UA System trustees narrowly vote down potential affiliation with University of Phoenix

Trustee who last week spoke in favor of proposal abstains

A billboard for the University of Phoenix (top) and a snow-covered sign for the University of Arkansas, Fayetteville are shown in these file photos. The billboard is shown in Chandler, Ariz., on Nov. 24, 2009, while the Arkansas sign is shown at the Fred W. Smith Football Center on the school's Fayetteville campus on Dec. 6, 2013. (Top, AP/Matt York; bottom, NWA Democrat-Gazette/David Gottschalk)
A billboard for the University of Phoenix (top) and a snow-covered sign for the University of Arkansas, Fayetteville are shown in these file photos. The billboard is shown in Chandler, Ariz., on Nov. 24, 2009, while the Arkansas sign is shown at the Fred W. Smith Football Center on the school's Fayetteville campus on Dec. 6, 2013. (Top, AP/Matt York; bottom, NWA Democrat-Gazette/David Gottschalk)

The University of Arkansas System board of trustees declined to give their blessing to a potential affiliation between the system and the University of Phoenix during a special Zoom meeting Monday -- albeit with a narrow majority, as five members voted against, four voted in favor, and Trustee Kelly Eichler abstained.

Chairman Morril Harriman, vice chairman Sheffield Nelson, and Trustees Tommy Boyer, Steve Cox and Kevin Crass voted against a resolution of support for an affiliation between Transformative Education Services (TES) Inc./the University of Phoenix and the University of Arkansas System. Trustees Ted Dickey, Ed Fryar, Col. Nate Todd and Jeremy Wilson supported it.

Eichler abstained, which Harriman said was her decision, and she did not offer any comments during Monday's meeting -- nor did she specify a reason for abstaining from voting -- although she did express support for an affiliation that was poised to provide $20 million annually for the UA System during a special meeting last week.

"We are looking at a real funding issue coming up" as traditional, face-to-face enrollment declines, and "the state is not going to give us any more money," Eichler said last week. "Online education is here to stay, and we're going to have to get into this realm."

Though Phoenix has made mistakes in the past, particularly with recruiting and marketing, new leadership has instilled a new culture and attitude, she added. An affiliation with Phoenix "seems like a lifeline to us."

Eichler's husband is an executive at Stephens Inc., which has performed a due diligence study on the proposed agreement and would have been paid up to $1.65 million -- perhaps more, depending on the final value of the deal -- for its work on the proposed purchase of Phoenix.

Fryar said Monday the UA System could, perhaps, have been in line for even more than $20 million annually because of the cash flow Phoenix generates, and he likened passing on the deal to Little Rock losing out to Memphis to become the home of FedEx in the 1970s.

"This is a FedEx moment," he said.

Last week, Dickey also drew a parallel between this potential agreement and another infamous business decision: Blockbuster declining to purchase Netflix when it had the opportunity a couple of decades ago.

"If we're not willing to disrupt our own business, someone else" will, Dickey noted. An affiliation with Phoenix would help the UA System appeal to a new audience and create cash flow, the latter of which could address deferred maintenance needs and possibly avoid tuition increases, he said.

"This is a sustainable model," Dickey said. "Raising tuition every year is a broken, nonsustainable model."

Wilson said last week he agreed with Dickey, and he reaffirmed that position Monday.

"This is a conversation about growth," Wilson said last week. A healthy organism "has to grow over time," and this deal is a "well-thought-out, reasoned approach to allow our system as a whole to continue to grow."

While Todd didn't verbally support or denounce the potential agreement last week, he spoke in favor of it Monday, noting he appreciates the "strategic" opportunities of such a partnership for the UA System.

"There is always risk, but this is 'moderate' to 'low' risk," and a 10-year affiliation agreement would be "appropriate," he said. He wants the UA System "engaged in this space" of online education, because that's the direction higher education is moving as traditional enrollment falls, and the technology and platform of Phoenix could help the UA System deliver educational content with "Arkansas values" to Arkansans and non-Arkansans alike.

As he did last week, Crass again applauded UA System President Donald Bobbitt and his team for exploring new possible partnerships that could bring new revenue streams, and said he considered the proposal with "an open mind," but couldn't support it because of the lack of control for the UA System. He also was given "pause" by being asked to "take a leap of faith" regarding various financial figures in the proposed deal without seeing the full report by Stephens.

The UA System could not buy Phoenix, because it has nowhere near the capital, and the state constitution prevents public institutions from using public money for private financing, but TES was created last year to potentially purchase Phoenix. Because the UA System would only be affiliated with Phoenix, not owning or controlling it, the system would not have any legal or financial responsibilities should, hypothetically, Phoenix face a lawsuit.

Like Crass, Harriman said he respected the "time, work and effort" put forth on this proposal by "top professionals," but was "concerned" the UA System would have no control or governance of Phoenix. He added that he was concerned about partnering the system with Phoenix.

Nelson lambasted Phoenix on Monday, saying it has a "terrible reputation" and that he has received myriad phone calls from those inside and outside the education realm advising against any affiliation with Phoenix.

It's "a mess we don't need to get our feet in," Nelson said.

The close vote Monday was no surprise, as the board appeared divided over the potential agreement during last week's special meeting, with roughly half speaking in favor and half opposed.

POSSIBLE BENEFITS

Under the proposal, Arkansas nonprofit TES would purchase Phoenix -- estimates are that price could be around $500 million -- and the UA System would enter into an affiliation and licensing agreement with Phoenix that would've provided $20 million annually to the system. The system also would've had the opportunity to access technology, content and course management, and data analytics of Phoenix, while Phoenix would've gained an affiliation with the system and transitioned from for-profit to nonprofit status.

