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Digital school: Edtech IPO hopefuls shift to M&A as market sinks

When the COVID-19 pandemic closed classrooms, demand for remote learning tools from education institutions and corporations soared. That fueled record growth for even fledgling education technology companies, prompting robust capital raising at high valuations. The strongest initial public offering market in years then saw the successful debuts of several edtech companies in 2021, including Coursera [NYSE:COUR], Duolingo [Nasdaq:DUOL], Instructure [NYSE:INST], Powerschool [NYSE:PWSC] and Udemy [Nasdaq:UDMY].

Since then, however, the stock market has tanked. Now, many large private equity-backed edtechs that were seen as likely near-term IPO candidates are instead looking to mergers and acquisitions as an interim step or even an alternative exit.

That should further boost edtech M&A, which along with fundraising activity had already reached heady levels during the pandemic. In 2021, a record USD 10.2bn-worth of capital raising and M&A deals took place, a nearly 50% increase in value from the prior year, according to Dealogic. By number of transactions, 2022 is on pace to meet 2021’s record haul of 127.

Lessons learned

Worries about rising inflation and interest rates first surfaced last summer. Since hitting a record high in early January, the Standard & Poor’s 500 index has fallen 18% amid the Federal Reserve’s interest rate hikes, war in Ukraine and China’s economic slowdown as it battles the pandemic. The decline has put the brakes on IPO activity and the edtech sector is no exception. But private equity firms still want their exits and are posturing for potential future IPOs through additional M&A or minority stake sales.

An early example of that came last September when Blackboard, a Washington DC-based edtech company backed by Providence Equity Partners, announced a merger with Anthology, a Boca Raton, Florida-based provider of higher education solutions backed by Veritas Capital and Leeds Equity Partners. The combined entity will be majority owned by Veritas Capital.

Two months later, Renaissance Learning, a Francisco Partners-backed pre-K–12 edtech platform, sold a significant minority stake to Blackstone, thereby pushing its planned IPO into the future.

Changing course

Cambium Learning was also considered a candidate for an IPO. But in February, its owner, Veritas Capital, took Houghton Mifflin Harcourt private in a USD 2.8bn deal. That deal is prompting speculation the PE shop will look to merge the two before a listing, several investors and sector advisers say.

More recently, Frontline Education, another PE-backed edtech widely expected to go public, instead decided to pursue a sale with JP Morgan advising, this news service reported in April. The Thoma Bravo-owned provider of administrative software to K-12 school districts has about USD 200m in EBITDA. Its closest peer, PowerSchool, went public in July, before the market dislocation. PowerSchool’s shares are trading at around a third of the high reached last August, a drop on par with other recently listed edtech companies, Coursera, Udemy and Duolingo. Such an erosion of value begs the question: how long will they remain public?