July 3, 2007

Expansion for ETS

The Educational Testing Service on Monday announced the purchase of Thomson Prometric — which provides Internet- and technology-based testing systems to ETS and others — for $435 million. ETS officials hailed the deal, which will double the testing service’s work force and push its annual revenues over $1 billion, saying it would greatly help with plans to expand abroad.

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Outside analysts had a range of views. Many saw the logic in ETS acquiring a company crucial to its own operations and with a strong foreign presence. Coming two months after Pearson’s purchase of Harcourt Assessment, the move also reinforces the belief of many analysts that the testing industry — in K-12 and higher education — is attracting a lot of money and experiencing consolidation. But some experts said that they were wondering about the price ETS paid and about how the purchase of such a large for-profit operation by the nonprofit ETS would affect both entities. (Thomson Prometric will be operated as a for-profit subsidiary, paying taxes, but controlled by ETS.)

Thomson Prometric is among the education units that Thomson has been selling off. Prometric has testing centers in 132 companies and offers exams over the Web. It works not only for ETS and the College Board, but for individual colleges and for many businesses and government entities using tests to award credentials or test various skills. Thomson Prometric’s significant clients include Britain, Ireland and Saudi Arabia.

Kurt Landgraf, CEO of ETS, said there were a variety of reasons for the purchase. As Thomson’s top client, it would have been a problem “to allow our computer-based deliver model to fall into the hands of another owner,” he said.

But beyond protecting current operations, Landgraf said that major thrusts for ETS in the years ahead will involve diversification of testing services offered, offering tests through a variety of technologies, and expanding internationally. He said that Prometric fit in with all of those plans. ETS has faced difficulties introducing a new, Internet-based version of the Graduate Record Exam and in April aborted plans to introduce the revision. Landgraf said that those plans were moving forward again and that a new version would be introduced soon, making use of Thomson Prometric services.

Landgraf said that a closer tie to Thomson Prometric would also allow for the creation of more testing centers for the Test of English as a Foreign Language — a test that is vital to foreign students seeking to enroll in the United States, and an exam on which ETS is getting increased competition from a British competitor, the International Language Testing System. “We’re going to be able to offer the TOEFL in so many more places now than we could have before,” Landgraf said.

For all ETS tests, he said, there is a growing foreign market, and he expected to push along with Prometric in China, Japan, Korea and leading European Union nations, especially Britain.

“What you’re seeing is a desire to have more consolidation along the supply chain, so you are seeing companies like ETS trying to expand our market offerings, including our supply chain so that we can be more efficient and can invest more in our products,” Landgraf said.

Landgraf added that when he took the top job at ETS seven years ago, one of his goals was to see revenue top $1 billion. In 2006, ETS revenue was $836 million while Prometric was $317 million, so that goal would be achieved. The companies each have about 3,000 employees.

The scale of the purchase attracted considerable attention for what it said about the testing industry. Courtesy of No Child Left Behind and the assessment movement, testing is seen as good business.

Robert Schaeffer, public education director of the National Center for Fair and Open Testing, which frequently spars with ETS and the College Board over the SAT and other tests, pointed to the sums of money involved in the deal. The purchase, he said, “demonstrates once again that standardized testing has become a huge industry that increasingly serves as the gatekeeper to education and employment.” That’s a problem, he said, because “there is minimal public oversight or control over these mega-corporations, whose products too often turn out to be defective, unfair or irrelevant.”

Trace A. Urdan, who analyzes the education industry for Signal Hill, which did not play a role in Monday’s sale, said that the purchase could raise questions about ETS as a “quasi for-profit/not-for-profit that means to act like a business, but doesn’t always do so.” Urdan said that the idea of operating Prometric as a subsidiary makes sense in theory, but could get complicated. He wondered whether ETS down the road would want Prometric working with entities that are ETS competitors. If not, “that makes Prometric less competitive,” he said. (Landgraf said that Prometric’s client base does not include any ETS competitors.)

Some analysts privately said that ETS paid too much.

Urdan was more cautious. But he said that the sale did indicate that “ETS has a lot of assets to deploy” and said he wondered if ETS “might not be as disciplined a buyer as a publicly traded company.”

At the same time, he said he saw the logic of the purchase, given ETS’s growth plans and international ambitions. “This is right down the fairway for ETS.”

— Scott Jaschik

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