Knowledge Universe, Inc.

2450 4th Street
Santa Monica, California 90401
U.S.A.
Telephone: (650) 549-3200
Fax: (650) 549-3222
Website: http://www.knowledgeu.com

Private Company
Incorporated: 1996
Employees: 14,000
Sales: $1.75 billion (2001 est.)
NAIC: 611110 Elementary and Secondary Schools; 611310 Colleges, Universities and Professional Schools; 611420 Computer Training; 611430 Professional and Management Development Training; 511210 Software Publishers

Knowledge Universe, Inc. (KU) is a holding company for a multinational conglomeration of companies in the field of education and training. KU owns outright or has a stake in some 50 companies in a variety of interconnecting fields. KU owns or invests in companies that operate schools, including Knowledge Learning Corp., a leading operator of daycare centers; Unext, an online college and graduate business school; and Nobel Learning Communities, a network of private schools. KU also owns the British temporary staffing and technology training company Spring Group, and Nextera Enterprises, a business consulting firm. The company owns a majority interest in Leap Frog Enterprises, an educational toy maker based in California that grew rapidly in the late 1990s to become the fourth biggest toy company in the United States. The company also has interests in many online ventures, including TeckCheck, a computer skills assessment program; and Knowledge Kids Network, an online learning and skills assessment program for children aged three through ten. Although the company’s holdings seem diverse, they are held together by what the company calls a “common theme of building human capital.” KU has the potential to present branded, for-profit educational services to people from the age of three on up through middle age. The company was founded by financier Michael Milken, his brother Lowell, and the founder of Oracle Corporation, Larry Ellison.

The Milken Fortune in the 1970s and 1980s

Knowledge Universe, Inc. represents the second act in the drama of former “junk bond king” Michael Milken. Milken grew up in Encino, California, graduated from the University of California at Berkeley in 1968, and then earned an M.B.A. from the Wharton School of Business at the University of Pennsylvania. While already at Wharton, Milken began working at Drexel Burnham & Co. (later Drexel Burnham Lambert), a relatively small New York brokerage. Milken, who had been hailed since early childhood as a mathematical genius, presumably could have done better than the lackluster Drexel. But he had the freedom there to develop his interest in an underutilized area of high finance, what became known as “junk” bonds. Apparently Milken himself originated the pejorative term junk, while preferring to refer to them as “high-yield” bonds. Established and prosperous companies could issue bonds to raise money, and the ratings services, Standard & Poor’s and Moody’s, would grade the bond according to the perceived risk of the investment. The best so-called investment-grade bonds were rated triple A, and those that seemed riskier were given various B ratings. But small companies, young companies, or companies that had fallen on hard times found themselves in a category where their bonds were not worth rating. They were below investment grade, known as “fallen angels” and other terms. Milken turned his attention to the bonds of these troubled companies, finding research that showed that over the long term, these high-risk bonds performed better than a portfolio of investment-grade bonds. Milken built his career around trading junk bonds, which gave much higher returns than the staid paper of America’s elite companies.

Milken’s dedication to junk bonds bordered on the messianic, but he quickly won a number of converts. His managers at Drexel let him run his own high-yield bond department, and keep 35 percent of the profit. Milken soon made millionaires of his bond traders, and sparked a veritable financial revolution. Companies that could not get a foot in the door of established Wall Street banks were able to raise money through Milken at Drexel and then use this for acquisitions. Milken attracted a coterie of entrepreneurial financiers such as Carl Icahn, Victor Posner, and Steve Wynn. In 1978 Milken moved his entire high-yield bond department to Los Angeles, where he could be closer to his family. There he worked from 4:30 in the morning until late at night, developing the possibilities of junk bonds. Junk bonds became instrumental for leveraged buyouts, when an investment group buys up stock in a public company and takes it private. By the mid-1980s junk bonds also became used for hostile takeover transactions. Very small companies, financed with Milken-raised junk bonds, were able to swallow up corporations much larger and more senior. Milken was so well connected and his advice so esteemed that he was able to raise billions of dollars practically overnight to make a deal go through. Drexel Burnham Lambert rose from a languishing, second-tier brokerage to the most powerful force on Wall Street, all due to Milken’s formidable skills. Milken himself had an income in the hundreds of millions of dollars annually by the mid-1980s, more than the revenue of many Fortune 500 companies. He invested in a variety of funds for himself and his family, and he set up several charitable foundations.

