May 3, 1999
The Education of Mike Milken
From Junk-Bond King to Master of the Knowledge Universe
See below for background and related information.
by RUSS BAKER
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"'Gotta go to Moraga!' That's what everybody says," notes a visitor to the Oz-like place where the American educational revolution is being plotted: "That's the code word for going to the mountain." In truth, "Moraga" is a three-story building on a cul-de-sac of that name in the hills above the exclusive Los Angeles enclave of Bel Air. Moraga is near the haciendas and sprawling glass palaces of the men whom Michael Milken and his junk-bond wizardry transformed from a band of small-time entrepreneurs into kingpins of global commerce and technology. Few of those billionaires could have imagined that just three years after leaving a minimum-security prison near San Francisco, where he served twenty-two months for fraud, rigging securities prices and other felonies, Milken would have engineered a comeback as the putative Bill Gates of the untapped gold mine known as American education.
In 1996 a $500 million pot from Milken (who paid the Feds a $1.1 billion fine as part of his plea bargain but remained one of America's richest men), his brother Lowell and Oracle Corporation chief executive Larry Ellison launched Knowledge Universe (KU), a holding company for an impressive transnational array of enterprises in the business of training human minds. While Milken operates from Los Angeles, the president, Tom Kalinske, a former head of Mattel and Sega, ostensibly runs the firm from Northern California, and 9,500 employees are scattered around the US and Great Britain in various operating entities.
The former Junk Bond King is positioning himself as a sort of Sam Walton of gray matter, offering Americans one-stop shopping for smarts from their diaper days to emeritus rank. Milken's company, with annual revenues of $1.2 billion, has bought or purchased stakes in everything from Children's Discovery Centers (CDC, also known as Knowledge Beginnings), the nation's sixth-largest preschool company, with 25,000 toddlers in nearly 300 locations across the United States; to Spring, Britain's largest vocational-training firm. KU owns or has invested in more than a dozen companies involved in computer training, proficiency testing, educational toys, strategic consulting and CEO training, as well as private, for-profit schools (nearly 400 at last count, ranging from preschool to secondary).
From a business standpoint, the education industry is certainly tempting: As a $600-billion-and-growing market, it is larger than either the military budget or Social Security. Like healthcare a few decades ago, it is dominated by government and nonprofits, and it is the target of sustained (and sometimes justified) attacks for inefficiency and failure. Milken's for-profit ventures are only the most ambitious of a number of aggressive capitalist incursions into the once-gentle confines of service-oriented pedagogy. And they've captured Wall Street's attention. Stock prices of two competitors, DeVry of Chicago and Baltimore-based Sylvan Learning Systems, which both provide a cafeteria line of educational technology and services, have almost tripled over the past three years. CBT Systems, a provider of business-training software and a subsidiary of another KU competitor, CBT Group, went public in 1995 at $16 a share and, had it not split, would have a stock value of more than $200 today. Even household names like Sun Microsystems, Microsoft, Oracle, Apple, Sony and the Washington Post Company are getting in on the racket, investing millions in education-related enterprises. "It's absolutely an exciting time to be involved in this industry," notes Michael Moe, an analyst with Merrill Lynch who specializes in education securities. Moe estimates that the for-profit component of the US education and training industry was $70 billion in 1998, and that it will grow at 13 percent annually for the next few years.
In the most traditional area of education--preschool, K-12 and college--Milken is a for-profit player. He has a minority stake, likely to become a majority, in Nobel Education Dynamics, a Pennsylvania company that runs 139 schools in thirteen states. He plays a role in the for-profit early-childhood field through CDC and is an investor in the startup online Knowledge University and the Internet education company UNEXT.com. The business of for-profit schools has a mixed record, in both financial and educational terms, but it continues to expand: The "virtual" University of Phoenix is now the fastest-growing and largest provider of higher education for working adults in the country, with more than 60,000 students. The Edison Project, founded with great fanfare by former Yale University president Benno Schmidt and new-media entrepreneur Chris Whittle in 1991, is avidly seeking contracts to manage public charter schools. It now has fifty-one under its control, though it has yet to turn a profit.
