Running head: COMPANY ANALYSIS OF EDMC

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Company Analysis of Education Management Corporation (EDMC) Robin Holt McLaren MGNT6920 Dr. Ericsson July 24, 2012

COMPANY ANALYSIS OF EDMC Table of Contents

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Executive Summary ........................................................................................................................ 4 Company Description ..................................................................................................................... 5 Products and Services ................................................................................................................. 5 Demand ....................................................................................................................................... 6 Target Markets ............................................................................................................................ 8 Expectations/Values of Customers ............................................................................................. 9 Determining Factors for Strong Competitive Position ............................................................. 10 External Analysis .......................................................................................................................... 13 Industry/Competition – Five Forces ......................................................................................... 13 Current rivalry opportunities................................................................................................. 13 Current rivalry threats. .......................................................................................................... 13 Potential entrants‘ opportunities. .......................................................................................... 14 Potential entrants‘ threats ...................................................................................................... 15 Bargaining power of buyer opportunities ............................................................................. 15 Bargaining power of buyer threats ........................................................................................ 15 Bargaining power of supplier opportunities ......................................................................... 16 Bargaining power of supplier threats .................................................................................... 16 Substitute products opportunities.......................................................................................... 17 Substitute products threats .................................................................................................... 17

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General External Environment ................................................................................................. 18 Demographic opportunities ................................................................................................... 18 Demographic threats ............................................................................................................. 19 Political-legal opportunities .................................................................................................. 19 Political-legal threats ............................................................................................................ 21 Financial Analysis ......................................................................................................................... 27 Recommendations ......................................................................................................................... 31 References ..................................................................................................................................... 32

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Executive Summary The for-profit college industry, once a viable and vibrant enterprise has become soured. Education Management Corporation (EDMC) started 40 years ago, in 1962 as a for-profit university system. Since, 1970 they have consistently climbed in revenue and enrollment, until this year, 2012. The predicted expiration and downfall of EDMC is coming as a result of the niche market they sought to serve from the beginning. The low-income, non-traditional student needed a place to get a degree while still maintaining a job and family life. EDMC and its colleges sought to fill this need through their career oriented college programing. Yet, after Goldman Sachs bought 38% of EDMC in 2006 their business model changed and with it came increased scrutiny (Hechinger, 2010). The scrutiny came from concerned citizens, the SEC, the Department of Education, and Congress (Burd, 2011b). With the new regulations and pending lawsuits EDMC and their financial future is perilous. This report describes how EDMC can strategically position themselves in the market by applying a competitive analysis. This company analysis is based upon business principals in order to assess the scope of the competitive forces, which face EDMC today. This methodology is also applied in developing a strategic plan for adapting to these forces. The five forces model created by Michael Porter includes: current rivalry opportunities and threats; the potential entrants‘ opportunities and threats; the bargaining power of buyer opportunities and threats; the bargaining power of supplier opportunities and threats; and substitute products threats and opportunities (Coulter, 2010). Each competitive force is discussed within the framework of how it exists in today‘s for-profit college and university competitive setting, and of its implication in the EDMC‘s planning process.

COMPANY ANALYSIS OF EDMC Company Analysis of Education Management Corporation (EDMC) Company Description

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Education Management Corporation (EDMC) is a publicly traded provider of private forprofit post-secondary education institutions (EDMC, 2012). The company is headquartered in Pittsburgh, Pennsylvania and operates schools primarily in the United States. The schools are focused on programs, which lead to a specific career and include job skills. EDMC carries the school brands: Argosy University, The Art Institutes, Brown Mackie College, and South University. EDMC started in 1962 and bought its first brand, The Art Institutes—art and design school—in 1970 (Education Management Corporation, 2012). EDMC is now the second largest for-profit school with a combined enrollment of 142,600 students (Belser, 2012). Products and Services Higher education is defined as education that follows high school and is obtained through colleges, universities, or professional schools (Dictionary.com, 2012), (Robinson, Petrunich, & McLaren, 2012). Education is a service industry that holds many responsibilities to society. Higher education is expected to serve the overall greater good for the public (Mintz, Savage, & Carter, 2010). Not only do students who attend expect they will earn more income after graduation, but universities and colleges are to encourage critical thinking skills (Robinson, Petrunich, & McLaren, 2012). Exposure to knowledge expands a student‘s way of thinking leading them to grow personally, intellectually, and academically (Moody's Investors Service, 2012). The difference between a for-profit and a not-for-profit higher educational institution is the college‘s function (Lechuga, 2008). Although both are in the business of education, nonprofit colleges‘ purpose is to educate for the greater good of society. For-profit colleges‘

