Unpacking the Arizona-Ashford Deal

Despite millions in guaranteed revenue, experts agree establishing the University of Arizona Global Campus will not be risk-free for Arizona.

September 15, 2020
 

Exactly how for-profit Ashford University will become the nonprofit University of Arizona Global Campus became a little clearer this month when the University of Arizona published its asset purchase and sale agreement with Ashford.

The 340-page contract contains new details of how Arizona will work with Ashford’s parent company, Zovio, formerly Bridgepoint Education, to establish and jointly operate Global Campus. The document outlines responsibilities each party will assume, describes governance and budgeting processes, and discusses issues such as legal liability.

But the agreement also leaves some key questions unanswered -- chiefly, what happens if things at Global Campus don’t go as planned.

Ashford University’s enrollment has been in decline for several years, and there is no indication from the contract that extra investment is planned to turn that trend around, said Phil Hill, partner at MindWires Consulting and publisher of the Phil on Ed Tech blog.

“I was expecting to see an outline of what the spend will be to establish the new institution in terms of marketing and what will be required to turn around the downward trend in enrollment. I thought there would be some indication of whether Zovio is going to invest more in the university than it did previously,” said Hill. “I don’t see that anywhere.”

The Ashford agreement seems to take “an optimistic view that the numbers are going to work out,” said Hill. “I don’t think it’s safe to assume based on this document that Zovio will dip into their own funds to make this work. Even if that were true, I’d be willing to bet Zovio will not do that for free.”

A spokeswoman for the University of Arizona said in an email that enrollment at the University of Arizona Global Campus is projected to grow “in part due to its nonprofit status and its affiliation with the University of Arizona.” The spokeswoman did not directly address how much investment the university expects will be required to turn around the downward enrollment trends at Ashford. “We are comfortable beginning with approximately 35,000 students and the potential to grow over time,” she said.

While some institutions that have converted from for-profit to nonprofit have seen a positive impact on enrollment, there is no guarantee that Ashford will see a sudden bump in interest when it becomes the University of Arizona Global Campus, said Hill.

There are many parallels between the Arizona-Ashford deal and Purdue University’s acquisition of Kaplan University, said Hill. Both Arizona and Purdue acquired the assets of for-profit institutions for $1 and signed long-term service agreements with the parent companies of those institutions, agreeing to pay them a sizable slice of tuition revenue in exchange for nonacademic services such as marketing and enrollment.

Kaplan University’s rebranding as Purdue University Global has not been a resounding success. Purdue Global spent more than $132 million on marketing and student recruitment in fiscal year 2019 and had a loss of $43 million, said Hill. Kaplan's enrollment fell from around 60,000 in 2013 to 45,000 in 2016. Since the Purdue takeover in 2017, enrollment has continued to decline, but at a much slower rate. Purdue Global's enrollment was 38,138 in fall 2019 according to federal data. “You’ve got to give Purdue credit that they’re pumping money into the school trying to stabilize enrollment,” he said. “It looks like Arizona wants to pump money out.”

A key difference between the Kaplan contract and the Ashford contract is that Arizona has negotiated that its expenses are covered before Zovio’s, said Hill. This “distribution waterfall” was described by Hill in a recent blog post as follows.

  1. "The first dollars go to UAGC to cover expenses for the academic side of things -- professors, administration, leases, etc.
  2. The next $25 million goes to UAGC under the contract, which guarantees $25 million per year for the first 5 years, and $10 million per year for the next 10. The $37.5 million cited in the news reports is a prepayment on the first 1.5 years of this.
  3. The next dollars go to Zovio to reimburse its costs of providing OPM services.
  4. Zovio then gets 19.5% the total revenue, if the residual funds are available.
  5. The remaining funds (if any) stay with UAGC, which it can invest in itself, or send back to the University of Arizona proper in the form of an affiliation / trademark licensing agreement, or some combination of the two."

Though this distribution waterfall is described indirectly in the contract, it does seem to be accurate, said Hill. “The public statements on the deal made the payments seem a lot more clear-cut,” said Hill. Money that is described as “guaranteed” in public statements, for example, becomes “minimum residual amounts” in the contract.

Much of the financial risk of the deal appears to be shouldered by Zovio rather than the University of Arizona, said Bob Shireman, senior fellow at the Century Foundation. “But that comes with a big asterisk, which is the reputational and opportunity risk to Arizona,” he said.

Arizona could have focused on growing its existing online programs. Instead, it is paying a company to manage an institution over which it will not have a lot of direct authority -- opening up the potential for things to be run in a way that could damage the institution's reputation, said Shireman.

The University of Arizona spokeswoman said that multiple steps have been taken to protect the institution's reputation. “The University of Arizona Global Campus (UAGC) will be governed by an independent board responsible for all aspects of operation. The University of Arizona will appoint four out of the nine board members, and certain acts of the UAGC board will require a supermajority vote, ensuring that the University of Arizona has significant influence in critical decisions of the UAGC board,” the spokeswoman said in an emailed statement.