Companies like Milken's are not just competitors with public schools; they are poised to supplement the traditional classroom, viewing public and nonprofit educational institutions--as well as for-profit firms--as both potential customers and avenues to a vast consumer base. What distinguishes much of the capital now pouring into education is that it is linking the previously sacrosanct domain of the classroom with more conventionally business-dominated information spheres. With its array of holdings in software, corporate consulting and educational service companies, Milken's Knowledge Universe perhaps best exemplifies this trend, but it can also be discerned in the strategy behind KU's closest rival, Sylvan, which had 1998 earnings of $36 million on revenues of $440 million. It is as ambitious as KU, with holdings in testing preparation and administration, teacher education, English-language training, long-distance learning and college-level study abroad. Sylvan insists it isn't out to supplant public and nonprofit schools, but to complement them.
As noted in books such as Robert Reich's The Work of Nations and Jeremy Rifkin's The End of Work, changes in the economy have raised the stakes considerably. Many economists contend that knowledge is increasingly the commodity that determines economic success and failure. A 1997 Education Department study showed that college graduates who participated in additional training from the beginning of their employment earned an average of $601 per week, compared with $461 for those who did not. Among everyone from preschoolers' nervous parents to older workers fearful of being overtaken by better-trained youngsters to firms struggling to retain a competitive work force, the demand for superior technical knowledge grows steadily in tandem with the fear of falling behind. This has become the new conventional economic wisdom, justifying everything from federal investment in education and training at the expense of job-creating economic stimulus packages to massive private capital flows into the burgeoning field of creating and disseminating information.
As Milken asked rhetorically in a rare interview with the Los Angeles Times, "What type of world are we living in?" He offered his own answer: "One where intellectual capital is the most valuable component." And if he has his way, it will soon be a world controlled to a large extent by educational conglomerates like his. Even if Milken's most direct impact is within the for-profit education sector, the effect of his range of investments on public schools could be profound. Not only are public schools purchasing KU's educational products but they are watching Milken's schools closely, both as a potential model and as a competitive threat.
Thanks in part to Milken's fanatical secrecy, his flurry of acquisitions has received remarkably little public attention. Even Benno Schmidt of the Edison Project oddly pleads ignorance of the Milken for-profit operations. Instead, Milken is widely hailed in the press as a philanthropist, noted for his work in educational and other nonprofits. Long before he began cobbling together an eclectic array of "knowledge" businesses--and even before the law got to him--he was establishing himself as a significant force through his giving. In the early eighties the Milken Family Foundation National Educator Awards were established, and by 1987 Milken was doling out cash prizes to promising teachers and administrators. The awards bestow $25,000 checks annually on "the best" teachers and administrators; 1,330 educators--many widely admired as progressive innovators--have been awarded thus far with nearly $30 million of Milken's money. Milken began another charity, the Milken Scholar's Program (which offers financial aid to selected high school students entering college), in 1989 while he was facing prosecution that would land him in prison. He also dreamed up Mike's Math Club, a concept through which he (himself a product of public schools), and now hired staff, would land their sleighs in inner-city schools to dispense fun and accessible math lessons. Towering over Milken's charitable efforts is his well-publicized $25 million search for a cure for prostate cancer. (He survived a bout in the early nineties, and pumps millions a year into research, besides donating proceeds from his low-fat cookbook.)
Two nonprofit entities, the Milken Family Foundation and a think tank called the Milken Institute, founded in 1991, operate from offices on a palm-tree-lined avenue in Santa Monica, several miles from Moraga. Milken, who was rumored to be frustrated with the institute because of its scholarly remove from the worlds of politics and business, hosted the second of his Milken Institute Global Conferences at the Beverly Hilton Hotel (site of Milken's Predator's Balls in the eighties) in early March. Nobel laureates such as economist Gary Becker mingled with California Governor Gray Davis, controversial Russian oligarch Boris Berezovsky and high-level reps from Goldman Sachs and OppenheimerFunds, ruminating on the future of the world economy. The Milken Institute Review was recently relaunched with former New York Times columnist Peter Passell as editor; Passell's debut issue features contributors ranging from MIT economist Paul Krugman to former Fed governor and George W. Bush adviser Larry Lindsey. Milken himself contributed an article in which he identifies "intangible assets such as human capital, management information systems, software and digital distribution systems"--all on KU's acquisition list--as the key features of today's marketplace.