TES would have owned Phoenix, so the UA System would not "oversee" or "control" TES, attorney Julie Miceli, managing partner at the Chicago office of Husch Blackwell, confirmed last week. Phoenix would be affiliated with the UA System, but a TES-run Phoenix would be "wholly independent."

TES does, however, have UA System connections, as Ben Hyneman, an alumnus of UA-Fayetteville and a former UA System trustee, is president of the TES board, while Fryar is a member of the TES board.

The structure of the affiliation agreement "isolates" the UA System "financially and legally" from any problems Phoenix might encounter, Bobbitt said. The contract as proposed "is balanced, but probably favors" the UA System, which would be able to continue the relationship so long as the system continued to derive benefits from the affiliation.

The $20 million annual payment to the UA System would be "as guaranteed as any agreement we have with any other private entity," Bobbitt said. Should that payment not occur, the UA System would have "legal remedies."

Either side could get out of the agreement earlier than 10 years if there was a "material default," said Patrick Hollingsworth, the UA System's interim general counsel. Additionally, the proposed affiliation agreement would have "clear restrictions" on how the UA System's name, likeness, and imaging could be used by Phoenix/TES.

TES would finance the deal "in the market and (is) currently working to secure the most beneficial package. No public funds are being used in this process or in the future, and none of our institutions, divisions or units are involved in any collateral scenario," according to the UA System. No system entity, including foundations, would be involved in any way financially, and all debt would be incurred by TES if the transaction were completed.

"More details on the structure and nature of the financing would be available in the event the purchase goes through," according to the UA System. However, the financing package -- including whether bonds would be involved -- does not involve the UA System, and "the bond rating of the UA System is very important for all member campuses, (so Bobbitt) has been adamant that the system would not take on any debt for this purpose."

Phoenix reached out to the UA System roughly two years ago, starting this exploration process, according to Bobbitt. For millions of Americans -- 300,000 in Arkansas -- with some college but no degree, the traditional college model "won't cut it, [so] you need a university specifically designed" for them, like Phoenix, he said.

There'd be several benefits to both parties, Bobbitt said. In addition to the $20 million annually that the board of trustees would control, the UA System would be affiliated with a national brand with "world-class course designers."

Phoenix also builds exceptional "student information and content management systems," Bobbitt said. "We want the best -- state-of-the-art -- and if TES is able to offer that through Phoenix, we want first shot at it."

A LONG, BUT IMPERFECT HISTORY

The University of Phoenix offers associate, bachelor's, master's and doctoral degrees and a variety of certificate programs, according to the university. The university has 10 locations in California and one each in Nevada, Texas and Hawaii, but is currently enrolling students only at its Phoenix headquarters, and courses are online.

The University of Phoenix lists total enrollment near 79,000 students, 81% of whom are employed while attending school, and 60% of whom are first-generation college students, but enrollment has been falling since peaking more than a decade ago.

The main reason Phoenix has lost enrollment since its early days is that there are "far more people playing in the online market," according to Michael Moore, the UA System's vice president for academic affairs. "Phoenix quite literally built the market in online education," which is now "an extremely crowded marketplace."

In 2017, Apollo Group sold Phoenix to Apollo Global Management, an investment company, according to the Higher Education Inquirer.

The University of Phoenix, founded in 1976, agreed in December 2019 to a $191 million settlement with the Federal Trade Commission, which claimed the college had lured students with fraudulent claims about partnerships with major companies, according to The New York Times.

Due to the Federal Trade Commission action, the Department of Veterans Affairs threatened to cut off funding for Phoenix the following year, but ultimately declined to do so.

The University of Phoenix has been scrutinized for its outreach and service to veterans and use of GI Bill funds.

Veterans Education Success, a nonpartisan organization with a mission to advance higher education success for veterans, service members, and military families, and to protect the integrity and promise of the GI Bill and other federal education programs, has publicly denounced Phoenix and urged the UA System not to affiliate with the college due to "evidence of unfair and deceptive practices by the University of Phoenix, potential liability for hundreds of millions of dollars in federal loans, and poor outcomes for students."

The faculty senate at UA-Fayetteville also cautioned against an affiliation with Phoenix in a letter, although Bobbitt said that letter mischaracterized the potential parameters of the deal and unfairly criticized Phoenix.

Several Phoenix alumni wrote a letter to the UA System fully endorsing Phoenix, and the college has "righted" past wrongs under new administration, Bobbitt said. "False arguments" against Phoenix by some opposed to an affiliation with the UA System "are not supported by the facts."

The "due diligence" on this potential affiliation -- not only by those with the UA System, but by Stephens bankers and attorneys from Husch Blackwell -- has been "staggering," Bobbitt said last week. "I have great confidence" in the viability of this relationship.

THE FUTURE

Though the UA System president technically does not need board approval to enter into licensing agreements such as this one with Phoenix -- that responsibility has been delegated to the president by the trustees -- Bobbitt has said multiple times he'd like board approval to move forward with this project.

Bobbitt "has previously expressed that it'd be difficult to move forward without support from the board," said Nate Hinkel, director of communications for the UA System. "I think that statement remains true, and he is certainly disappointed in today's outcome."

Fryar indicated last week as many as four other entities may be interested in striking similar agreements with Phoenix, should the UA System not wish to move forward.

"Throughout our discussions, it's been clear that University of Arkansas System leadership recognizes the high quality of our education, our common accreditation, commitment to student success, and capacity to help the University of Arkansas System achieve its goals," said Andrea Smiley, public relations vice president at the University of Phoenix. "Since our founding, we have been deeply committed to successfully serving working adult learners and will continue to pursue that mission in partnership with those who share that critical goal."


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