By New Times
By Connor Radnovich
By Robrt L. Pela and Amy Silverman
By Ray Stern
By Keegan Hamilton
By Matthew Hendley
By Monica Alonzo
By Monica Alonzo
The cars seem remarkably new for a university parking lot. There are no bikes or beaters, no VW buses with bumper stickers that read "Honk if something falls off." These are shiny Tauruses and Sentras, the sensible cars of people with jobs.
The cars' owners are middle-aged middle managers, white-collar working stiffs earning bachelor and master degrees at night at Western International University in west Phoenix. Many of them come to class still wearing the skirts and ties of their workaday uniforms.
Working adults represent the fastest-growing segment of American college students. They want degrees--especially business degrees--so they can better their employment, and often, they have been sent and supported by the companies they work for. In fact, U.S. corporations spend about $40 billion per year on employee tuition, money they hope will prove to be more of an investment than a perquisite. And so both employer and employee are more concerned with pragmatism than prestige. Adult education, meanwhile, has become a growth industry.
Western International has catered to that market niche since 1978, but never with the success of such educational neighbors as the University of Phoenix, which claimed gross revenues this year in excess of $90 million. On the contrary: WIU, despite its accreditation, despite its respectable academic programs, has been plagued by bad financial decisions--which in the world of business schooling could instill as much confidence as a barber with a bad haircut. And though the Phoenix business community has not seemed to notice WIU's fiscal problems, the U.S. Department of Education has. In 1994, the year WIU started to turn a profit, the DOE demanded the university post a letter of credit to continue to participate in federal student loan programs.
Losing federal student aid "wouldn't have immediately put the school out of business, but it would have put us at great risk," says university president and board member Jim Haynes.
Unable to come up with the cash needed to satisfy the government, Haynes worked the old-boy network he'd cultivated in 15 years as president of the Phoenix Chamber of Commerce. He found a group of investors to buy the university and convert it from a nonprofit to a proprietary, for-profit institution.
The investment group includes Haynes.
Haynes claims his first priority is to keep the school open, insisting that he is staying out of the dealing process and that he will resign if anyone cries "conflict of interest."
Even so, his positions on the boards of both the buying and selling corporations certainly raise questions. And it may only be coincidence, but half of the expected sale price of the university would be paid back to the new owners in an accounting maneuver that involves previously paid student tuition.
Less than a week after WIU announced the pending sale, the university was hit by a court judgment demanding more than $4 million, money the school doesn't have, more money than it is worth. Both sides still think the sale will go through, though how is anyone's guess. Why would anyone want to buy a failing little school in the first place?
Because business is business, and the business of business schools is booming. Everyone wants or needs an MBA these days. Why shouldn't little Western International University get its share of the revenues generated by the MBAstardization of America? The market is out there. Can a group of savvy businessmen at the helm of WIU get at it more successfully than a succession of educators could?
WIU has about 2,000 students, and slightly more than twice that number of alumni, a scant showing for its 17 years of existence. Most of the current students are 35 to 45 years old. About 20 percent of the student body comes from abroad, especially from Asia, and many of the rest of the students come from Valley corporations, notably Intel, Motorola, and McDonnell Douglas Helicopter Systems, all of which have WIU courses taught on their own premises. The university was started in 1978, funded by World Universities, Inc., a Puerto Rico-based foundation intent on fostering continuing education for adults in the United States and Latin America and funded partly by donations from such philanthropists as Albert Schweitzer and Pablo Casals. WIU was the fifth World Universities project, and the only one still operating. Ronald Bauer, the head of World Universities, named himself president of WIU and sent his son Logan Bauer and a prot‚g‚, Robert Webber, from Puerto Rico to handle the day-to-day management. (None of them returned calls from New Times.)
The school operated in the red for nine years; though it finally posted revenues greater than liabilities in 1987, it was plagued by the kind of nickel-and-dime lawsuits from suppliers that are symptomatic of bad business and worse cash flow. By 1983, World Universities had pumped more than $4 million into WIU, and whether that money constituted a loan or an endowment is a question of dispute today.
