Why Capella Makes a Good Takeover Candidate

Mar.13.07 | About: Capella Education (CPLA)

In a recent article about education stocks, I mentioned that Capella (NASDAQ:CPLA) would make a good takeover candidate. Some of my readers were wondering why.

First, let's look at the financials. Revenues have risen significantly over the last five years, a total of 263% during this time frame. EBITDA was up 22% in 2006 over the previous year, and net income was up 30.8%.

Now let's look at one of the major metrics of higher education stocks, student growth, up 173% over the last five years. Major players have taken large positions in the stock, including Wells Fargo Bank with 14.4% and Maverton Equity Partners.

Finally, the kicker is a big intangible, and that is its accreditation. Capella University is accredited by The Higher Learning Commission and is a member of the North Central Association of Colleges and Schools [NCA], one of the big six regional institutional accreditors in the United States, that accredits both public and private schools, elementary through college. [More information can be found about accrediting agencies at distancelearningdegree.com.]

Accreditation is a very big asset that is not recognized on its balance sheet. Anyone can go out and set up an unaccredited university. But most students will look for an institution that is accredited. If you set up a university, it can take several years before the accreditation comes through. Therefore, any company that wants to get in the higher ed business would be far better off buying a fast growing company such as Capella in order to hit the ground running. The acquirer would end up buying existing students and market penetration, in addition to the accreditation.

Disclosure: Author does not own the above.