Education Management Corporation is one of Pittsburgh’s most prominent employers. But not everyone was hurting when the for-profit educator, which owns the Art Institute of Pittsburgh and other schools around the country, laid off hundreds of workers last Thursday.
Cabbies, at least, did well: During much of the day, Yellow Cabs were parked outside the company’s Online Higher Education office in the Strip District. Periodically, employees were ushered into the cabs, which drove off into the rain.
EDMC was picking up the fare, one employee said while watching from a nearby bar, “because now they can afford it.”
Actually, EDMC wasn’t lacking money before: The company had $400 million on hand last year, financial records show. But the firm has directed much of its cash elsewhere. Weeks before the layoffs, EDMC announced it would spend millions to buy back its own stock.
That move, analysts say, will create another group of winners: the investors who own the vast majority of shares, including some EDMC board members.
Stock buybacks are not unusual. But they have become controversial, especially in an economy where Wall Street can seem hostile to Main Street.
“Using company revenues to re-purchase stock tends to resonate with people, particularly when you’re cutting back and letting people go,” says Paul Griffin, a professor of management at the University of California at Davis.
That may prove especially true at EDMC, nearly half of which is owned by Goldman Sachs, the investment giant which became a lightning rod in the wake of the 2008 Wall Street bailout.
EDMC did not respond to e-mailed questions or phone calls. In a statement last week, the company said that layoffs were designed to make it more efficient, and amounted to “fewer than 2 percent of its 20,000 employees.”
But Griffin, like other observers, says EDMC’s strategy “has Goldman Sachs written all over it. This company is an example of capitalism working in a very impressive way. … That’s the role of Goldman in our economic society.”
Not everyone thinks it’s a role worth playing.
“All I have seen is the company making strategic moves to save themselves and their shareholders money,” said a current EDMC employee — who, like most employees City Paper spoke with, insisted on anonymity. “Everyone who was laid off is now a scapegoat, and the vicious circle continues.”
Perhaps very few Americans understand the value of education better than Goldman Sachs.
In 2006, it joined with two other firms — Providence Equity Partners and Leeds Equity Partners — to purchase EDMC for $3.4 billion. Leeds is a private-equity firm that has built a portfolio investing in what it calls the “knowledge industry.” The company’s advisory board is chaired by Colin Powell, former Secretary of State under President George W. Bush. Providence is also a private-equity company with a wide array of investments — including the YES network, which is best known as the television home of the New York Yankees — totaling roughly $23 billion.
In January 2007, the company hired Todd S. Nelson as CEO; Nelson is the former CEO of Apollo Group, the parent company of online educator University of Phoenix.
Under Nelson’s management, EDMC’s profits have swelled. Between 2007 and 2009, the company’s net revenues more than doubled, from $1.3 billion to nearly $2.9 billion. And in 2009, EDMC decided to “go public,” selling 20 million shares to stock investors. The offering netted the company more than $300 million.
“This is a successful business,” says Anthony Catanach, a professor of accounting at Villanova University. “They’ve been extremely profitable in the past five years.”
Arguably, EDMC may have had too much money: $400 million in cash by 2011. “Companies typically don’t like to have a lot of cash on the balance sheet,” says Catanach. “It can make them ripe for a takeover.”
In such circumstances, he says, companies often do one of three things: reinvest their money back into operations, pay dividends to shareholders … or repurchase stock.
EDMC chose the last option. So in June 2010 — just one year after the company offered up stock for sale — it began buying shares back.
At first, EDMC sought to spend $50 million on its share buyback. But the program has been extended repeatedly, and it has spent $291 million so far. It announced plans to buy back another $50 million in stock this past December — one month before the company carried out its layoffs.
In a memo sent days before the layoffs, EDMC executive John Kline told employees that the company had to “better position ourselves for success within the current economic and regulatory environments.”
Kline did not mention specifics, but the layoffs were heavy among employees recruiting students to EDMC’s online programs, like Argosy University. In an October conference call, Nelson told investors that enrollment had dropped 4.5 percent over the previous year; enrollment in online programs — where January’s layoffs were concentrated — dropped by 7.6 percent.
