Lifelong Learning Spells Earnings Soon you may be hiring people trained by Knowledge Universe, Mike Milken's mysterious new company--or you may be trained by it yourself.
By Justin Martin

(FORTUNE Magazine) – We're all familiar with Michael Milken the junk bond king and symbol of the anything-goes, boom-and-bust '80s on Wall Street. Then there's Milken the philanthropist, busily repairing his reputation by performing good deeds such as tutoring inner-city kids in math. Now get ready for Mike Milken 3.0, a fusion of the other two, at once troubled by the woeful state of American education and excited by the money to be made teaching kids--and business people--what they need to know for 21st-century life.

To pursue his vision, Milken recently founded a company called Knowledge Universe. Joining him in the endeavor are his brother Lowell, an international real estate investor, and Larry Ellison, billionaire CEO of Oracle. A stairwell startup this ain't. Just two years old, KU already has more than $1 billion in revenues, thanks to an acquisition rampage, and its growth rate in operating margins last year was close to 100%. Yet it has no promotional materials, no cutesy logo. Corporate headquarters is a nondescript building in Burlingame, Calif. Indeed, Milken's new venture may be the lowest-profile high-profile company out there.

KU can afford to be secretive. Together, the founders put up $500 million to get the venture started. (For this article, the Milken brothers and Ellison were unavailable for comment.) But KU also has its reasons for being tightlipped. Quite simply, its founders don't want to alert the market to what their next acquisition might be. "People always ask why we're so secretive," says President Tom Kalinske. "This is a tough world. We'd like to get a bit of a head start from all the hard thinking we've done."

The vision may be concealed, but Milken told FORTUNE as long ago as 1996 that his next big idea was to view education--everything from preschools for 2-year-olds and CD-ROM-based math tutorials for high school students to executive training and continuing education for retirees--as one vast market, with individual companies integrating these diverse businesses. Very soon now, KU hopes to offer a full spectrum of educational products and services aimed at every age group--a so-called cradle-to-grave approach. And across that spectrum the company has identified 31 industry segments it wants to get into, from publishing to training to toys. KU may not be offering Introduction to High Yield Securities, but it wants some part of your managers' minds.

KU will not disclose its earnings, but Kalinske says that all of its properties are profitable. In August 1996, KU spent a third of its initial cash hoard acquiring a 48.3% stake in a British training and recruitment firm called CRT Group. That sum has already doubled in value. Michael Moe, an analyst at NationsBanc Montgomery Securities, gives KU a hypothetical market value of $4 billion to $6 billion--at least an octupling of the principals' investment.

Though KU is the only company thus far attempting to fit together all the pieces, demographic and social trends support its ambition. K-12 enrollments are growing again. The knowledge-based economy is in full bloom. America's investment in lifelong learning--everything from teaching kids in the schools to training adults in the work force--runs to $665 billion a year (see chart), more than is spent on national defense.

Even so, polls show that the public considers much of this spending wasted. American corporations are forced to deal with the consequences in lost productivity and costly worker training. The need for skilled employees has never been keener, yet one in ten information technology jobs sits unfilled, and companies are almost as hungry for workers adept at so-called soft skills such as team building and other forms of managing.

Such inadequacy spells opportunity on Wall Street. Many analysts believe that education, broadly defined, will emerge as one of the leading investment sectors over the next 20 years. Montgomery's Mr. Moe believes it will be comparable to, say, the health-care industry over the past 20. Recent years have seen a number of high-profile IPOs, including those of Learning Tree International and Sylvan Learning Systems. But there's still not much out there in the way of large, name-brand education companies for institutional investors and big mutual fund companies to take positions in.

KU wants to be the first of the megabrands. Already it has assembled a stellar management team. The chance to work with Milken and Ellison has lured folks like Kalinske, a former CEO at both Mattel and Sega of America. KU just stole Netscape's CIO and also has executives from Disney and AT&T. "KU has used its talented management team to assemble a potential category killer," says David Nadel, an analyst with Bear Stearns. "They're going to change the face of for-profit education."

Already KU has acquired Executive Committee, an education and development organization catering to CEOs. It owns about 80% of LeapFrog, a maker of talking toys that help teach kids to read. And it owns the vast majority of Productivity Point International, which trains workers in information technology skills.

Training is a niche particularly well suited to KU. Companies are desperate for help, particularly in IT. But the costs of setting up and running one's own training programs are often prohibitive. So there's a trend toward outsourcing training to organizations such as Productivity Point International. Training is also a business that KU co-founder Ellison understands. Although Oracle's focus is developing and selling network and database software, the company has built up a substantial IT training business. In fact Oracle Education, with more than $400 million in sales, is the world's second-largest IT training provider, after a unit of IBM.

From a consumer perspective, however, the training industry remains disorientingly fragmented, with 53,000 suppliers in the U.S. alone. If all the mom-and-pops were rolled into, say, Productivity Point International, KU could create a major brand. It could even go global, better to serve the training needs of a big multinational such as DaimlerChrysler.

