, Becker said, a look back at Sylvan's history suggested that he and Christopher Hoehn-Saric, who served as co-chief executive officers until last month, had a strong record of building small companies.

Over the past six years, Sylvan, which started as a small tutoring business, added the computerized testing division, a contract services tutoring arm, English language instruction business and foreign universities.

"Sylvan has become big in essence by having a lot of small companies," Becker said. "Every two years or so, we would start a new business. Maybe our core is the ability to have done that before."

The history of Sylvan stock appears to support the notion that the management is better at growing companies than running them once they've gotten large. Sylvan, which traded at $5 when it went public late in 1993, rose to more than $30 by the end of 1997 before it skidded.

While investors became bearish on Sylvan stock, they embraced entrepreneurs who had built businesses the way Becker and Hoehn-Saric had done five years earlier.

"Just when we were getting ready to become a big company, the market was starting to recognize the value of being a small company," Becker said. "The real value in our industry from our view was being created in a thousand garages."

Maybe Sylvan Prometric is the best way to explain the company's shift. To keep the testing business growing, Becker said, Sylvan would have had to devote virtually all of its attention and many of its resources to the division.

"It required management capabilities beyond what we were able to bring to the table," he said. "We could take that same time and those same resources and use them to grow 10 companies. The opportunity to transform the company back into an entrepreneurial vehicle makes me feel much more comfortable."

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