Among the shifts in the “regulatory environment,” meanwhile, was a lawsuit filed by the Obama administration’s Justice Department, as well as ongoing congressional inquiries into the recruitment practices of EDMC and other for-profit educators. During the conference call, Nelson partly blamed “negative press” for faltering enrollment.
If the layoffs attract more bad press, EDMC won’t be alone. In November, The New York Times ran a story highlighting companies — including pharmaceutical giant Pfizer — that laid off workers even as they spent money repurchasing their own stock. As the Times noted, “The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster.” But meanwhile, the paper added: “Liberal critics insist the trend is another example of top corporate executives raking in an inordinate share of the nation’s wealth, even as their employees suffer.”
Catanach says those criticisms can be sharpest for companies like EDMC, whose stock is largely held by the very board members, executives and institutional investors who chart its course.
Of EDMC’s 10 directors, two are principals in Goldman Sachs, three either directly represent or have ties to Providence Equity Partners and one represents Leeds Equity Partners. Nelson is the only executive to serve on the board, though former CEO John McKenran Jr. serves as its chairman. (The remaining members are a former airline executive and a corporate lawyer.) Together, those 10 directors, as well as the private-equity firms tied to several of the directors, control 80 percent of EDMC’s shares.
By contrast, according to financial documents, managers, directors and large investors at the Apollo Group, Nelson’s former employer, hold only 14.4 percent of shares at that company. At for-profit educators Capella and Career Education Corporation those numbers are 9 percent and 3.8 percent of shares, respectively.
Such concentration among directors, says Catanach, “raises questions about an increased buyback, because what it’s doing is really raising the value of the stock for the institutional shareholders” who own the firm.
“Goldman has a very large position here,” agrees Griffin. “You’ve got two of Goldman’s main players — Mick Beekhuizen and Adrian Jones — sitting on the board of directors. They have a big interest in keeping this stock price up.”
Nelson, meanwhile, received stock-option bonuses worth $11.5 million last year, on top of a base salary of $630,000 and other bonuses.
“That’s a lot to earn in stock bonuses,” says Catanach. “He definitely has some incentive to get that stock price up.”
That’s been a knock on Nelson at Apollo, where shareholders sued him in 2004, accusing him of withholding information to keep the stock price high. But at EDMC, Griffin says, “Goldman Sachs is here to monetize this investment and then move on to the next one.”
“This company is good for Wall Street,” allows Kevin O’Donnell, a spokesperson for labor union SEIU, which has launched a campaign to educate students about the perils of for-profit education (www.forprofitu.org). “But they’re selling education, and they shouldn’t be running their company like they’re selling ketchup, or some other product that can be bought and sold without consequences.”
“Look at their board of directors,” O’Donnell adds. “There’s not one educator there. It’s all business people.”
This article appears in Feb 1-7, 2012.
EDMC says the layoffs are fewer than 2% of its employees, but it fails to mention the layoffs of 4000 employees in September of 2011. The Art Institute of Pittsburgh was once a well respected school, but Todd Nelson has turned it into just another for-profit McCollege. Shame on Colin Powell for even being involved.
Michael Powell, Son of Colin Powell, was on the EDMC Board of Directors until March, 2011. Given the explanation above of Colin Powell on the investment company, this explains some very deep and complicated Circle of Phoenix connections
The Art Institute of Pittsburgh may NEVER be looked at That same way again.
People like Todd Nelson and John Kline, along with their smaller alter egos like Jake Godec, Carla Caldwell and Doug Glenn are people who give very little respect, and are deserving of even FAR less than what they give. 0. They are weak, thoughtless, greedy people who think of nothing but themselves. EDMC will not be long for the world. The world will be a MUCH better place without ill willed places like EDMC.