"Both World Universities and WIU passed board resolutions that made it clear that this was an injection of funds and not a loan," says John Blair, who currently heads WIU's board of directors. According to Blair, the agreement cleared WIU's books so that they would pass muster with the North Central Association of Colleges and Schools, which granted accreditation to WIU in 1984. "Otherwise, we would not have been accredited," Blair continues.
Then, in 1989, the board of directors discovered that Ronald Bauer was entertaining investors willing to pay off WIU's obligations to World Universities and then take over the board and administration of WIU. Board members felt Bauer had betrayed their trust, refused to reelect him to the board and dismissed him as president. Robert Webber assumed the presidency.
Two years later, Bauer and World Universities sued WIU for the money it had lent or endowed, plus interest, an amount totaling $4.6 million. To Western International's great relief, Maricopa County Superior Court, in a summary judgment, ruled that not only were World's loan agreements too vague to collect on, but the demand for repayment had exceeded the statute of limitations, and it ruled in favor of WIU.
In 1992 and 1993, the university lost about $1.5 million, according to Jim Haynes. The board, concerned that Robert Webber was not on top of the financial situation, fired him, and asked Haynes, who was then a member of the board, to step in as chief executive officer of the university last November.
Fiscal '94, Haynes claims, will show about a half-million dollars in income over expenses (he can't use the word "profit" while referring to a nonprofit institution), but it was too little, too late.
In June, the U.S. Department of Education demanded that the university post the $450,000 letter of credit to guarantee its student loan program, which affects about 40 percent of the student population. Essentially, the school needed to come up with $450,000 cash as collateral. The deadline was June 30.
"We are out of compliance," Haynes admits, "but fortunately, it takes time for pieces of paper to wander around the Department of Education." Time is running out. "We feel the school does not satisfy our department's regulatory requirements for financial responsibility," a DOE spokesperson told New Times. "It's most likely that we will send an 'intent to terminate' letter to the school in the near future."
Haynes started shopping for investors, much as Ronald Bauer had, and he found help in one of his former associates at the Phoenix Chamber of Commerce, John Cotton, a local investment banker. Cotton was once president of Great Western Bank, once head of the Goldwater Institute for Public Policy Research, once sued by the Resolution Trust Corporation.
He put together a group that includes Haynes ("John and I go back a long way," Haynes says), John Norton III, Matthew and Daniel Diethelm and Jock Patton. Norton is a former deputy secretary of agriculture, president of J.R. Norton Company, and his name frequently shows up on boards of directors--he has sat on the boards of Arizona Public Service Company, America West Airlines, Aztar Corporation, Pinnacle West Capital Corporation and WIU.
Matthew Diethelm is an engineer with a Ph.D., who, as general manager of a division of Intel, knows the value of a WIU degree; his son Daniel is an associate at Cotton's investment firm, Maricopa Partnerships. Patton is an attorney and president of a stock evaluation firm; like Cotton, he was sued by the RTC in the Western Savings and Loan failure while he was an attorney at Streich, Lang.
The investor group made its decision to buy the university's assets after conducting a market survey--which it will not share.
"If you could sum this up in a short phrase," says Daniel Diethelm, "the type of product that this investor group would want is a program that we, as employers, would want our employees to go to, where they could learn valuable skills that could help the employer, and that's the point."
That's one point in favor of the sale, perhaps. Another is that it's a screaming deal for the buyers. Haynes expects the fair market value to be appraised between $1.3 million and $1.5 million. But John Blair, who now heads the board controlling the nonprofit university, admits that WIU would have to pay back about $700,000 to the new university corporation to compensate it for instruction that must be delivered to students who already have paid for it. The new owners, then, would only really have to come up with $600,000 to $800,000 to buy WIU.
A paltry price, given the potential profits. "I'd be disappointed if it wasn't regularly running at least a quarter of a million in profits," says Jim Haynes.
Or more. Every conversation about WIU's future--whether a conversation with local educators or businessmen or with national education experts--starts the same way: "Look at the University of Phoenix."
Indeed, look at business schools in general, and especially at the new breed of lean-and-mean proprietary business-school franchises that offer market-driven degree programs, especially degrees resulting in MBAs.
In 1972, American universities awarded 30,000 master degrees in business administration; by 1992, that figure had swollen to 84,000. Similarly, the number of MBA programs has grown from 389 to 700 in the last 20 years. As many as 60 percent of the students in those programs go to school part-time.