COMPANY ANALYSIS OF EDMC motivation is to operate in a manner that produces the most profit for its shareholders. This information does not mean the for-profit colleges, like EDMC, do not care about the students‘ education. It means the for-profit colleges must give the students‘ the best customer service to keep them enrolled (Radford, Tasoff, & Weko, 2009).

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When a student successfully completes his or her program of study, the concrete element he or she has from the university or college is a diploma (Robinson, Petrunich, & McLaren, 2012). The diploma is a sheet of paper with a name, the degree the student earned, the university‘s name, and the president‘s signature (Robinson, Petrunich, & McLaren, 2012). No value lies within a single sheet of paper. The value of the diploma is the education and skills the student absorbs while earning the diploma (Radford, Tasoff, & Weko, 2009). EDMC‘s model emphasizes the practical job related application of its degree offerings. EDMC also includes technical or trade specific training, which garners a certificate (Yahoo! Inc., 2012). EDMC also offers employment placement opportunities as a service for their students. Another service EDMC offers to their graduates is the alumni association. Part of the college experience is meeting classmates and building relationships for personal and professional growth (Moody's Investors Service, 2012). Networking with alumni is a potential benefit to students when looking for employment (Robinson, Petrunich, & McLaren, 2012). Demand Total enrollment numbers since 1980, has more students enrolled in higher education institutions in 2009 than in any year published since 1980 (Institute of Education Sciences: U.S. Department of Education, 2011). In the past nine years, college enrollment in the United States has increase by 33.4% (Institute of Education Sciences, 2011).

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The increase of students above the age of 25 grew 43% between 2000 and 2009 (Institute of Education Sciences, 2011). These students above the age of 25 are often classified as nontraditional students. Many non-traditional students need the flexibility of online learning. Online learning allows them to manage their educational responsibilities around family, career, and community obligations (Deggs, 2011). Research found that in 2007 of the students older than 25, more than 50% are enrolled in for-profit institutions, and between 25 to 33% are enrolled in traditional non-profit public and private colleges (Bennett, Lucchesi, and Vedder, 2010). This information shows a shift in the largest group enrolling in universities. Demand for the for-profit programs like EDMC‘s is increasing in the largest group of new students. Students want practical education to aid in their overall career skills and in order to make them more marketable to employers (Natale & Doran, 2011). Another advantage the for-profit universities have over the non-profit universities is they are run efficiently like a business instead of being run as an inflexible bureaucracy (Bennett, Lucchesi, and Vedder, 2010). Students now demand more customer service than they have in the past from their schools. EDMC seeks ways to address these needs of their students in order to retain and keep them from taking their business elsewhere (Bennett, Lucchesi, & Vedder, 2010) (Natale & Doran, 2011), (Robinson, Petrunich, & McLaren, 2012). EDMC‘s demand is served through its four distinctive institutional products; each has a specialized spotlight on career training: the Art Institutes, Brown Mackie College, Argosy University, and South University. The Art Institutes has a total enrollment of 80,300 students on 50 campuses making it 53% of the total enrollment at EDMC and the largest of their operations (West, 2012). Graphic design, fashion, media arts and studies, and culinary training are the degree programs offered at the Art Institute. With 29,000 students and 20 campus locations,

COMPANY ANALYSIS OF EDMC Argosy University is EDMC‘s second largest school in the network (West, 2012). Argosy University too concentrates on career skills with its offerings in education, healthcare, business, and behavioral sciences from the Bachelor through the Doctorate levels (Yahoo! Inc., 2012). Brown Mackie College and South University run right alongside Argosy in enrollment numbers and degree programs (West, 2012). South University has 21,900 students in 10 locations and Brown Mackie has 19,900 students in 27 locations (West, 2012). Target Markets EDMC has had successful and consistent growth in enrollment since they acquired the Art Institutes in 1970 (Bennett, Lucchesi, & Vedder, 2010). This notable increase in students can be attributed to the specific need their schools address, career focused degree programs. Each brand has a different median age group. For instance, the Art Institute‘s average age is 25 years old and for Argosy University—which offers doctorates—the average age is 36 (West,