I used to work at EDMC back when the original owner, Mr. Knutson, was in the office daily and cared for his employees. It was a much kinder and enjoyable place to work at that time then when I left the company shortly after Todd Nelson was put in charge. Things were already getting bad and I can only imagine what it is like now. How sad that a company that once cared so deeply for their employees and students now only cares about the money in their pockets.
Kevin Powell bailed as soon as thing started to turn sour. This was months before his father started pitching the sector via Providence Equity. One Powell traded for another. 😉
I have been following this story for awhile now, and I think this story is very shameful. It is clear there is a lot of corruption at EDMC. Awhile ago, I was exploring a career change (2010) and went to glassdoor dot com to research the company. That research alone made me stay a mile away from this place. Current employees are very aware of the corruption going on, but feel trapped they cannot escape.
Some gems of late:
“Unethical business practices, Senior leadership and directors lie to employees. Unorganized communication. Unorganized when delivering new company rollouts. High pressure sales. Concerned with the bottom line ONLY, do not care about the welfare of the students.”
“You are basically encouraged to defraud the federal government
You are encouraged to sell students on the programs whether or not the degree will actually help them”
“It is very difficult to find a job once you are employed by EDMC. Luckily I had worked at other companies before going there- so it helped my resume when I went to interviews. However, most interviews I went on, I was questioned about EDMC and what I thought about their ethical practices. I also recieved the same grimmace and “ohhh, you work at EDMC…hmm – we know all about them.”
“It is hard to know that you are potentially ruining people’s lives and credit because they are not going to be able to pay those loans back most of the time because they aren’t really sure what payments they’ve signed up for after graduation.”
I think at this point in time, EDMC has been figured out and they know it. The only reason their enrollment was so high because they were paying their ADA’s commission to recruit students, often student’s that are not qualified. And I have no respect for their CEO, and his open quotes in the most recent shareholder’s conference call:
“You’ll have more people at a lower salary producing the same number of students,” Mr. Nelson, told analysts during the conference call Thursday.
Sorry Mr. Nelson, no you will not. The whole place has been figured out, and parents are not going to continue to let their kid’s fall for this type of fraud. Your numbers are already down, and with replacement ADA’s with no incentive to recruit – they will continue to fall.
Anyone considering these schools should simply look at the leadership at fortune 500 companies and ask why no one in leadership has a degree from these schools. Go three levels down – no one at that level has a degree from there either. Maybe a few – but trust me – these degree’s are not respected and offer very little in job mobility beyond your current company.
I wish everyone luck and hope they fix this – otherwise, Pittsburgh is going to lose a very large employer while Mr. Nelsen and his Cronies walk away with millions.
Hhhmmm….where is “Oh Really?” now?
A previous article about these layoffs got really hot and heavy when a multitude of people spoke up about the horrors of EDMC. Soon an overwhelming number of responses using a variety of fictitious names (“Oh Really?” was the most common one) slammed every honest person telling a truthful story from their own experience. (The last I checked it there were over 80 comments.)
These brave people, some using their real names, were subjected to an onslaught of insults, innuendos, and convoluted “facts” in an attempt to discredit their truths. It was evident that most of these posts were written by the same “Oh Really?” person who was attempting to make his position appear more popular by posting under multiple anonymous names. It was suggested by many that “Oh Really?” was indeed a paid PR stooge of EDMC as the tactics and “arguments” appeared so familiar to all with previous EDMC related experience.
But now comes this article which exposes more of the hard truth about what EDMC is doing to our city, our people, and the people of our land, and “Oh Really?” is notably absent from the conversation. THANK YOU CITY PAPER for continuing to report the truth about this evil and corrupt corporation. EDMC is giving Pittsburgh a bad name in the world – something that most real Pittsburghers will not stand for once they understand the gravity and depth by which EDMC is harming our populace with their lies and deceit.
Thank you to “Fix_EDMC” for taking the time to cut and paste truthful commentary written by the employees of EDMC on the website http://www.glassdoor.com – anyone doubting what EDMC is about should spend some time there to see what their employees are writing about them. The truth is coming out… how could it not when they are churning and burning employees in the same manner they are churning and burning students?