Traditional academics worry that with the glut of MBAs, the degree has lost its value, and that today's students view it only as a ticket to a better salary. "They want the degree, not the knowledge," said one Arizona State University professor who asked to remain anonymous. "They don't want to work very hard. They just want to get that piece of paper that says 'MBA.'"
Forty percent of college students at the graduate and undergraduate levels are adults returning to school after years in the workplace. They don't want to think deep thoughts about the lesser existentialist Spanish poets. They want to change jobs or make more money in their current jobs. They have to go to school at night because they have kids and mortgages and they can't quit work to go to school full-time.
From an instructor's point of view, adult learners make wonderful students: They're serious, they know where they're going and they already have highly developed problem-solving skills, so they don't need to be spoon-fed.
College administrators like them, too, because they pay their bills. The student loan default rate at WIU and at the University of Phoenix, for example, is only about 5 percent, one-third the national average.
The small proprietary business schools--some of them chain operations--have not only locked onto the specific needs of those older students, but they have carefully canvassed the students' employers, as well.
In fact, corporate and business America increasingly want a say in what their employees learn. As Chuck Hickman, from the American Assembly of Collegiate Schools of Business, says, "Companies are clearly becoming much more demanding in what kinds of education they are willing to pay for. They want it just in time, and they don't want to pay for knowledges or skills they don't expect to use through the employee, hence the demand for more customized degree and nondegree programs."
The proprietary schools, of course, must suffer more than a bit of condescension from the academic establishment, which regards trade-school degrees as if they were awarded at Montgomery Ward. From that point of view, the theory-based degree, taught by full-time educators, enhances the student's credentials more than a program customized to a current employer.
Theories aside, though, many traditional schools, including ASU, have created part-time and weekend programs to capture part of the adult-executive market. But it's still difficult for them to meet the needs of the local corporate market.
"ASU is a fantastic university," says Intel's Joe Rollins, "but they were a lot more difficult to work with in terms of trying to get them to work with our working adults. Their schedules weren't as flexible, and they weren't willing to tweak anything to satisfy our needs."
Of WIU, Rollins says, "They were willing to make sure their instruction was about today's technology rather than just theory," an opinion echoed by officials at Motorola. Furthermore, the corporate types were impressed that Western International checked in with them monthly to evaluate how its programs and the companies' needs matched up.
WIU is hardly alone in the Phoenix market for adult-executive training. Ottawa University, which offers graduate and undergraduate programs in human resources and education, has campuses in Phoenix and in Tempe (as well as in Kansas and in Wisconsin). DeVry Institute of Technology has eight locations (including one in Phoenix) in seven states, offering undergraduate degrees in business and technology. A sister institution, Keller Graduate School of Management, has two Valley campuses and 15 others in five states. Last year, the parent company of both DeVry and Keller posted gross revenues of $211 million.
Traditional universities have had problems competing with the cost structure at the "upstart" schools, where courses are entirely taught by adjunct faculty. The schools advertise them as "real professionals in the field" as opposed to tweedy and baggy-assed professorial types. What the schools don't advertise is that adjunct instructors come cheaply. At a going rate of $1,000 to $2,000 per course, an adjunct can teach a full-time load and still not make $10,000 per year.
As Haynes says, "What makes it [WIU] look profitable is that on an overall basis, our instructional cost is about 28 to 30 percent, and beyond that, it's a fixed-expense operation." Once the university reaches the break-even point, 70 cents of every tuition dollar drops directly to the bottom line.
So it's no wonder that for-profit schools are proliferating. The University of Phoenix recently wound up on the front page of the Wall Street Journal when its parent company, Apollo Group, which also includes a consulting firm and a publishing company, decided to take its stock public. Apollo touted gross earnings of $97.5 million for the last year, revealing an enormous operation that includes 17 campuses and 16 smaller "learning centers" in seven states and in Puerto Rico. Like WIU, UOP hires only adjunct faculty, and charges dearly for its adult-oriented courses in nursing, education and, of course, business.
Somewhere in this sea of profit and opportunity, Western International University struggles to stay afloat.