Former associates say Milken is obsessed with discouraging cynical speculation about links between his for-profit and not-for-profit orbits. A notoriously covert operator in his Wall Street heyday, Milken today has an extra incentive to keep an arm's distance from the details of his for-profit educational ventures: Following his conviction in 1990 he was permanently barred from brokering financial deals. Because Knowledge Universe is a holding company, not an investment firm, and because Milken is a founder and part-owner rather than executive, he is somewhat insulated from such accusations. However, the post-prison Milken has succumbed once to the lure of filthy lucre: In 1998 he admitted to improperly acting as a broker in a deal involving MCI and Rupert Murdoch's News Corporation, coughing up a $47 million fine.
If you believe his personal spokesman, Geoffrey Moore (who doubles as a senior vice president at Knowledge Universe), Milken is basically a full-time philanthropist: "He doesn't have time for interviews; he's too busy saving lives." During a recent TV appearance, Milken dodged Charlie Rose's attempts to discuss anything but his charity work. Moore insists that Milken is just "an investor" in the myriad educational ventures controlled from Moraga. Not so, say insiders, who contend that Milken is the same old business junkie he was at Drexel Burnham Lambert, where he was always at his desk by 4:30 am. "He does it full time, day in, day out," says Joseph Costello, a former Knowledge Universe CEO. "Every day of the week. Forget weekends, holidays. 'Cause that's his life. That's his art."
Milken's brother Lowell ostensibly runs the philanthropic ventures, but it's hard to separate the outfits entirely since the brothers are veritable Siamese twins. "They've been partners in all these things," says Columbia University Teachers College president Arthur Levine, who has followed Milken's attempts at educational reform and innovation closely. "Talking to them, they're almost interchangeable." Throughout his Wall Street career, Milken relied on Lowell, a lawyer by training, to handle both his personal investments and the structuring of tax shelters (Milken cut a deal with prosecutors whereby he took the heat for himself and his brother). "His brother is in with him on all ventures," says Joseph Carrabino, a former president of the California State Board of Education, who served on the faculty of UCLA's Graduate School of Business with Milken and knows both brothers. "He's like his alter ego."
Intellectual Venture Capital
In three years, the privately held Knowledge Universe has risen to 150 on the Forbes Private 500, and, at $1.2 billion, it is twice the size of its competitor KinderCare, an education company majority-owned by an affiliate of legendary buyout firm Kohlberg Kravis Roberts. According to former Knowledge Universe CEO Costello, he and Milken divided education into several main areas: K-12, business training and continuing education (including community college and professional certification). In the United States, they estimated, K-12 is worth a whopping $250 billion and business education some $70 billion, with continuing education falling somewhere in between.
The diminutive, workaholic Milken declined a Nation interview request, but the magazine was able to speak with four people who have worked inside Milken's coalescing business empire and with a number of outsiders who have dealt with him. Most question whether he's as suited--by temperament or inclination--to the task of educational reform as he is to the financial horse-trading that characterizes his for-profit company. "He's like an addicted shopper," says Costello, who left Knowledge Universe in early 1998 over strategic differences. "They told us to buy absolutely everything that was possibly buyable in the education world," says another former staffer, who requested anonymity, noting that some former associates have been threatened with lawsuits for talking to outsiders. Milken defined education broadly, and has spoken of a "cradle to grave" role in forming the human mind. He tried to buy Simon & Schuster's textbook division and saw gold in daycare, children's toys, curriculum creation, textbook publishing, charter-type school management and, for businesses, in offering everything from information technology training to courses on sexual harassment.