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2012). Yet, as a whole the population of enrollment for EDMC disproportionately serves the 25 and older, women, African Americans, Hispanics, and those with low incomes (Institute of Education Sciences: U.S. Department of Education, 2011). EDMC overall has a diversified model in which each school and its programs targets nearly every segment of the addressable market (West, 2012). The range of degrees starts at certificate programs and includes every degree in between the doctoral level. The disciplines cross the job market spectrum from IT to education. Even the modality of the courses offered include all three options: on-ground, online, and blended (West, 2012). The main draw is from the non-traditional or older student body who are simultaneously employed, in school, and usually taking care of a family. Therefore, EDMC targets this market by offering services, such as child care (Bennett, Lucchesi, & Vedder, 2010). EDMC schools

COMPANY ANALYSIS OF EDMC also help those 73.7% of students who need financial aid by assisting them with the numerous forms (Bennett, Lucchesi, & Vedder, 2010). There is also the incentive of generous transfer credit given to student who began their Bachelor‘s degree at other institutions (Bennett, Lucchesi, & Vedder, 2010). Expectations/Values of Customers As the non-traditional student market grows EDMC caters their curriculum and teaching practices to this large segment. The students choosing the for-profit university, such as, Argosy University often value the convenience and practicality of the program over the pure cost of the tuition (Bennett, Lucchesi, & Vedder, 2010). EDMC students expect financial aid or Title IV funding to be available and to cover all college expenses. Online course offerings are not exclusive to only one type of university. In today‘s market, two-year, public, and technical colleges all offer courses online. The online course offerings take away the geographical and time restrictions enforced by the parameters on an on-ground campus. Due to the multitude of online offerings, students in today‘s market expect to have the option of taking all if not part of their coursework online. For all the good and idealistic development, which has been associated with the ivory towers of postsecondary education there is a different expectation from the EDMC student. EDMC students have evolved with the consumer culture and bring the capitalist ideals to the

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footsteps of their colleges and universities (Natale & Doran, 2011). The change is seen not only in the students‘ perception of themselves as customers, but there is also a notable difference between the for-profit institutions and the non-profit/public colleges. There is an increased focus on how the degrees from an institution will relate to the specific tasks and duties students will find in the job field. Many participants and critics of

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higher education are looking for quantifiable measures and results limited to application in a job description. The external forces are demanding higher education to answer questions couched in the language of corporate viabilities. Institutions are required to graduate more students (consumers) while maintaining the same standards of quality, becoming more productive, and being more efficient (cost-effective) in processes (Natale & Doran, 2011). These endeavors of a liberal arts education are old fashioned academic ones, which need to be replaced with more ‗useful knowledge‘, like marketable skills (Natale & Doran, 2011). In the for-profit sector only 2.4% of the curriculum is in general studies and liberal arts (Deming, Goldin, & Katz, 2012). The education, once seen as a process, has been condensed to career training. It is now a product to invest in for the purpose of better job prospects and employment opportunities in business and technology (Natale & Doran, 2011). EDMC understands this and is responsive to its market by adding programs relevant to the job market. For instance, when the health profession fields expanded so did the offerings in the discipline at EDMC institutions (Deming, Goldin, & Katz, 2012). Determining Factors for Strong Competitive Position Market reputation for a university or college is critical to its long term success and overall value in the market place (Moody's Investors Service, 2012). ―Students (customers) want the best value for their tuition (money)‖ (Robinson, Petrunich, & McLaren, 2012, pg.12). The stronger the university‘s reputation is in the market place, the higher the value the student places the degree from the university. Students want a high quality education from a reputable university, but they do not want to pay for services that they do not use. Many of the public universities charge student activity fees, athletics fees, and other fees that both traditional and non-traditional students do not see the