Suddenly though, Milken’s world began to come apart in 1986. Financier Ivan Boesky, whom he had helped do many deals, was implicated by the Securities and Exchange Commission (SEC) in a vast ring of insider trading. Boesky, an extravagant and flamboyant man whose Merger Mania was a hit business text of the 1980s, was a big fish for the SEC to catch. But Boesky agreed to cooperate with the investigators in order to lead them to an even bigger fish, Michael Milken. Milken was not convicted of insider trading, but the investigation uncovered systematic irregularities in his bond trading. After a protracted investigation by both the SEC and the U.S. attorney’s office, Milken pleaded guilty to five counts of fraud and market manipulation. In 1990 he was sentenced to ten years in prison.

A Fresh Start in the 1990s

Milken paid the government a fine of $ 1.1 billion as part of his plea agreement. Even so, he remained one of the richest men in the United States. Milken was released from prison in 1993, after serving 22 months. Immediately on his release, he was diagnosed with prostate cancer. So Milken concentrated on his health, and also funded a foundation to find a cure for his disease. By 1996, Milken’s cancer was gone, and he began a new career. Milken had been barred for life from the securities industry, but he was not enjoined from owning a corporation. He and his brother Lowell, along with Larry Ellison, the founder of Oracle, put together $500 million to start a holding company, Knowledge Universe. Ellison was described as a passive partner in the enterprise, which was chaired by Milken and run by Thomas Kalinske, a former CEO of the toy company Mattel. KU’s goal was lofty and far-seeing. It attempted to bring under one roof an array of companies dedicated to education and training. This was not such a strange transition for the former junk bond king. He had been working with Los Angeles youths for years with projects such as his Mike’s Math Club, and his family foundation gave annual awards to outstanding teachers. Education and training was also a huge, fragmented industry. The total market was estimated to be worth around $700 billion annually in the mid-1990s. With widespread dissatisfaction with public schools, a growing need for daycare, and corporations’ thirst for technology-savvy employees, there seemed to be lots of room for growth and improvement. Consequently, Knowledge Universe began buying up companies in all these sectors.

The company’s first purchase was a majority stake in the British firm CRT Corp. in 1996. KU paid $169 million for the firm, which was one of England’s top employment and training firms specializing in information technology. CRT, which later changed its name to Spring Group, thrived under KU’s wing, and saw a tripling of its London-traded stock. Next KU bought an interest in a Florida training company, Productivity Point International Inc. KU acquired the rest of CRT Corp. in 1997, and also bought a technology consulting firm based in Boston for $18 million. KU’s revenue was around $600 million in its first year, and before 1997 was out, the company predicted its revenue would reach $1 billion as it continued to acquire. KU bought Knowledge Adventure, a maker of “edutainment” software in 1997, and took a majority stake in ETC, a subsidiary of Tele-Communications, Inc. (TCI). ETC was a young company that, like KU, had invested in a number of education and technology ventures. It developed training programs for for-profit schools, and had subsidiaries including CareerTrack, Inc., In-genius, and the Academic Systems Corporation. Also that year, KU bought a 16 percent stake in Nobel Education Dynamics for approximately $8 million. Nobel, based in Pennsylvania, ran a string of for-profit schools for kids in grades kindergarten through six.

In the fall of 1997, KU took on a new executive, Joseph Costello, who was to be vice-chairman. Costello had headed the software company Cadence Design Systems, Inc. and built it up to a $700 million firm. Costello quit after three months, and later described to Forbes ASAP (Fall 2001 Supplement) the frenetic atmosphere of KU. On his first day at the company, he told Forbes, Milken “presented me with a list of 40 companies he wanted to acquire,” and asked Costello to look them over. When Milken went ahead with an acquisition Costello frowned on, he left the company. Although people at the company frequently claimed that Milken had little to do with the day-to-day running of KU, Costello and others who had left KU painted a different picture. Knowledge Universe later brought in other top executives from Netscape, AT&T, and Disney. Milken himself had more legal trouble stemming from a deal he had brokered in 1996 for Rupert Murdoch’s News Corporation. In 1998 he paid the SEC a fine of $47 million for having violated his plea agreement.

