Yesterday, shares of Bridgepoint Education Inc. (BPI) traded harshly (a third of the prior close) down on news of an accreditation problem at its subsidiary Ashford University. The Bridgepoint press release explains that although Ashford is accredited through the 2014-15 school year by the Higher Learning Commission of the North Central Association of Schools and Colleges ("HLC") - with which Ashford remains in good standing - an application for initial accreditation was denied by the Accrediting Commission for Senior Colleges and Universities of the Western Association of Schools and Colleges ("WASC"). Shareholders fled.
So - all panic aside - what does this mean for Bridgepoint and its shareholders?
What are HLC and WASC, And What's Their Beef With Ashford?
HLC and WASC are bodies which accredit institutions of higher education in their respective geographical areas. HLC includes 19 states from Arizona to West Virginia, and includes Ashford's residential campus in Iowa. WASC is another of the U.S. higher education market's seven regional accrediting bodies. Accreditation by HLC and WASC are not mutually exclusive.
Ashford, having migrated substantial operations in support of its online activities into the region served by WASC, applied for initial accreditation in that region. Although Bridgepoint described its effort to appeal the WASC's denial of initial accreditation to Ashford, and to initiate a new effort to obtain WASC accreditation, its press release did not explain the basis of the denial. Moreover, Bridgepoint said it remained in good standing with HLC through 2014-15. According to Reuters, Bridgepoint explained that Ashford was required to demonstrate "substantial presence in the 19-state north central region by December 1 this year" as a condition of accreditation by HLC. It is unclear whether the "substantial presence" test was triggered by Ashford's migration of online infrastructure to another region, or was otherwise outside the ordinary scope of accreditation review.
To Panic Or Not To Panic?
Lest investors brush this entirely off as a non-event - Ashford remains accredited with a body showing no signs of refusing continued accreditation on renewal - onlookers should consider that accrediting bodies are always keen to notice and to react to the accreditation decisions of other accrediting bodies. Like a tele-radiologist whose license discipline on one state requires notice to and potential further action from licensing agencies in forty-nine other states, Ashford's denial stands to spark early review by the body currently accrediting it. Reuters' reports Bridgepoint's explanation that "failing" to satisfy the WASC "could result in reconsideration of accreditation by the HLC."
But like a tele-radiologist required to report to every state in which a license is granted, Ashford doesn't face a rubber-stamp repetition of WASC's decision by other accrediting bodies any more than a reporting physician faces discipline everywhere a license is held. (Being suspended for failing to make a fee payment on time in one state doesn't automatically get a multiply-licensed physician suspended everywhere else, too.) If the accrediting decision were based on the extent of Ashford's contacts in WASC's jurisdiction, and Ashford's physical campus remains in Iowa, there'd be little reason to suspect HLC would revoke the certification of an otherwise compliant accreditee.
In the meantime, Ashford is not only appealing WASC's decision but simultaneously making another initial application.
So, No Big Deal, Right?
Ahh, no. There's more. The decision may not really about facilities, despite the suggestion of Reuters' article. WASC published a public statement regarding its decision respecting Ashford University. The second paragraph is as follows:
The Commission found that Ashford University was not yet in substantial compliance with elements of Standard 1 (Defining Institutional Purposes and Ensuring Educational Objectives), Standard 2 (Achieving Educational Objectives through Core Functions), Standard 3 (Developing and Applying Resources and Organizational Structures to Ensure Sustainability), and Standard 4 (Creating an Organization Committed to Learning and Improvement), as required for initial accreditation.
This comes across rather differently than the "we're moving our offices" impression one might draw from the Reuters reports of Bridgepoint's statements. Indeed, the accreditation commission's action letter specifically says: "Given that there were multiple areas in which substantial compliance could not be demonstrated and that these areas fell into several aspects of the Standards of Accreditation, the Commission determined that denial of initial accreditation of Ashford was the appropriate action."
WASC acknowledges that Bridgepoint "has submitted the required documentation to reapply" and that Ashford is "permit[ted] ... to reapply for initial accreditation with a single Special Visit in spring 2013." Moreover, that visit may consider "recent efforts to address the areas cited above" and acknowledged that "progress had been made[,]" though as of the date of the action letter WASC was unable to measure the impact of the changes made to improve compliance. Presumably, the re-application will permit assessment of the extent to which compliance has been achieved.
