China is full of strivers. By high school, students already face intense pressure to excel. Some hope to land a spot in the handful of schools that make up China's Ivy League; others seek admission to colleges overseas or English training. The market for afterschool tutoring, English classes and supplementary education has boomed in the past few years.

Hoping to capitalize on a long-term trend, foreign education companies have embarked on a series of acquisitions involving private schools and colleges. Financial investors such as Macquarie Bank Ltd., Lehman Brothers Inc. and Softbank Corp. have also crowded into the nascent sector.

Last October, in the biggest deal yet by value, Singapore's Raffles Education Corp. Ltd. paid $267 million to buy Oriental University City Development Co. Ltd., which operates a 19-college campus in the province surrounding Beijing. In late May, publishing giant Pearson plc, owner of the Financial Times and Penguin Books, said it had bought two privately owned English language school chains, the Learning Education Center and Dell English. The two companies together generated sales of about $10 million in 2007.

For now, the supply of targets is fairly limited, which has pushed up prices. "There's no question that as the sector heats up generally, there's pressure on valuations," says Joseph Kauffman, director of business development for New Oriental Education & Technology Group Inc. This April, the New York Stock Exchange-listed company, which describes itself as the largest provider of private educational services in China, acquired Mingshitang, a Beijing-based test preparation firm focused on the gaokao, the Chinese equivalent of the SAT. It didn't reveal how much it paid.

New Oriental typically prefers acquisition candidates that generate upward of $1 million a year and can comply with U.S. generally accepted accounting principles, and not too many local companies fit the bill. But given the strong market outlook, the company remains on the lookout for potential buys, Kauffman says. Over the long term, there's plenty of room for consolidation. New Oriental estimates that it holds only 5% of the market for language training. China has about 30,000 language-training schools in total.

The English-language training market on the mainland is expected to grow at a compound rate of almost 15% per year, to reach $3.8 billion in 2010, up from $1.9 billion in 2005, according to ResearchInChina.

So it's no surprise that a player like Pearson would be scouting for deals. The company ranks as the biggest supplier of English-language teaching materials worldwide, and it has lately been trying to diversify its sales beyond the U.S. Last year Pearson paid $950 million for Reed Elsevier Group plc's international education businesses, Harcourt Assessment and Harcourt Education International. In China, the company already prints a Mandarin-language version of the FT newspaper and publishes Penguin classics books in Mandarin.

Several other foreign education companies have recently wrapped up deals in China. In November 2007, Kaplan Inc., the test preparation firm owned by the Washington Post Co., increased its stake to become a majority shareholder in a Chinese firm offering prep courses for entry to British universities. Kap-
lan had initially taken a minority stake when it set up a joint venture with the Shanghai-based company, ACE Education, in April 2007.

The deal with ACE, which has operations in Chengdu, Chongqing, Qingdao, Suzhou and Changsha, dramatically expanded Kaplan's geographic footprint -- a key priority for the company.

"Distribution is our biggest challenge," says Mark Coggins, president of Kaplan Asia Pacific. "National coverage, particularly in second-tier cities, is an important part of our strategy. We're constantly looking for new opportunities, particularly in emerging second-tier cities."

In a separate deal, in 2006 Kaplan took a 20% stake in Beijing New Channel Education and Cultural Development Co. Ltd., a chain of schools offering tutoring in English and test preparation.

Coggins says the recent boomlet of foreign buys in education is partly due to the emergence of local companies like ACE that are big enough to be worth buying. A handful of successful deals has helped prove acquisitions are feasible, from a regulatory standpoint. "Also, I think there's a natural proliferation once vendors know there are foreign buyers," he adds. "And once foreigners know others are buying, there's a copycat element."

But as dealmaking has picked up, local companies have started to assign a higher value to themselves. New Oriental chief financial officer Louis Hsieh said in April, after announcing the Mingshitang deal, that although his company had "a number of acquisitions in the pipeline," some potential candidates looked overpriced. "There is still a lot of private equity money that is pouring into this sector," he added.

Indeed, for-profit education has lately won a number of investments from big Asia-Pacific financial investors. In October 2007 a consortium led by Macquarie Bank raised $54 million for Bejing-based Ambow Education Group, which develops online learning platforms.

In March 2007, Lehman Brothers Commercial Corp. Asia took a stake in Noah Education Holdings Ltd. Noah, which offers study materials for primary and high school students though hand-held digital gadgets, proceeded to list on the Nasdaq last October.

In yet another deal, Softbank Asia Infrastructure Fund made a 2006 investment in Global IELTS School, a nationwide chain that prepares Chinese students for the International English Language Testing System that's typically used in Commonwealth countries. Global IELTS is reportedly considering an IPO.

Despite more competition for deals, strategic investors show no signs of slowing down. One of the most ambitious players is Raffles Education, which is building a pan-Asian network of for-profit colleges and trade schools.

Besides the Oriental University buy, in March Raffles said it would purchase Wanbo College, a private school in the central province of Anhui. That follows two smaller China acquisitions last year of China Education Ltd., which operates a business college in Tianjin, and Shanghai Zhongfa College, a vocational and technical school.

Raffles is so bullish on the mainland, in fact, that in January it hired UBS to explore a Hong Kong listing for its People's Republic of China education holdings. A listing would give the public markets another way to invest in education plays -- and perhaps guarantee that those complaints about high deal prices won't abate anytime soon. - K.C. Swanson

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