Company Perspectives:

Knowledge Universe (KU) believes that people and organizations have an almost unlimited power to improve themselves —to realize their own potential. Changes in technology have increased the need for learning, but have also provided new ways to acquire it. In serving the needs of people in what is sometimes called the Knowledge Age, we believe we are addressing some of the major social and business challenges of the 21st century.

KU often seemed to buy with a long view in mind, and not all its purchases were quickly profitable. But the shrewdness of the company’s picks was sometimes immediately evident. Perhaps its best move was taking a half interest (later 86 percent) in Leap Frog Enterprises, a California toy company, in 1997. Leap Frog made interactive books that helped young children master phonics and reading. Sales galloped ahead as the company broadened its product line, from around $10 million at the time of the acquisition to $70 million two years later. By 2000, Leap Frog’s LeapPad was one of the hottest toys on the market. In a similar move geared toward young children, KU bought a chain of for-profit daycare centers in 1998. This was Children’s Discovery Centers, for which the firm paid $80 million. Children’s Discovery Centers owned a chain of almost 200 pre-schools and daycare centers and had recently gone public. KU took the company private again and began investing heavily in the company’s real estate and curriculum, changing the name to Knowledge Beginnings. In another vein, KU also went into business consulting that year, buying up the firm of Gresham T. Brebach, Jr., one of the first partners of Andersen Consulting. The consulting arm then purchased a string of other companies, which were put together under the new name Nextera. KU took Nextera public in 1999.

A Coalescing Conglomerate into the 2000s

By 1999, the young company’s revenue was already about $1.4 billion, and KU showed no signs of slowing its acquisitions run. A profile of Knowledge Universe in Training & Development (July 1999) claimed the company was “growing so fast it can’t keep its brochures up-to-date for more than a month.” That year CEO Kalinske and at least part of the company moved into new offices. Then it started a new subsidiary, Teacher Universe, offering computer training to teachers. At that point the company was divided into six main business areas, most containing several subsidiaries. The Knowledge Enterprises division included the British Spring Group as well as a consulting firm and another company that provided seminars to corporate CEOs. Knowledge Universe Studio oversaw all of the company’s interactive learning business. It included two publishing companies. The Knowledge Universe Training division was made up of one of KU’s very first acquisitions, Productivity Point, which had grown to a chain of technology training and consulting firms. Knowledge Beginnings was the umbrella for the firm’s childcare centers; Knowledge Kids Enterprises took in the successful Leap Frog toy company, and the new start-up Teacher Universe stood alone as its own division. It was a complex organization, but KU held it together with a vision of a lifelong branded learning experience. The company began to talk about a “cradle to grave” product line. One of KU’s competitors praised the company to Training & Development, saying she could not think of “anyone else in the market right now that’s better positioned to really approach learning from kindergarten through retirement.” CEO Kalinske, in the Forbes ASAP article cited earlier, spoke speculatively about the future of the company: “A child plays with Leap Frog, then moves on to KU software in school, then takes an SAT prep course from KU.” This did not quite take KU consumers to death’s door, but it indicated the plausible reach of the vast company.

By 2001 the company had some 14,000 employees scattered among close to 50 subsidiaries, divisions, or part-interests. Some were visible successes, some not, and some were still getting going. The company took Nextera, a consulting firm and expert witness provider, public in 1999 only to see its shares tank a year later. Nextera cut 15 percent of its workforce and retrenched under new management. Leap Frog, the toy company in which KU had a majority stake, also sold stock to the public, debuting on the New York Stock Exchange in late 2002. Despite a general slowdown in toy sales and less than stellar expectations for new initial public offerings, Leap Frog did extremely well. Its toys had become quite popular, and it found itself the fourth largest toy company in the United States, behind the giants Mattel, Hasbro, and Lego. KU made another interesting move in 2003, combining its subsidiary YaYa, LLC with a part interest in a public company called American Vantage Companies to make a new subsidiary called Gamze Inc. YaYa specialized in corporate communications, and had developed a combination of advertising and games it called “ad-vergames.” Presumably the new KU Gamze subsidiary would continue to develop this novel approach in what a KU spokesperson called a rapidly growing industry.