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value in. EDMC schools do not charge these fees to the student (Deming, Goldin, & Katz, 2012). The tuition may be higher per credit hour, but the students do not feel they are being cheated out of money by being charged mandatory fees for services that they do not utilize (Bennett, Lucchesi, & Vedder, 2010). Overall cost is a consideration for students. Relating the costs back to services that the students utilize will give the educational institution more creditability with the cost discerning students. A university or college holding regional accreditation is part of a strong competitive position. There are different levels of accreditation. In the United States the base level accreditation that allows for Title IV funding is national accreditation (Bennett, Lucchesi, & Vedder, 2010). In the past, there was a problem with many of the diploma mills having national accreditation. This element has tainted the value of a nationally accredited college. Therefore, EDMC schools seek regional accreditation to boost their creditability (Bennett, Lucchesi, & Vedder, 2010). In the realm of higher education, regional accreditation is the academic standard and pinnacle. Credits from these schools transfer to other regionally accredited schools and are required by most employers (Council of Regional Accrediting Commissions, 2003). The best graduate programs are found in regionally accredited schools and require an undergraduate degree from a regionally accredited school. Students with bachelor degrees from nationally accredited schools must find a graduate program at a nationally accredited university, which is uncommon. Therefore, if the student ever hopes to be accepted by a regionally accredited school, he/she must start his/her education from the beginning at a regionally accredited school. In the United States there are six regional accreditation boards. These regionally accreditation boards are:

COMPANY ANALYSIS OF EDMC 1. Middle State Association of Colleges and Schools 2. New England Association of Schools and Colleges 3. North Central Association of Colleges and Schools 4. Northwest Association of Schools and Colleges 5. Southern Association of Colleges and Schools 6. Western Association of Schools and Colleges (Council for Higher Education Accreditation, 2012) EDMC has a unique method of allocating regional accreditation for its schools. There are other for-profit organizations within the industry which seek accreditation from a single

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source for every campus and institutions. However, EDMC uses multiple accreditors for regional and national accreditation, even within a single brand (Education Management Corporation, 2011). The Art Institutes and Brown Mackie College use multiple accreditors, while Argosy University—accredited by Western Association of Schools and Colleges—and South University—accredited by Southern Association of Schools and colleges—each use a single accrediting body (Education Management Corporation, 2011). There are also programmatic accrediting organizations (Council for Higher Education Accreditation, 2012). These organizations are program or trade specific. Argosy University has accreditation from the American Psychological Association for its counseling programs and Western State University College of Law is accredited by the American Bar Association (Education Management Corporation, 2012).

COMPANY ANALYSIS OF EDMC External Analysis Industry/Competition – Five Forces In order to analyze the current state of EDMC and its brands, this analysis follows the breakdown of Michael Porter‘s five forces model. Management uses this model to examine the

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existing environment and competition inside the industry (Coulter, 2010). After climbing out of the recession of 2008, consumers in the United States continue to recognize the importance of a good education, but they selectively seek education for the best price possible, which leads to an increase in competition in the higher education for-profit industry. Current rivalry opportunities. The growing trend of online education in a slowed economy proves to be a key factor in giving certain schools and universities the competitive edge not only in attracting students but in turning a profit as well. Universities with online programs reap the benefits of having reduced fixed costs (Moody's Investors Service, 2012). The cost of an online classroom‘s web space is far lower than the cost of an on-campus classroom. The school is responsible for additional costs such as heating/air conditioning, building and campus maintenance, and other additional operating costs. Another opportunity in higher education rivalry is current players in higher education are equally balanced and similar because these organizations are all selling the same product: education. Many companies take advantage of this fact and turn a profit, regardless of their accreditation or educational standards. Current rivalry threats. Though the number of students in the higher education grows each year, the rate of enrollment slows in the current economic climate. Due to a copious amount of competitors in the higher education arena, this deceleration creates increased competition and rivalry. Currently, EDMC is facing enrollment challenges. The online programs grew at an average of 90% from 2002 to 2010 (Belser, 2012). However, starting in

