RM is in the midst of a perfect storm –a plummeting share price (down almost 13% at lunchtime today), falling sales, downgraded forecasts, savagely cost cutting, a weak currency and a management admission that,’ shareholders should anticipate a potentially difficult and unpredictable period in the near term’. Add to this mix the growing chaos on international stock markets and you have an extremely volatile situation with two interlinked scenarios.
In the first you have a mini doomsday scenario, where frightened institutional investors, whose understanding of the education sector is generally pretty unsophisticated (at best), have been dumping RM’s shares thereby creating negative sentiment which is likely to drive the price down further. Such mob mentality is the fodder for short sellers, who are likely to be the only ones to have done well from RM recently.
Next is the interesting bit. Education is an increasingly global market, which has for several years been attracting interest from companies, institutional investors and private equity funds. These range from Capita, APAX, Apollo Group, Pearson and News Corp. to EDUCOMP, Cox & Kings, Blackstone, the Carlyle Group and even the Ontario Teachers’ Pension Plan (who have $110bn in funds under management and their own private equity arm Teacher’s Private Capital).
These entities all share several common attributes; an international orientation, a long-term investment perspective (buy and build) and the financial capacity to do large deals without unduly worrying investors (or members). In short they are market makers at a time when RM is a market taker.
My view is that RM has been a takeover target for some time. They’re cheap (and getting cheaper) so it’s a matter of when not if a bid happens. Add all of this together along with the rumours that have been circulating in the market for some time, and my conclusion is that Pearson is not just a potential suitor, but that they may well have been working (in secret) on a takeover for some time. Still not convinced, then consider these signs that I think make my hypothesis even stronger:
- Profits at Pearson’s education division are up 30% to 135m, with particularly strong performance from their International Education Division inc. Wall Street English, TutorVista, CTI, SEB (Brazil) and Melorio
- Pearson have access to capital for investment, indeed there may be money left over from the $2bn sale of Interactive Data Corporation in 2010
- Pearson’s management have a strong business intelligence programme and will be well aware of the strengths and weaknesses of RM’s products and services
- RM’s assessment business and some of their content divisions would be good fits for Pearson; they might even keep TTS (as it’s performing fantastically)
To test the rumour I put in calls to the press offices of both RM and Pearson at about 10.30am. At 11.50 AM a spokesman from Pearson’s Press office called and said, ‘we decline to comment and as a company never comment on any rumours’. Fast, succinct and highly professional, exactly what I expect from such a large company. RM, on the other hand have yet to reply, and the lack of activity in their press office makes me wonder (and investors worry) whether their senior management team is ‘away for the school holidays’?
If Pearson announce a bid (as I think they eventually will), this may well flush a rival bid(s) from some like Capita, but whatever happens the next few months will be interesting ones for RM and their investors. Remember where you read it first!