Keep it coming, City Paper – Pittsburgh needs to know the truth!
And 90% of that is Federal Money.
Any former (or current) ADAs or HR people at EDMC read this?
I’d love to speak with you.
The question today in the online Pittsburgh Business Times was whether you plan to add, keep level or lay off employees. I answered EDMC is shedding people – PERIOD.
Wouldn’t this round of layoffs put them over the top that they have to report them?
“Look at their board of directors,” O’Donnell adds. “There’s not one educator there.”
O’Donnell could well have said, “Look at their faculty, there is not one qualified educator there.”
I worked there and I saw it fir what it was. I was good at enrollment until I saw the scam, so I collected the 40K paycheck and didn’t enroll anyone intentionally. I beat them at their own game.! The team leaders were so full of BS they would say the student comes first. Yes they are the first ones to get bilked and then the government comes second. Since they guarentee the loans. Living in Pittsburgh I have personally never met anyone that went to Art Instiute of Pittsburgh and went into the field they studied. It was such a joke! Then rhere was the bald headed guy who really ran boiler room! him and his girlfriend (she was married to a recruitor at another school ) just loved life making a ton of money. It was an amazing thing to see. The school went from 200 to 2,000 recruiters or what they called assistant director of admissions. What a joke. They cooked the numbers on income after graduation. When asked how many students were placed after graduation, if you worked at McDonalds you were counted because you had a job. When asked how many complete the degree on time? they use 6 Years not 2 or 4 it should take as the percentage to complate on time. So even if you asked all the right questions you still got lied to by the company.
I think that the employees of EDMC may be about to give the board of Directors including the directors from Goldman Sacks a lesson in the consequences of long term criminal behavior. When you rip off two hundred thousand people to the tune of tens or hundreds of thousands of each dollars by fraud and the government to the tune of more than ten billion dollars heads may be about to roll and we may see some Goal time for these buckets of slime. It may not be pretty. This time I don’t think that they will be laughing all the way back to Goldman Sacks.
EDMC didn’t give employees a tough lesson. They cheated and lied to them as they did to the Federal Government and over 100,000 students who are left with loans they cannot pay and and an education that has close to zero chance of getting them a job even if they are amongst the small percentage that finished their degree. Golman Sachs who part owns EDMC and shares Directors with the company are a criminal organization involved in fraudulent criminal activity throughout the world. They decided to pillage the US education system because they can, no one stopped them and because they philosophically are against education because they are ultra conservative and know that education gives people power. They preyed on the poorest members of US society. If they are not brought to justice and by that I mean that the CEO and directors of EDMC and Goldman Sachs spent 30 or more years in jail then the US law system is a joke. Wake up America.
Looks like EDMC will cease trading soon. Their stock is almost worthless. Usually a sign that a company is going out of business.
EDMC stock will hit zero in about two weeks if it keeps on its 2014 trajectory. They will lose their accreditation if someone buys them.
The 100,000 remaining students should take Goldman Sachs to court and recover damages for the years of lying and fraud. The Federal Government and States have been given the goahead to get serious about the 11 billion dollars that Goldman Sachs stole from Taxpayers.
I was an Art Institute of Philadelphia Employee for 11-years and was cut. We were pulled into an office like cattle and given severance packages. “Thank you for your service” They said ….. 11-years of my life, A+ reviews….It meant nothing!
I have not been able to recover from this devastation and will soon be forced to sell my home. It appalls me to hear of the bonuses given to Todd Nelson and others at EDMC. Their choices effects the lives of so many people. Hard working people who at one time believed in the college they worked for. You can say “It’s Just Business” but imagine If they cut just a little of the salaries from these big wigs at EDMC, imagine how many people would have been able to keep their jobs. I will soon loose my house because I have not been able to find employment close to my salary range. I just wish these guys could come to my house to see the pain it has caused my family.
When this was all going down in 2012, I sent Mr. Nelson a picture of my wife and son and begged him not to do this….He actually had someone else respond back in an email …. The was so spineless he had to get someone else to write me back!