Private equity firms and strategic acquirers interested in making deals in K-12 education this year will be looking to invest in businesses that provide adaptive learning and assessment, according to a report from Berkery Noyes, a New York-based investment bank.

“Most companies in the education sector have been doing very well of late,” said Mary Jo Zandy, a Berkery Noyes managing director, in an interview.

Despite political resistance to the common-core standards, and assessment controversies and breakdowns, she said that “when you talk to people who run companies and ask what their expectations are, they’re optimistic.”

In An Overview of M&A in the Education Industry, a white paper released Monday, the bank analyzed 625 education industry mergers and acquisitions in 2013 and 2014—including transactions in K-12, higher education, and the corporate education market. The volume of deals increased 9 percent in 2014, while the value of deals rose 25 percent in all segments.

For deals that were technology-based, the transactions received a median revenue multiple of 2.8 times the acquired companies’ revenues during that timeframe. 

To be an attractive acquisition candidate in education, a company “has to be online, and digital,” Zandy said. “Size is the biggest factor with respect to the multiples.” A multiple is a way of calculating a company’s prospects for growing, and Zandy said companies worth over $100 million can command double-digit multiples.  

Here’s Berkery Noyes’ breakdown of merger and acquisition activity in different segments of the K-12 market.

K-12 Media and Technology Market Segment

In this category, Berkery Noyes found that the number of transactions increased 17 percent from 2013 to 2014. Renaissance Learning’s acquisition by the private equity firm of Hellman & Friedman for $1.1 billion topped the list. The assessment and learning analytics company’s valuation and high-profile sale brought attention to the category, which Berkery Noyes expects to be an “in demand” segment for the near future.

Other notable transactions in 2014 included:

• Insight Venture Partners’ acquisition of iParadigms, which created Turnitin, a Web-based plagiarism and student feedback platform, for $752 million;
• Blackbaud’s acquisition of WhippleHill Communications, which provides cloud-based enrollment, learning, content, and student information management to private schools for $35 million; and, 
• Blackboard’s acquisition of ParentLink, which provides K-12 communications tools to connect teachers with parents.

Financial Buyers vs. Strategic Buyers

Berkery Noyes found that there has been a 34 percent increase in the number of financial, or private equity, buyers, compared to the number of companies acquiring an education company as part of a strategic move.

Zandy said many companies are still “readily available for private equity firms, and they can borrow at attractive multiples” to purchase them. “That spigot is still widely open,” she said. 

Aside from that, there aren’t as many strategic buyers like McGraw-Hill Education and Houghton Mifflin Harcourt left to make acquisitions, she said.

One thing appears clear, she said: Growth comes from sales of companies that have digital education options.

“It’s a bifurcated market,” Zandy noted. “Anything that has growth is selling for a very nice multiple.” But trying to sell a publisher that is “print only” is challenging, she said.  “Print is still being well-used in the classroom, but the trends aren’t good.”

Credit for bar graph: Berkery Noyes

See also:

• K-12 Merger and Acquisition Market Looks Positive for 2015, Says Investment Firm
• K-12 Dealmaking: Education Mergers, Acquisitions Rising in 2014, Report Shows
• K-12 Dealmaking: Blackboard Buys ParentLink; Fifth Acquisition of 2014
• Billion-Dollar Deal Heats Up Ed-Tech Market

For more news on mergers, acquisitions, and venture capital in education, follow Marketplace K-12’s “K-12 Dealmaking” series.