By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
By Eric Nicholson
"There's no history of an enterprise that's made money on [for-profit management]," says Henry Levin, the Teachers College economist. Like Gremlins under a sprinkler hose, however, Edison and its imitators continue to multiply. Edison is simply the largest and most visible of about 15 Education Management Organizations (EMOs), a term coined by investors eager to carve up education the same way they chopped up health care in the 1990s. Other for-profits include Advantage Schools (which has four charter schools in Texas, including Dallas' Advantage Charter School) and Beacon Educational Management.
Wall Street's titans have accepted as gospel the notion that public education is a complete failure and cannot be told otherwise. Leading the charge to break up the public school "monopoly" is the global financial services firm Merrill Lynch. "Bringing market forces to schools such as competition, choice and capitalism are at the center of the inevitable change in how education is delivered in America," declares The Book of Knowledge, an influential report the firm released last year.
Merrill Lynch predicts EMOs will account for 10 percent of the $360 million K-12 school market in 10 years, a market share of $30 million. But where will Wall Street -- and Edison -- extract its needed profits? About 7 percent is needed to pacify investors, and while discounted computers, lower food costs, and online learning technology are all seen as profit centers, action to cut large, wasteful school bureaucracies is seen as the surest way to get returns.
"Approximately 50 percent of school budgets are spent on regular classroom instruction," says the report, which lists no source for the factoid. "No service business in the world could exist where 50 percent of every dollar is spent outside where the service is being rendered."
Edison officials are more generous to public schools than their benefactor Merrill Lynch. In a 1998 interview with Across the Board, a business journal, Edison executive John Chubb estimated that 66 percent of school funding was spent in actual schools. "We spend roughly 80 percent of every dollar at the school site instead of 66 cents," says Chubb, whose 1990 book Politics, Markets and America's Schools energized privatization advocates.
But what if school districts are not as bureaucratic as their critics insist? Some Edison critics say that's simply the truth.
"The public is misguided about the nature of public school administration," says CSCE's Morales. "School districts are not sitting back on layers and layers of fat." (DISD's bulging bureaucracy may be an exception: In August, Bill Rojas added six DISD administrators at record salaries of up to $175,000.)
Richard Rothstein, an education analyst with the Washington-based Economic Policy Institute, argues that Chubb's figures are wrong because they count employee-benefit costs as an off-site expense, when they are really a school-site expense. Move the benefit costs over a column, Rothstein says, and the share of spending at the school site jumps from 66 percent to 90 percent.
He doubts Edison will ever achieve profits because of education's labor-intensive nature, and thinks the company's young teaching staffs will contribute to part of its undoing. "When those teachers age," Rothstein asks, "are they going to be content with low salaries?"
Edison has also drawn heckles for taking donations from right-wing nonprofits. The company refused to manage schools in California because of the state's low per-pupil spending until the family foundation of Don Fisher, founder of the Gap clothing chain, pledged $25 million -- or $1.3 million for each school -- to make California worth Edison's time.
Meanwhile, Edison's stock tumbles. For its Initial Public Offering on November 8, Edison hoped to net as much as $172.5 million by valuing its stock at $21 to $23 a share. The market had other plans. Edison settled with a disappointing $122 million and an $18 share price, which has since fallen in value more than 20 percent to around $14 (most IPOs go up in this bull market, not down).
Before the IPO, the business press sounded an alert. "Take in $215 million and lose $326 million -- and there's not even a dot-com in the name to blame it all on," quipped financial journalist Christopher Byron in an article on TheStreet.com Web site last August. "The deal's a dog, and the only investors who stand to come out ahead in it will be wily Whittle and his boola-boola buddy, Benno Schmidt."
Likewise, a September article by BusinessWeek's Diane Brady cited as liabilities the lavish salaries of Whittle and Schmidt and millions in sweetheart loans and stock-option deals extended by the company to its two leaders. Both Whittle and Schmidt make $296,636 a year -- far more than any public-school educator -- while Schmidt's contract allows him to pocket two years of salary and a bonus $2.5 million if he gets canned. Schmidt also took a $1.8 million low-interest loan from Edison, while Whittle will receive a $5.6 million loan to buy Edison stock.
Thus, Brady says, it's likely both Schmidt and Whittle will walk off with millions, even if investors are left holding the bag. "The deal deserves to flunk," she concluded.
Despite the ominous signs, Wall Street continues to embrace Edison. A prestigious line of investment firms, including Merrill Lynch, J.P. Morgan Securities Inc., and CS First Boston Corp., underwrote the offering and issued "buy" recommendations, bringing conflicts of interest to new levels. The firms promise big gains when Edison unveils new contracts this spring.