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May 2011 EDMC saw its first decline in online student enrollment with a drop of 7.6% (Belser, 2012). The current decline in online enrollment is 18.5%; as reported in 2012‘s third quarter (Belser, 2012). What were 42,300 students in 2010 are now 35,800 students in the fully online programs (Belser, 2012). Another factor attributing to rivalry, particularly in EDMC‘s traditional campus setting, is when the schools need to grow, they add additional wings to current structures or create new buildings entirely to attract and accommodate more students. This type of addition is expensive during a time when the schools look to cut costs in every possible area. Maintaining a school is costly, both monetarily and emotionally. Schools that have existed for hundreds of years feel compelled to stay in the industry. Therefore, rivalry increases due to the barriers to exit the industry (Robinson, Petrunich, & McLaren, 2012). More schools remain in the industry not having a profit (Collis, 1999). Since the market is so saturated with competitors and there is little or no cost for a student to withdraw and attend a different school, decision makers for these schools have to constantly stay aware of this threat. Potential entrants’ opportunities. Current competitors in higher education have the opportunity of an established and significant economies of scale since their fixed costs are spread out over the many students already attending the school. Companies who seek to enter the higher education market have a cost disadvantage to current competitors because established schools have already procured name recognition, they have purchased prime locations, and they already employ reputable professors and staff. Schools currently in the market do not fear a flood of potential entrants. Opening a school, regardless of accreditation, requires a large investment of capital to which many companies or individuals do not have access. The government highly regulates the higher education market, which creates a high barrier for

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potential entrants (Fried, 2011). For example, to gain regional accreditation is a lengthy process that takes five years (Council for Higher Education Accreditation, 2012). Some competitors have found a way around this process. ITT Educational Services strategically purchased the regionally accredited school, Daniel Webster University, in 2010 in order to skip the accreditation process (Bloomberg News, 2010). However, this technique is the exception, not the rule, but decision makers should keep this situation in mind. Potential entrants’ threats. Potential entrants do pose some threat to EDMC. In higher education, product differentiation barely exists between the institutions. Despite the format, education is education. As with switching between current rivals, there is little cost for a student to switch to a potential entrant. Potential entrants have access to the same distributors of educational products. Though current competitors have a special pricing plan with distributors, potential entrants have the ability to gain exclusive contracts with distributors as well. Bargaining power of buyer opportunities. Though the students in higher education hold much bargaining power over the EDMC, current schools do have certain opportunities of bargaining power over the students. One student‘s tuition does not make or break a school‘s budget; therefore a school is not concerned to lose one or two students to a competitor. Schools also have the advantage over students because students cannot produce their own education. They must seek the knowledge from high education institutions to receive the credentials needed for job promotion or qualifications when seeking new employment (Robinson, Petrunich, & McLaren, 2012). Bargaining power of buyer threats. Despite the few opportunities that current schools have over their consumers, students hold more bargaining power against the schools. The current economic climate makes students more of a threat to schools now than in a booming

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economy. As the price of higher education has been driven up and the economy has gone down, educational costs now takes larger portions of students‘ budgets, meaning they are shopping around to find the best deal for their education (Bankston, 2011). Education is a rather standard product in a saturated market, which give students the power to choose from many options with low switching costs if they are unsatisfied with their first choice. Consumers have access to most if not all information needed thanks to the Internet, and this information is a large driver of increased student bargaining power. Students find out the information they want about every school they consider attending. Bargaining power of supplier opportunities. EDMC and other higher education institutions have the biggest opportunity over their suppliers in bargaining power. Suppliers, such as publishing companies for books and leasing companies for buildings, cannot provide education and the credentials that schools are able to provide (Robinson, Petrunich, & McLaren, 2012). Therefore, suppliers to higher education do not pose a threat to offering what schools offer consumers. Schools shop around for the best deal on their supplies, just as students shop to compare schools. Bargaining power of supplier threats. Suppliers have bargaining power against competitors in higher education. The inputs needed for higher education, particularly in the way of professors and books, must be of a certain level, which puts the bargaining power on the side of the suppliers (Robinson, Petrunich, & McLaren, 2012). These products are invaluable to an institution because they cannot exist without them. In order to teach at a regionally accredited school, professors must hold a degree from regionally accredited schools. Some subjects are studied more than others in graduate programs. Professors in the less studied areas, such as math and science, are scarcer and highly valuable to an institution (Robinson, Petrunich, & McLaren,