Bridgepoint and Higher Ed
BPI is one of the few private institutions not currently suffering enrollment issues, has made technological investments in the early identification of students who won't be good for BPI's government compliance metrics, and it leads online competitors in third-party quality certification. Bridgepoint is arguably better positioned than other private institutions of higher education to satisfy the growing demand for accessible higher education. The accreditation issue raises the question whether the market has appropriately gauged the regulatory environment in which Bridgepoint operates.
The primary investment decision underlying investment in Bridgepoint remains the risk/reward of private higher education as a market opportunity. The accreditation barrier - regardless whether it proves transient - highlights that one of the issues affecting all market participants is the regulatory environment for higher education services, including the applicable accreditation regimes. To the extent that lenders, government agencies guaranteeing student loans, and students will all rely on accreditation in their decision-making, the accreditation-related risks are material to the success of any provider of higher education services. The question is whether investors and the market are assigning to Bridgepoint's regulatory risk the correct value.
It is unclear to this author whether Ashford's effort to expand its accreditation was driven by a desire to bolster existing credentials, or a real business need related to imminent expansion activities. As Ashford's migration of online infrastructure continues, its claim to substantial presence in WASC's jurisdiction presumably improves. However, since the concerns of WASC are broader than the mere "presence" suggested in the Reuters report, investors have little to go on in estimating the scale of the problem Bridgepoint faces as Ashford seeks additional accreditation.
The accreditation denial does not, by itself, indicate either current or future inability to maintain accreditations required to conduct operations. Managing required accreditation is a core competence of higher education administrators, and Bridgepoint has access to this expertise at both University of the Rockies and at Ashford. The accreditation decision now in the news appears to have been driven by factors well beyond the extent of physical presence of facilities in a new geographical region, and may indicate execution issues impacting growth Bridgepoint. The specifics of the accreditation denial are apparently known to WASC, however, whose action letter suggests Bridgepoint is aware of and already acting on the very concerns at the heart of the decision. Given that Bridgepoint's accredited educational institutions have acquired and maintained their required certifications and accreditations (and some optional ones, such as from Quality Matters™), and given the broad range of educational quality available from the panoply of nonprofit, for-profit, and government educational institutions, it is implausible to believe that Bridgepoint management will prove ultimately unable to satisfy the accrediting bodies unless their objective is to close existing schools based on new rules driven by newly-moved goalposts. This is not impossible, of course; but the author harbors real doubt that regulators have suddenly begun imposing certification requirements that cannot be met by competent administrators. Whether a new wave of increased accreditation oversight will materially increase compliance costs will, of course, be worth watching.
The real news is, strangely, actually worse than the initial report. The accreditation decision is based on multiple factors affecting much more than the physical location of Bridgepoint's Ashford operations. However, heavily-regulated industries such are filled with panic-inducing accreditation actions and audits, which are not infrequently peppered with criticism and action items noted by accreditation bodies. In the health field, for example, regulation descends in the form of a panoply of oversight agencies and industry self-governing bodies - but allows business as usual even as administrators face what seem to be dire emergencies in each oversight pass. The substantial involvement of government in the funding of higher education will, naturally, lead higher education into increasing oversight. However, the author is unable to discern in the WASC letter an indication of an accreditation relationship that has passed beyond the "usual panic" frequently present as oversight is administered by accrediting bodies. Moreover, the language in the letter directed toward Ashford's current remediation efforts have already been lauded as appropriate and forming a suitable basis for finding effective correction during a new round of evaluation in 2013.
The sharp price drop may present a potential opportunity to buy at a low price a volatile stock with significant upside opportunity in a growing market dominated by high-cost competitors. The author is inclined to learn more about the panic-inducing regulatory decision and its practical consequences before trying to outrun the market to sell on the current news, the impact of which on operations may ultimately prove immaterial. Investors with industry-specific insight sufficient to ascertain the trajectory of the WASC accreditation review may, if Bridgepoint continues to look otherwise attractive, find the price drop an attractive circumstance for adding shares.
Disclosure: I am long BPI. The author may add to or liquidate BPI holdings on the basis of information gathered following publication, which may or may not occur within 72 hours of publication.