Milken is following the example of large toy companies like Hasbro by swallowing up promising small firms whose products can be sold to classrooms. In 1997 Milken bought LeapFrog, an Emeryville, California-based maker of award-winning toy products such as The Book Wizard (a child points a "magical pen" at this interactive book to hear the story). LeapFrog books are provided to reading centers courtesy of the nonprofit Riordan Foundation, established by LA Mayor Richard Riordan, a close pal of Milken's. Another KU unit, Reston, Virginia-based MindQ Publishing, also markets classroom-oriented software.
Milken has talked of dominating legal training and college prep courses, according to former insiders, and grandiosely pondered taking positions in media companies, themselves on the outer reaches of the knowledge universe. Costello thought Milken was out of control, wanting to go in too many different directions at once. "They'd look at these giant things, doing some kind of a leveraged buyout of temp agencies," recalls Costello. "They were all over the map." Knowledge University, Milken's version of an online institution of higher learning, is one of KU's most prominent flops. An idea that promised Internet courses taught by the nation's top professors, it has yet to open its virtual doors. The "University" now lies in disrepair in the hands of a Chicago consulting firm, from which KU has retreated to a minority stake.
Costello, considered a golden boy for his ten-year tenure at Cadence Systems, which during his reign became the world's leading supplier of electronic-design-automation software, argued for a strategy targeting modes of education best equipped to address anticipated changes in society. Milken's vision, by contrast, encompassed both innovative educational products and services and more conventional ones. For example, Milken wanted to put $100 million into buying existing language-training companies. "I said, Jesus, why buy an old dog for a hundred million bucks?" Costello recalls. Instead, he urged spending $10-$20 million to create a new model for language training. Costello, who continues to admire Milken in many respects, left after two and a half months of working with him.
In fact, Milken seems most successful when he is not reinventing the wheel but buying existing businesses in hot categories, and then doing whatever it takes to pump up the company's value--such as offering educational "breakthroughs" like jump-starting the sandbox set with early math and language training. Still, many KU holdings remain volatile, making it difficult to predict whether Milken will realize his expansive business aims. A case in point is KU's Nextera Enterprises, a 600-employee consulting arm offering corporate strategy planning and personnel development, which grew a whopping 745 percent last year but showed a net loss of $1.6 million. Two competitors, CBT Group and Learning Tree, have three times the sales. But perhaps the most interesting thing about Nextera, which is being spun off as a public company, is the direction it is taking and what that may say about Milken's broad definition of education and about his values. Nextera recently bought Lexecon Inc., which dispatches economics and law professors to assist companies accused of wrongdoing. For example, Lexecon expert witnesses trooped into courtrooms on behalf of handgun manufacturers facing liability suits and helped Merrill Lynch executives weather scrutiny of their role in the bankrupting of Orange County.
Where Do You Want to Go Today?
Arthur Levine of Columbia's Teachers College has spent as much time as anyone talking with Milken and has a strong sense of why Milken casts his net so widely. "We're seeing publishers, television, museums, libraries, universities--all of them are in the knowledge business and what they're all doing right now is beginning to produce the same products.... Suddenly what we have is a brand-new world in which Michael Milken is probably the most visible of all the entrepreneurs. Does one worry? Of course one worries."
Milken is perhaps uniquely equipped to play the game of leveraging assets and promoting synergy. He pushed through the conventional Wall Street firewalls, working not just as a broker on behalf of bond issuers but also as a middleman for the buyers. And he constantly linked his clients, pushing every possible opportunity for one component to ignite income opportunities in another. It's not unlikely that Milken will see synergistic opportunities with many of the corporate titans he helped enrich during the seventies and eighties--people like Rupert Murdoch and Ted Turner, and companies like MCI, TCI and Time Warner. The conceivable possibilities for incorporating their products (from Sports Illustrated to The Simpsons) into education are endless: Imagine, for instance, a line of "Homer does Homework" products. The trend is already here: Chris Whittle's Channel One introduced advertising into public schools in 1989. Dozens of schools are now allowing for-profit companies access to elementary students for focus groups in return for computers, and the widespread use of Nike and other brand names in math textbook problems has prompted angry parents to lobby for bans.