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2012). Book publishers control which books they release; therefore, the book publishers control the prices of these publications. It is a major threat to schools because this expense passes directly down to their consumers. A substitute for quality professors does not exist (Bankston, 2011). Few options exist for to substitute textbooks. Electronic books and additional content are available online; however, the supplying publishers provide these resources. Substitute products opportunities. The largest opportunity for current competitors in higher education is that there is not a substitute for regionally accredited education aside from other regionally accredited schools (Robinson, Petrunich, & McLaren, 2012). Regional accreditation is the gold standard for higher educational credit. Students who earn their degrees and class credit from a regionally accredited school are able to take their education to any institution (Council for Higher Education Accreditation, 2012). Regionally accredited schools must monitor the student trends to ensure they offer programs that suit the needs of their students. Substitute products threats. The slowed economy drove the creation of substitutes to regionally accredited education. Though these schools are not true substitutes to regional accreditation, less credible substitutes are available to students in their endeavor for academic achievement (Robinson, Petrunich, & McLaren, 2012). Diploma mills that provide students with a ―degree‖ for attending little to no classes for a certain fee, trade schools that provide technical, vocational training, and nationally accredited schools that provide similar training but of a lower approval than regional accreditation, and employers that provide on the job training and certification for programs such as Six Sigma are threats to regionally accredited, higher education institutions (Bloomberg News, 2010).

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General External Environment In order to inform the company analysis of EDMC an overview of the external environment must be taken into account. This overview will include the demographic, politicallegal, and technological opportunities and threats. The higher education industry is unique because not only is it a business, it is also given a broader responsibility of shaping the future through education. Demographic opportunities. The enrollment of students into the higher education sector has grown from 300,000 students in 1986 to 1.8 million in 2008 (Bennett, Lucchesi, & Vedder, 2010). It is the for-profit establishments, which sees the largest consistent growth at an annualized rate of 8.4%, while non-profit and public institutions have grown only 1.5% per year within the same 22 year period (Bennett, Lucchesi, & Vedder, 2010). At EDMC enrollment doubled from 2007 to 2011 to 160,000 students (Burd, The transformation of EDMC, 2011a). The total share of for-profit students is 11% of the entire group of post-secondary enrollments (Adams, 2011). The main contributing fact to this boom in growth at the for-profit level is the type of students these institutions attract. EDMC provides educational opportunities for the historically underserved students in the higher education sector (Bennett, Lucchesi, & Vedder, 2010). More than half of all the students enrolled at EDMC are older than 25, 40% are minorities, and 64% are female (Bennett, Lucchesi, & Vedder, 2010). The students who are over the age of 25 are considered ‗non-traditional‘ students. It is these non-traditional students who not only make up almost the entire student population at EDMC, but also, obtain the greatest proportion of federal student aid. These demographic trends affect the institution and the students at every level (Robinson, Petrunich, & McLaren, 2012).

COMPANY ANALYSIS OF EDMC Demographic threats. The opportunity to serve the underrepresented market within EDMC is a positive development for the non-traditional students looking to enhance their careers. However, the demographic population also carries with it a threat to the institution‘s viability and sustainability over the long run. These non-traditional students are usually from low income backgrounds and require the greatest number of government funds and grants

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(Education Management Corporation, 2011). This in turn requires EDMC to wholly depend on government dollars. The dependency on Title IV funding introduces the threat of violating the 90/10 rule. The 90/10 rule mandates that revenue derived from the government must not go over 90% and if it does that school will no longer receive federal financial aid. Currently, EDMC received 89.3% of its revenues from federal financial funds and this percentage does not include military benefits like the GI Bill (Lewin, Education Management Corporation accused of widespread fraud, 2011a). With this alarming statistic of 89.3% EDMC has landed in trouble with the courts and is very close to the edge of the proverbial cliff. Even though EDMC seeks to educate low-income students the 90/10 rule assumes there are other financial resources available to the students and incentivizes institutions to raise tuition above Title IV funds in order to generate ‗other‘ revenues (EDMC, 2012). If the 90/10 rule changes and military funds are included in the 90% EDMC and several other for-profit institutions, like Apollo Group Inc. will lose federal funding and thus students/revenue. Political-legal opportunities. The notion that the nation needs a more highly educated and sophisticated workforce has been advanced and subsidized by the federal government (Bankston, 2011). These subsidies bring about significant profits to the higher education industry. Immediately after Barack Obama was elected president, he stressed his commitment to