KU also appears to be establishing a beachhead in the $30 billion early-childhood market. The company snapped up Children's Discovery Centers of America, a day-care provider, for more than $80 million. As with corporate training, early-childhood services make good sense for KU. These days, 80% of families are either dual income or headed by a single parent. But running an on-site day-care center is costly; thus, many corporations outsource this service as well.

Day care, executive education, corporate training, talking toys--KU has its fingers in a bunch of different pies. Exactly how does it all fit together? Given its deep pockets, KU can continue amassing properties opportunistically, but at some point it is going to need to attend to such obvious needs as branding its far-flung properties and fashioning a company that is more than just the sum of its parts.

First to the branding question. KU is not likely to merely rechristen all the disparate companies under its umbrella Knowledge Universe. Granted, LeapFrog and Executive Committee are hardly household names, but they do command a fair amount of brand equity within their narrow niches. With this in mind, KU might well follow what one of its executives terms a "Nabisco-style brand-endorsement strategy." Thus might LeapFrog become LeapFrog: A Knowledge Universe Company. Other toy companies KU acquires might get the LeapFrog name.

One example of synergy: KU owns most of a company called MindQ, which provides CD-ROM-based training in Java programming and such. Starting this month, MindQ will offer CD-ROM versions of some portions of Productivity Point International's instructor-led curriculum. Or consider talking toys. They could be used in KU's day-care centers. The company may even be able to identify some cross-sector synergies. The same company that outsources training to KU might be willing to outsource its day-care services as well.

As of now, a number of puzzle pieces are missing, such as language instruction--Berlitz International could be a target--and retiree education. There's also the college market, though KU has plans afoot to establish an online institution of higher education. The main challenge, however, is getting into K-12 education in a big way. That represents half the $665 billion education pie. KU has already shown its interest by acquiring a 21% stake in Nobel Education Dynamics, a company that operates, in addition to its 100 preschools, roughly 30 private elementary schools. On all but the 12 schools it has started in the past year it is making profits of 20%, says CEO Jack Clegg, though 1998's first-quarter profits for the company as a whole were closer to 6%. But private schools represent only a sliver of the K-12 education market. Public schools are the big quarry.

This used to be sacred ground, barred to profit seekers. But people have come to see private enterprise as an antidote to public-sector paralysis. If for-profit hospital chains can squeeze overhead out of the not-for-profit hospitals they've acquired, why can't the same be done for public schools? Most of the activity involves charter schools--independent public schools accountable to a public authority such as a school board. Some 800 charter schools are scattered around the country, a fifth managed by private enterprise.

"Running schools is the heart of the game," says Chris Whittle, president of the Edison Project and a for-profit schooling pioneer. "There are also some serious barriers to entry." Arizona and Michigan like charter schools; New York fights them. Battling powerful teachers' unions is a constant. The Edison Project runs 25 schools and expects to be profitable by the fall, when it will have 48 schools up and running and revenues of $125 million, though its margins per site will be much lower than Nobel's. KU's Nobel will take over its first charter school in the coming year.

Edison executive vice president Christopher Cerf says his company has no present plans to diversify into products, though he sees the "logic" in companies like his doing so, as does Nobel's Clegg, who wants KU's help in phasing technology into the classroom. For one thing, it would be convenient for the curriculum developers, principals, and teachers the companies employ to be making purchasing decisions. Peering through the other end of the telescope, Kalinske sees benefits in KU's running schools, which in general spend heavily on goods and services. Several states, including Florida, California, and New York, have increased budgets for instructional materials, for example. That will be a windfall for textbook publishing, a business KU certainly wishes to enter. The company recently bid for Simon & Schuster's educational, professional, and reference lines. British publisher Pearson beat them out. But similar properties can be found at a number of companies, including Harcourt General, Houghton Mifflin, and McGraw-Hill.

KU is particularly well suited to fulfilling the education system's technology needs. Here, too, money is available. A number of states have increased the technology portion of their latest education budgets by more than 10%. In addition, there's a mostly untapped market for training teachers in how to use technology effectively. Says Arthur Steinert, an analyst with EduVentures, an investment firm: "Despite all the money spent on technology, there are still many technophobes and Luddites among the ranks of teachers."

As more schools go high tech, opportunities to sell other types of products will soar. Already there's a $640 million market for educational software and CD-ROMs. Educational services on the Internet, meanwhile, make up a tiny $10 million market, according to Simba Information, but it can be expected to explode as more schools get wired. Given KU's resources and long tentacles, almost any company is a potential takeover target. It talks to everyone and relentlessly searches for good acquisitions.

So what's KU's next move? Analysts speculate that the company might make a play for a degree-granting technical school such as DeVry or ITT Educational Services. Milken also spoke favorably to FORTUNE two years ago about edutainment. Broderbund Software or Learning Co., which sells such products for use in both the home and schools, might be candidates. Or how about Kaplan or another test-preparation company? Says Bear Stearns' Nadel: "There are so many ways to go, it's endless."