Haynes and his fellow investors hope that a UOPish structure will lead to UOPlike profits.
Though the sale to John Cotton's investment group is far from done--there are bureaucratic hurdles to clear with both the U.S. Department of Education and the State of Arizona--the new investors have already made their managerial style clear. On August 26, the day the potential sale was announced, eight senior administrators at WIU--deans and special programs directors and the comptroller--were called into an office and told that their contracts would not be renewed.
"We were surprised," said one, who wanted to be left unnamed. "None of us who were senior managers knew anything about this buyout."
The intent was to make operations as lean as possible, to replace full-timers with contract labor wherever possible.
The next surprise descended on the boards of the new and the old WIU corporations alike. On September 1, the Arizona Court of Appeals reversed the Superior Court decision denying that WIU had to pay back loans to World Universities and Ronald Bauer, and ordered that summary judgment be entered in favor of Bauer. Suddenly, WIU had an additional $4.6 million added to the liability side of its balance sheet, and the proposed sale became instantly complicated.
If and when the sale occurs, the nonprofit entity now known as WIU would transfer its name and certain assets to an entirely new corporation formed by the for-profit investor group, which would then run the university. The debts of the old corporation would be paid by the proceeds of the sale, and that nonprofit entity would be dissolved.
But the investors have not offered to pay anything near $4 million to acquire WIU. And the WIU board is left wondering if the new debt could be dumped off on the soon-to-be-extinct nonprofit corporation.
William Moore, Ronald Bauer's attorney, has taken a firm stance against such a move. "There's no way you can get out of a debt that easily, by transferring your assets to another corporation," he says. "Until some provision's made for the payment of the debt, there's going to be a big problem with any sort of transfer."
WIU has asked the appeals court to reconsider its reversal. Meanwhile, the new investors have stated that the question will be settled one way or another, perhaps by reaching a settlement with Bauer.
Taking the theoretical market value of $1.3 million to $1.5 million, less $700,000 in prepaid tuition, less an estimated $300,000 in other debts, would leave $300,000 to $500,000 to cover Bauer's claims.
"Knowing Bauer, if they offered him $500,000 to walk away, he might take it," says former WIU comptroller Lee Simpson. "On the flip side, he's been pushed around enough that he just might not go for it."
But as Blair says with a sigh, "If they're looking for $4 million, well, I'd like to find it, too."
Perhaps it will be left to the prospective investors to pick up whatever pieces are left in the wake of bankruptcy proceedings.
Even if the dealing parties figure out a way to squelch or satisfy Bauer, former WIU employees are questioning whether a group of businessmen can make the university run better than they could.
While board president Blair extols Haynes' "good, solid leadership," which has helped turn around WIU's finances, others question his credentials.
"Here's the joke," says Carolyn Flagler, the university's former director of international programs. "Jim Haynes has a bachelor's degree. He has no industry experience; he has no academic experience. It's nothing against him personally, but if we were going to build a business that was oriented toward a more aggressive, profit-educational stance, you'd think they would pick someone who had some sort of connections or credibility either in industry or academia, or at least a credential.
"I've worked in industry where you make decisions from a bottom-line point of view, but I wonder from a staff point of view what the hell they're doing."
"They're doing what they're doing to get the money out of the university," says former comptroller Lee Simpson, "and my only concern would be that they would milk more money out of it than they should." Then he softens.
"[John Cotton's] going to make a run for it, and dump some money into the university. If they do it right, it can be a good university and a good revenue producer."
Daniel Diethelm of the new investor group counters by pointing out how badly bureaucrats and state governments have delivered education. He would describe his group's investment as largely philanthropic in nature, aimed at keeping the university in business as a favor to its alumni and for its service to the business community.
But, he admits, "If run academically appropriately, if you keep the academic standards up and you provide a good service, education is going to be the foremost field in the future. Everybody needs it."
Can good deeds and good profits co-exist? James Samels, a Boston-based college business consultant, thinks so. "I don't think it's necessarily a self-serving, totally pecuniary interest that seeks to upstream the vertical integration of business synergies so that they can just turn a buck," he says. Nonacademic translation: Businessmen aren't just whores for money.
Standard English commentary: "But I do think they wouldn't be doing it if there wasn't a buck to be made.