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guaranteeing access to a higher education for all (Bankston, 2011). In January 2010 Pell Grants were made available to an additional one million students (Bankston, 2011). The opportunities offered from political and legal issues began with the GI Bill in 1944, otherwise known as the Servicemen‘s Readjustment Act (Bankston, 2011). The GI Bill following World War II expanded enrollment in colleges and universities and set a precedent for even greater governmental subsidies of postsecondary education (Bankston, 2011). In 1958, the National Defense Education Act was put in place for college students who were identified as having talents and for primary and secondary schools to prepare pupils for college at the tune of $900 million dollars in four years (Bankston, 2011). Further federal subsidies for college came into place in 1965 in the form of the Higher Education Act (HEA); it was instituted by President Lyndon B. Johnson during the War on Poverty (Bankston, 2011). In 1972, the pool of entitlement grew as a result of the Pell Grants, which were issued to those seen as having the greatest financial need (Bankston, 2011). On top of the continuous influx of funds from the federal government there are also tax cuts, loans and scholarships awarded at the state level government (Bankston, 2011), (Fried, 2011). All these different forms of federal subsidies make higher education in the realms of forprofit and non-profit a higher for profit education. EDMC reported a 45.20% gross profit margin in the 4th quarter of 2011 (The Street Wire, 2011). Non-profits actually have an even higher profit margin, but the profits are reported as expenses (Fried, 2011). Therefore, operationally, higher education and specifically EDMC is inundated with opportunities for profit and growth granted to them from the boon of the federal and state subsidies (Robinson, Petrunich, & McLaren, 2012).

COMPANY ANALYSIS OF EDMC Political-legal threats. Although these subsidies are good for EDMC‘s bottom line,

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there are other consequences, which are in many ways considered a negative. In the political and legal arena EDMC has been in hot water since 2010. ―The for-profit postsecondary education industry has the distinction of being regulated as both a profit-seeking business and as a provider of educational services‖ (Bennett, Lucchesi, & Vedder, 2010, p. 35). Therefore, EDMC is subjected to licensure and consumer protection laws and the certification process of inspection of educational quality as is applied to its non-profit counterparts (Bennett, Lucchesi, & Vedder, 2010). The growth EDMC experienced from 1998 and 2008 has not come unrestricted, and instead a plethora of federal agencies such as the Federal Trade Commission, General Accountability Office, the Securities and Exchange Commission, and the Department of Education have come knocking at EDMC‘s door (Bennett, Lucchesi, & Vedder, 2010). EDMC faces an ominous and multifarious regulatory environment to navigate. Politically the regulatory challenges fit into two general categories: consumer protections and use of public funds. Consumer protections. Government has consumer protections in order to minimize certain types of predatory or unsafe behaviors. In the for-profit education sector consumer advocates are upset about the increasing student loan debt and the default rates on those loans. Advocates point to the mishmash of corporate greed, slipshod regulations, misleading marketing and recruiting pressures (Bennett, Lucchesi, & Vedder, 2010). Gainful employment. The Higher Education Act (HEA) requires EDMC to provide, ―an eligible program of training to prepare students for gainful employment in a recognized occupation‖ (Ledderman, 2011). This vague qualification must be met in order for EDMC to receive Title IV funds. In 2010 President Obama increased the pressure on the for-profit schools, lauding that the students receive debt they cannot afford for a degree they cannot use

COMPANY ANALYSIS OF EDMC (Cook, 2010). Obama proposed new regulations in order to force universities to quantify the vague statement about ―gainful employment‖ (Cook, 2010). The new regulations sought to

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require for-profits to meet two conditions. ―Graduates must successfully pay down their student debt and enjoy loan-to-income ratios under a specified threshold‖ (Cook, 2010, para. 8). In 2011 the DOE issued policies to restrict debt-to-income ratios to ―12 %, on average, for students in a given program or school and discretionary-income-to-debt ratios to 30 %‖ (Burke, 2012). The DOE also included a rule stating schools or programs with a debt repayment rate of less than 35% will no longer have access to federal student aid (Burke, 2012). The Association of Private Colleges and Universities sued the U.S. Department of Education and the Education Secretary charging that the modifications to the HEA unfairly discriminate against for-profit institutions (Burke, 2012). In regards to the 35% debt repayment regulation, ―the court concluded that this decision ‗was not based upon any facts at all…[and] was chosen arbitrarily‖ (Burke, 2012, para. 9). Thus the entire debt repayment measure rule has been made null and void. However, EDMC and other for-profits are not out of it yet because the Education Secretary may still appeal the district court‘s decision (Burke, 2012). If all three of the rules were to be enforced—the Department of Education will make certain of it—only a third of the for-profit programs would pass and the rest will fail, including EDMC (Lewin, 2012b). Incentive compensation. The federal law in the HEA bans the payment of incentives to enrollment recruiters contingent upon the number of students they enroll (Simba Information, 2011). This ban used to include 12 safe harbors which were enacted in November 2002. The exception to the incentive pay includes: 1. Adjustments to employee compensation—restricted to twice a year 2. Recruitment into programs not eligible for Title IV funds