The 15-year contract will automatically renew for up to two additional five-year terms unless one of the parties elects not to renew the agreement. The contract may be terminated without any fee after seven years if the net tuition and fee revenue generated in the applicable fiscal year is less than $400 million.

“There is one big difference between this contract and Purdue’s, which is that it appears after 15 years Arizona can terminate the contract with no penalty and will wholly own the assets it is buying. But it would be a very difficult thing to change contractors at that point or take over some of the operations directly,” said Shireman. “They are, in a sense, captive.”

The deal will guarantee Global Campus $225 million in revenue over 15 years, with 19.5 percent of tuition revenue flowing to Zovio on top of operating costs for services such as marketing, instructional design and technology. This is different from how most online program management contracts are structured, where the company providing the services takes a fixed percentage of tuition revenue -- for example, 50 percent -- as its total fee.

An analysis by Ariel Sokol, founding principal and managing partner at Kolari Consulting, conducted on behalf of the Century Foundation, estimates that Zovio could charge anywhere between 64 and 72 percent of the University of Arizona Global Campus's tuition revenue in 2021 as a service fee. The upper range, 72 percent, assumes the university generates $380.8 million of revenue and that Zovio generates $276 million of services revenue from the university. The lower range, 64 percent, assumes the university generates $418.5 million of revenue and that Zovio generates $267.6 million of services from the university.

“Does 64-72 percent pass the smell test? We think so,” wrote Sokol in a memo shared with Inside Higher Ed. “Recall that Zovio’s CEO in the Q2 2018 earnings conference call suggested that Zovio could see a 60-65 percent revenue share assuming that Zovio could convert Ashford to a nonprofit and sign a services agreement.”

“Yes, our calculated range is higher than what Zovio previously suggested that they would pursue. We note that unlike other similar online program management deals that have been signed to date (e.g., Purdue, Grand Canyon), this deal includes an assurance by Zovio of contractual profit minimums for UAGC through the life of the fifteen year contract,” continued Sokol. “It’s conceivable that the University of Arizona was able to negotiate the economic split of perhaps 60 percent and also get contractual profit minimums. Or alternatively it’s possible that the University of Arizona was willing for Zovio to receive a higher percentage of UAGC’s revenue in exchange for the profit minimums, which would also make sense. At this point outsiders can only speculate.”

Figuring out exactly how much money Zovio will make from the deal would require information that is not included in the contract shared by the University of Arizona, said Gary Rhoades, professor at the Center for the Study of Higher Education at Arizona and former general secretary of the American Association of University Professors. Rhoades expressed frustration at the amount of information redacted from the contract and noted that Arizona's Faculty Senate had requested additional documents.

Dozens of pages of the contract were blacked out, including details that might indicate the financial health of Ashford University, such as current contracts, net assets, intellectual property, the status of several legal proceedings against the institution, and details of multiple redundant functions that Zovio intends to "eliminate" from Ashford before the deal is scheduled to close later this year.

“There are elements of the contract that have been redacted that are important for us to know about,” said Rhoades. The Faculty Senate at Arizona recently created a group called the Global Campus Extended Advisory Committee, co-chaired by Rhoades, that will aim to evaluate the deal and “hopefully have some input into, at the very least, improving its implementation.”

The University of Arizona spokeswoman noted that the University of Arizona Global Campus is not subject to Arizona’s public records law, but said there would be “robust reporting and oversight built into the affiliation agreement between the University of Arizona and the University of Arizona Global Campus.”

“The University of Arizona has disclosed over 340 pages of agreements and related documents in response to faculty and Public Records Act requests. Additional disclosure will be within the discretion of the University of Arizona Global Campus and its independent board,” she said.

A particular concern for Rhoades is that there has been little outreach by the university to faculty teaching online programs at the University of Arizona’s online arm, Arizona Online, that overlap with programs currently offered by Ashford.

“If you’re in an academic unit that has overlapping programs, you’re already thinking about what this means for your website, what this means for developing new programs and what kind of relationship, if any, there will be with regard to students and faculty at Ashford,” said Rhoades. “The academic implications are profound, and there continues to be virtually no information provided. One of the aims of our committee is to reassert the importance of consultation not just about the initial decision, but implementation.”

The University of Arizona said in a statement that it had identified “transition teams” from both organizations to facilitate decision making “across all functional areas of business,” but added that overlap of online classes, academic pathways and related efforts would be addressed after the deal is closed.

The deal is projected to close Dec. 1 pending regulatory approval from the U.S. Department of Education, state regulators and Ashford’s accreditor, the Western Association of Schools and Colleges Senior College and University Commission.

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