One good thing that can be said about Milken is that he's not likely to be pushing any philosophical obsession on his students. He has put forth a few modest ideas, including the notion that preschoolers are ready to dip into foreign languages and preliminary algebra; he also envisions using classroom technology to deliver national-standard educational lessons. And he thinks that the sort of incentives that work well in business will produce higher-quality education. But if his Wall Street reign is any guide, the game is not about a particular political ideology but about finding assets that are undervalued, then structuring them in such a way that value is generated and investors make money.
Still, even Milken is not above a little editorial control. Would he allow a Milken School to assess the go-go eighties critically? "Absolutely not," says a former colleague. Such concerns seem borne out in a book produced by a Milken-backed publishing house, Knowledge Exchange. Its Business Encyclopedia approvingly cites Milken's role in the junk-bond market without mentioning the economic and social devastation associated with it. Of the bonds, it declares, "Though considered to be highly controversial, high-yield securities have emerged as an important investment category as well as a critical source of financing for growing companies."
Educators worry that if curriculum and the tools of teaching (let alone schools themselves) are controlled by conglomerates like Milken's, many of the virtues of public education will be lost. Roger Bowen, president of the State University of New York at New Paltz and an advocate for public schools, says that people like Milken "forget that one of the best outcomes of 'traditional' education is improved socialization and civic values. Techno-educators seem altogether indifferent to building a stronger democratic society." And when the emphasis is on selling a certain vision of the future--one that is intimately linked to the prosperity of private firms in the knowledge business--the welfare of students may well get short shrift. Indeed, there are no reliable studies demonstrating that technology can actually improve educational performance in the trenches of America's public schools. "No doubt, some solitary souls and antisocial types thrive using new learning technologies; and there is plenty of evidence that the television generation adores the computer screen," says Bowen. "But the mere conveyance of information, which computers do quite well, is only a small part of what the educational process should be."
The best hope for preventing the debasement of education as just another corporate product may lie in public control over curriculum. "One of the things that may happen is we may see more states dictating curricular content...and demanding accountability standards in these profit-making schools," says Levine. At the moment, very few do. California, with the largest total number of students, doesn't even license K-12 schools, according to Carolyn Pirillo, deputy general counsel for the California Education Department: "We stipulate branches of study [English, history and the like] but I'm sure nobody has tried to enforce [even] this content on private schools, and I'm not sure what would happen if we did." A school could offer health classes that sing the praises of Twinkies, Ho-Hos and Ding-Dongs for building strong bodies--with nary a worry.
On one level, it is unsettling even to contemplate that the business of education--from software to SAT prep courses to employee training--may lie in the hands of a man who became infamous by helping financiers take over and gut companies, throwing thousands out of work and producing nothing but payoffs for investors. As James Stewart argued in Den of Thieves, Milken's reign served as a catalyst for extensive layoffs and economic recession. Would he blanch at making "surplus" teachers "redundant"? Or at maximizing profits by underpaying labor? "Education is labor intensive if it is done well," says Bowen. "Simpletons who argue that education can be made 'cost-effective' by relying more on learning technologies are seldom educators themselves. The corporatization of American education results in techno-educators getting the ear of education-bashers who are eager to prove more comes from less." Indeed, two recent studies have documented that for-profit schools in Arizona and Michigan have slashed teacher salaries, special-ed services--and transportation for students, which has increased racial segregation in schools.
The dirty little not-very-secret is that educational establishments, which still shape our society more than any other institutions, are being turned over to those who see life as one giant Risk board. Progressive educators may win the battle to halt the full-scale privatization of our schools; nearly 90 percent of American children are still educated in public schools. But if we lose sight of the war for control over their content, the future may belong not to teachers and students but to the new proprietors of knowledge--corporate executives and investors. Surely, too, judging education based on measurable "improvements," which corporations love to do in flogging their whiter whites and wider seats, has its nefarious side. Will it come down to how schools market themselves rather than how well kids learn and what they learn? Will students even be permitted, for example, to see the negative consequences of unfettered greed? In an era when even our most basic public institutions are being shaped by financial interests, defending these core principles has become an increasingly important struggle.
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The New York-based journalist Russ Baker is a longtime Nation contributor. Research assistance was provided by David Levinson Wilk. For more information, go to www.thenation.com.