Was 2U Inc. Smart in Buying GetSmarter?

2U Inc. (NASDAQ:TWOU) closed its acquisition of online short-course company GetSmarter nearly six months ago. With the integration activities in full swing, the details of how these companies will get along together are being shared. 2U helps colleges and universities deliver their programs digitally. It hosted an investor day on Oct. 5, sharing insight on the reasons behind the GetSmarter acquisition, some quick wins, and positive indicators for the long-term growth potential of the company.

The idea behind the acquisition

2U announced its purchase of GetSmarter in May 2017 for $103 million plus $20 million in potential earnouts based on financial results of 2017 and 2018. The press release covered two key reasons for the purchase.

The acquisition is expected to strengthen 2U's position in the approximately $1.9 trillion global higher education market which is expected to grow approximately 8% in 2017, while accelerating two of the company's key strategic growth initiatives -- expanding internationally and into non-degree alternatives.

GetSmarter is headquartered in South Africa, and gets most of its revenue from non-U.S. sources. 2U's customers are U.S.-based schools and the company is headquartered in Maryland. As part of the acquisition announcement, the online education company published a global map showing the partner schools for each company, which indicated there was no overlap in customers.

GetSmarter serves students in 140 countries. This global customer base gives 2U a chance to provide its current customers exposure to more students around the world.

The second reason for the purchase was driven by the potential for synergistic offerings. The table below shows the complementary nature of the offerings with high retention rates for students.

Metric

2U's Digital Graduate Programs (DGPs)

GetSmarter's Short Courses

Average program length2.2 years9 weeks
Average tuition$70,000-$75,000$1,000-$3,000
Average retention rate82%-84%88% – 90%

With little overlap in customers and offerings, 2U was willing to pay 6.4 times sales to purchase GetSmarter. The deal was closed July 1.

The benefits

There have been a number of quick wins the company has realized in the short time it has been a combined entity. Two immediate ones are more leverage when dealing with social media platforms for advertising and adding a GetSmarter course offering to 2U's Teach.com website. But the biggest short-term win is the being able to leverage 2U's robust analytics engine that optimizes marketing spend.

Four college-age people outside all looking at the screen of a laptop and smiling.

IMAGE SOURCE: GETTY IMAGES.

Longer term, adding short courses to 2U's menu of offerings is the biggest benefit. Many of GetSmarter's short courses are not offered as on-campus alternatives, so these new offerings enable 2U's customers to expand their reach and student base. In the most recent earnings call, in early November, management was asked whether they would add new partners from 2U's current customers or from GetSmarter's pipeline. Chris Paucek, co-founder and CEO said:

Certainly, either are possible. There's a lot out there. The pipeline team is super active. ... [It's] a little tricky for me to tell you which exactly ones they will be, but we have so many coming that I have no doubt there will be more between now and the end of the year.

A "super active" team working on new customers is a good sign for future revenue growth.

A bright future

The company is projecting full-year revenues of around $20 million from short courses. While this revenue is a small contributor today (less than 10% of the overall), the impact on the 2018 projections is notable. 2U expects short course revenue to accelerate in 2018 due to a number of new offerings late in 2017 which brings the overall 2018 growth projection to 38% to 39%, up from 30%. Paucek expressed his confidence in the future pipeline of opportunity during the third-quarter conference call:

But the teams [2U and GetSmarter] are working really well together and one of the places where that's now evident is on the pipeline. ... We feel that the 2U clients will have some announcement soon about 2U clients taking up short courses and vice versa. ... it's early days. But there's no question that when we talk about being a more comprehensive solution for our clients, having a stronger product assortment where why would somebody go to somebody else if we've got both degrees [and] short courses.

Was 2U smart with its acquisition? Given the future growth opportunities of the combined company, I don't think it was smart move -- it was brilliant one.

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