Principal Subsidiaries

Spring Group pic; Knowledge Learning Corp.; Nextera Enterprises, Inc.; LeapFrog Enterprises, Inc. (86%); Unext, Inc.; kl2; Productivity Point International Inc.; TEC Worldwide; Knowledge Planet.

Principal Divisions

Knowledge Universe Business Group; Knowledge Universe Learning Group.

Principal Competitors

Bain Capital, LLC; Internet Capital Group, Inc.; Scholastic Corporation; Microsoft Corporation; Gores Technology Group; Electronic Arts Inc.

Key Dates:

1996:

Larry Ellison and Michael and Lowell Milken found the firm with $500 million.

1997:

The company invests in Leap Frog, Nobel Education.

1998:

The company buys a chain of for-profit childcare centers.

1999:

The Nextera subsidiary goes public.

2002:

Leap Frog goes public.

Further Reading

Baker, Russ, “The Education of Mike Milken,” Nation, May 3, 1999, p. 11.

Bradshaw, Delia, “Mission to Invest in Internet Education,” Financial Times, October 23, 2000, p. 2.

Bransten, Lisa, “Something Ventured,” Wall Street Journal, March 12, 2001, p. R8.

Brück, Connie, The Predators ’ Ball: The Junk-Bond Raiders and the Man Who Staked Them, New York: American Lawyer/Simon & Schuster, 1988.

Burrows, Peter, “Mike Milken’s Vision Thing,” Business Week, February 9, 1998, p. 6.

Carlsen, Clifford, “New Owners Let Child-Care Firm Go Out and Play,” San Francisco Business Times, June 26, 1998, p. 3.

Costello, Joe, “From Cadence to Limbo and Back,” Electronic News, February 9, 1998, p. 12.

Galagan, Patricia, “Bullet Train,” Training & Development, July 1999, p. 22.

Kasindorf, Jeanie Russell, “What to Make of Mike,” Fortune, September 30, 1996, pp. 86-96.

Lyons, Dan, “Milken-Led Group Invests Heavily in Service Companies,” Computer Reseller News, October 20, 1997, p. 1.

Martin, Justin, “Lifelong Learning Spells Earnings,” Fortune, July 6, 1998, p. 197.

Morris, Kathleen, and Lisa Sanders, “Professor Milken’s Lesson Plan,” Business Week, August 4, 1997, p. 32.

Paikert, Charles, “TCI Sells ETC Division to Secretive Group,” Multichannel News, September 29, 1997, p. 18.

Pizzo, Stephen P., “Master of the Knowledge Universe,” Forbes ASAP, Fall 2001 Supplement, p. 64.

Sanders, Lisa, and Kathleen Morris, “A New Universe for Milken to Master,” Business Week, April 28, 1997, p. 4.

Sandler, Linda, “Milken Builds a New Empire in Education,” Wall Street Journal, May 15, 1998, pp. Cl-2.

Savitz, Eric J., “Professor Milken,” Barron’s, April 27, 1998, p. 13.

Schellhardt, Timothy D., “Milken, Ellison Make Another Acquisition in Consulting Field,” Wall Street Journal, September 9, 1998, pp. A3, A10.

Sherrid, Pamela, “A Piece of Michael Milken,” U.S. News & World Report, April 5, 1999, p. 47.

Stewart, James, Den of Thieves, New York: Simon & Schuster, 1991.

Takahashi, Dean, “Cadence’s Costello Steps Down As CEO to Join Tech Firm,” Wall Street Journal, October 21, 1997, p. B4.

Wyatt, Edward, “Investors See Room for Profit in the Demand for Education,” New York Times, November 4, 1997, pp. Al, A27.

—A. Woodward