On Thursday July 11, 2013, a day after both Bridgepoint Education, Inc. (BPI) and Apollo Group, Inc. (APOL) publicly announced highly anticipated regional accreditation actions for their respective university operating units, Bridgepoint's stock price jumped an extraordinary 26.25%. In contrast, Apollo's was up a respectable but noticeably less momentous 6.04%.
The difference in the one day run-ups were echoed in the chosen vehicles for announcing each material event: Bridgepoint via a press release and required Securities and Exchange Commission (SEC) Form 8-K; while Apollo chose to submit only its SEC Form 8-K.
If all else were considered equal from an efficient market theory standpoint, one could ascertain Bridgepoint Education's news was perceived by investors as more than four times better than Apollo Group's. But reading between the lines of each company's announcements reveals an arguably more balanced story.
Reaffirmation and Two-Year Notice for Phoenix and Western
After the market close on July 10, at 4:08 p.m. EDT, Apollo Group made public its SEC disclosure revealing that on the previous day, its wholly-owned subsidiaries, the University of Phoenix (Phoenix), and Western International University (West) were separately notified in writing by their regional accreditor, the Higher Learning Commission (HLC) of the North Central Association of Colleges and Schools. The letters reaffirmed both universities' accreditations for a ten year period through the 2022-2023 academic year. The actions from HLC also stated Phoenix and West were each simultaneously placed on a two year 'notice' status by HLC.
Apollo Group said the two year notice status from HLC for Phoenix related to concerns about governance, student assessment, and faculty scholarship/research for doctoral programs. Their SEC disclosure did not specify the specific reasons for West's two year notice.
HLC defines notice status as a Commission sanction indicating that an institution is pursuing a course of action that, if continued, could lead it to be out of compliance with one or more Criteria for Accreditation. An institution on Notice remains accredited. At the end of the Notice period, the Board of Trustees may remove the sanction, place the institution on Probation if the identified concerns have not been addressed, or take other action.
Interestingly, there was no press release regarding Phoenix and West's accreditation affirmations, or any other known public disclosure from the company at the time this article was written. And no enhancements in the SEC 8-K such as the accreditation granted to both Phoenix and West were of the coveted ten year maximum variety.
Initial Accreditation with Two-Year Progress Visit for Ashford
Also on July 10, at 5:25 p.m. EDT, less than an hour and a half following the Apollo filing, Bridgepoint released a public notice announcing one of its operating units, Ashford University (Ashford), had been granted a five year initial accreditation by the Accrediting Commission for Senior Colleges and Universities of the Western Association of Schools and Colleges (WASC).
In its news release, Bridgepoint celebrated the WASC action letter that stated "The Commission found that the University has responded to Commission concerns and judges that it is now in substantial compliance with Commission standards." The company also applauded Ashford's administration, faculty, and staff.
WASC, along with HLC, is one of six regional accreditors recognized by the United Sates Department of Education (USDOE). The regionals and several national accreditors, also recognized by the USDOE, act as gatekeepers for post-secondary school, college, or university members that award federal financial aid to students, or are otherwise required to be accredited for reasons such as regulations in the state the school operates in.
As widely reported, the significance of the initial WASC accreditation for Ashford coincided with its ironic fate of being placed on notice status this past February by the same HLC body that accredits Apollo Group's Phoenix and West. HLC was Ashford's accreditor of record prior to the WASC initial action. Ashford's issues with HLC leading to the notice status included "not demonstrating it is substantially present in the region as required by the Commission's jurisdictional policies" as well as issues with certain other accreditation standards as outlined in the corresponding February 2013 HLC public disclosure. HLC is naturally aware of Ashford's intended transfer to WASC, which now requires only official recognition from the USDOE.
In July of 2012, WASC had initially denied Ashford accreditation based on six areas of non-compliance as outlined in its action letter at the time. Ashford made the bold decision to reapply to WASC for initial accreditation and apparently did a remarkable job in successfully addressing the issues during WASC's subsequent site visit this spring.
What wasn't specifically addressed by Bridgepoint's management in its initial press release, SEC disclosure, or prepared remarks at a scheduled conference call on the morning of July 11 [see transcript] was a stipulation from WASC that requires a special visit in two years (spring of 2015) to monitor the progress of Ashford University's initial accreditation.
Analyst Brandon Dobell of William Blair & Co. asked a pertinent question during the Q & A session at the end of the morning call regarding details of the then publicly unavailable WASC action letter. In response, Bridgepoint CEO Andrew Clark revealed the requirement for the two year follow-up visit. To be sure, Bridgepoint did attempt to link to the action letter on the WASC website in both its press release and SEC filing the evening before. But WASC did not post the letter to its website until later in the eventful market day of July 11th. Also not mentioned by the company: although Ashford publicly received a five year initial accreditation, WASC evidently chose not to award a more generous seven year grant.
Walking the Accreditation High Wire for Next Two Years
An intriguing parallel is both companies will have the proverbial accreditation nooses around their necks for the ensuing two years. Apollo because of the more serious HLC notice statuses at Phoenix and West; and Bridgepoint because of the follow-up visit to Ashford in the spring of '15.
Investors may consider taking note of this unlikely analogy. Each company's distinct yet time consuming responsibility of maintaining accreditation at their respective universities during the coming two years may force a continued allocation of resources in favor of accreditor preferred academic quality and student services. Understandably, shareholders like to see an equitable focus on enrollment and cash flow.
Arguably, neither preference is necessarily nobler than the other. And most reputable accreditors, administrators, and investors would probably agree a balance is ideal. A holistic approach of quality and quantity is necessary for long-term success of any education institution whether profit or non-profit.
The takeaway from Apollo Group and Bridgepoint Education's seemingly contradictory accreditation news is that both may be caught up in a "quality first" game for the next two years, potentially affecting stock prices as securing new enrollments, generating free cash flow, and delivering a return on capital take the proverbial back seat.
Conspicuously, Apollo Group took a less celebratory, more transparent approach by focusing on the adverse two year notice. But Phoenix and Western did indeed get a sought-after maximum 10 year reaffirmation. Avoided was the feared continued probation status signifying an accredited institution is no longer in compliance with one or more of the accreditor's standards. Or worse, a show-cause directive requiring an institution to present its case as to why accreditation should not be withdrawn.
Bottom line is both companies will undoubtedly remain in accreditation defense mode throughout the next two years. Apollo Group assisting Phoenix and West in addressing updates to their notice requirements; and Bridgepoint Education supporting Ashford because conceivably it could take between now and Spring 2015 to effectively prepare for a desirable, "zero findings" visit (industry parlance for a perfect accreditation review.)
Granted, Bridgepoint Education's result from WASC was certainly superior to Apollo Group's HLC outcome because of the public disclosure requirement for Phoenix and West. But more than four times better based on one day percentage increases of July 11th's closing prices? Debatably, these polarizing public disclosures of accreditation actions from two competing companies on the very same day are not clearly differentiated in the context of potential longer-term market performance.