With 9 cyber school contracts in Michigan, K-12 Inc. is getting clobbered by Investors
The invisible hand of the market is seriously bitch-slapping K-12 Inc., the cyber school start-up launched over a dozen years ago with $10 million in seed money from billionaire venture capitalist and purveyor of junk, Michael Milken, coupled with a whopping $40 million from Andrew Tisch, among other investors. The cyber company also earned high marks from Jeb Bush, who is now poised to throw his hat into the 2016 presidential ring. He founded and chairs the pro-charter/cyber organization Foundation for Excellence in Education.
With the help of a phalanx of lobbyists from the American Legislative Exchange Council, state lawmakers across the nation introduced ALEC model legislation, termed the “Virtual Public Schools Act”, designed to expand online education through deregulation, thereby paving the way for the private sector to vacuum-up even larger amounts of the one trillion dollars spent on education annually.
From the beginning, the venture was tainted with the unrestrained lust of capitalists poised to plunder the virgin resource of public education dollars. “Junk Bond King” Milken promoted the vast opportunities for the private sector claiming “There’s no reason why eventually you can’t be educating a billion kids online.” When the company went public in 2007, investors flocked enthusiastically to the offering. But, as it became increasingly obvious that the whole enterprise was doomed to experience a fleeting half-life, a different breed of investor moved in for the kill.
Smelling blood in the water, short sellers targeted the company for a quick profit. Bloomberg explains the mechanics of turning this particular investment trick — “In a short sale, investors sell borrowed shares, and profit when a stock falls by buying cheaper shares that are returned to the lender.” (Find a more detailed description below)
One of the marauding parties was Case Capital Management, a New York hedge fund managed by Whitney Tilson, who bragged that he hauled-in half a million in easy money from the cyber-charter mash-up’s expected free-fall. Tilson, by the way, is a former board member for the National Alliance for Public Charter Schools.
Also personally making a pretty penny, was the former CEO of K-12 Inc., Ronald J. Packard, who sold 43 percent of his shares in the company, earning him a tidy $6.4 million, although his lawyers beg to differ — claiming the amount was considerably less. What he did is not technically illegal, because it is considered normal for a CEO to cash-in prior to their departure.
As it became clear that the company had taken the concept of window-dressing their quarterlies to a new low by wildly over-stating their growth and earnings potential to smaller investors, a class action lawsuit ensued, leaving K-12 to settle with shareholders to the tune of $6.75 million. No culpability was admitted, as is the case with most settlements.
Last April, a senior analyst at Wells Fargo in San Francisco, Trace A. Urdan, talked to Education Week about the possible impact of the lawsuit:
Mr. Urdan did not think investors were likely to be rattled by the new legal action; they would probably expect it to get settled, he said. Investors are likely to pay closer attention, he argued, to K12’s performance as judged by its ability increase student enrollment, and other factors.
Urdan called it — K-12 stocks have plummeted since July of this year based on the poor academic performance of K-12 schools which triggered an exodus of students. Bloomberg described the nose-dive in an article last month.
Plagued by subpar test scores, the largest operator of online public schools in the U.S. has lost management contracts or been threatened with school shutdowns in five states this year. The National Collegiate Athletic Association ruled in April that students can no longer count credits from 24 K12 high schools toward athletic scholarships.
When the already southbound stock fell off the cliff in early October, Nasdaq.com reported the downgrades:
K12 Inc. (LRN): The kindergarten-through-12th grade education outfit does indeed wear the dunce cap today. Shares are tumbling 24% as I write after the company issued disappointing earnings guidance. BMO Capital (Market Perform from Outperform) and Robert W. Baird (Neutral from Outperform, target price taken to $25 from $40) both send the stock to the principal’s office.
K-12 Inc. runs 60 virtual charter school academies in 33 states, plus the District of Columbia — all paid for out of public education dollars. In Michigan, they currently operate one completely virtual school, and contract their services with eight other schools in an increasingly competitive market. Across the nation in recent months, their enrollment has dropped by 5 percent.
In the 2012-13 school year, only one-third of their schools made the grade in states that monitored K-12’s academic performance. Bloomberg reports that in Ohio, where their K-12 virtual academy represents 10 percent of corporate earnings, only 37 percent of ninth graders are expected to graduate within four years. K-12 shrugged-off the poor showing explaining that its student population is “highly mobile”. Well, duh!
The K-12 example clearly reveals the folly of monetizing public education. It puts venture capitalists, who don’t like to show their math, at the front of the class. They have time and again demonstrated that making a quick buck is their only priority. It’s all about the quarterlies.
A primer on short sales:
As a former commercial banker/discount broker, I still find these things terribly complex. Basically, investing with integrity is called “going long”, meaning you believe in the company and wish to contribute to its success. A short sale however, is just the opposite. It’s a sleazy opportunistic ploy, that remains perfectly legal.
Short selling as described by Investopedia: “when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money. “