COMPANY ANALYSIS OF EDMC 3. Payments for securing contracts with employers 4. Profit-sharing or bonus payments 5. Compensation based on program completion 6. Payments to employees for pre-enrollment programs 7. Compensation paid to managerial and supervisory employees not involved in admissions of financial aid 8. Token gifts 9. Profit distributions 10. Internet-based recruiting activities 11. Payments to third parties for non-recruitment activities

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12. Payments to third parties for recruitment activities (Bennett, Lucchesi, & Vedder, 2010, p. 44) It was then in July 2011 that the Education Department eliminated the 12 safe harbor rules and opened up for-profit and non-profits alike for litigation (Jaeger, 2011). EDMC is now a target for a multibillion dollar lawsuit from the U.S. Department of Justice and six other states (Burd, The transformation of EDMC, 2011a). Enrollment at EDMC doubled from 2007 to 2011 after Goldman Sachs bought EDMC for $3.4 billion (Burd, The transformation of EDMC, 2011a). It was the methods used by EDMC‘s governing body to accomplish this hyper-charged increase in student enrollment, which has brought the lawsuits and damaged reputation to EDMC‘s door. ―The Department of Education investigators found that promotion and higher salaries depended entirely on how many students the recruiters enrolled and not the multiple factors in the ‗matrix‘ document. One recruiter told an investigator that ―the matrix is a way to deceive the Department of Education.‖ ‖ (Malloy, 2011, para.16).

COMPANY ANALYSIS OF EDMC Misleading advertising. EDMC is estimated to spend 22% of revenues on sales and

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marketing and more than half goes directly to advertising (Education Management Corporation, 2012). The criticisms from the public about EDMC is that they and other for-profits use ‗high pressure sales tactics‘ and misleading advertising in order to gain their overrepresented population of unqualified, low-income, minority students and the financial aid funds that follow them (Bennett, Lucchesi, & Vedder, 2010). Specifically, one critic named Steve Eisman pointed out that the for-profit billboards are lining the poorest neighborhoods and recruiters are pitching to the homeless and the gamblers in order to promise a better life to those who are most vulnerable (Kroll, 2010) as cited in (Bennett, Lucchesi, & Vedder, 2010). The Education Department in 2011 included more rules concerning misrepresentation in order to give the department more power to come down on the institutions that use deceiving advertising and recruiting practices (Bennett, Lucchesi, & Vedder, 2010). Use of public funds. For-profit institutions like EDMC receive a larger share of the Title IV funds than any of their counterparts in the industry, such as, non-profit and public universities (Deming, Goldin, & Katz, 2012). In 2009 when 8% of the student enrollment belonged to forprofit institutions 26% of the loan disbursements were going to these institutions (Deming, Goldin, & Katz, 2012). It further points to the fact that the tuition is high and the majority of the students enrolled are either financially independent or from low-income families. These facts have caught the attention of the government and citizens alike. Two of the regulatory challenges facing EDMC is the 90/10 and the cohort default rate rules (Bennett, Lucchesi, & Vedder, 2010). The 90/10 rule. EDMC, as a for-profit company, is not allowed to receive more than 90% of its revenue from federal grants and loans (Bennett, Lucchesi, & Vedder, 2010). In order to continue to get Title IV funding 10% of revenue must come from other sources (Bennett,

COMPANY ANALYSIS OF EDMC Lucchesi, & Vedder, 2010). Currently, EDMC gains 89.3% of its revenue from Title IV funds and the other 10% also comes from government aid (Burd, The transformation of EDMC, 2011a). However, the other 10%, which comes in the form of federal funds is the military educational benefits, like the GI Bill (Bennett, Lucchesi, & Vedder, 2010) , (Education Management Corporation, 2012). Even though the 90/10 rule is in direct opposition with the

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goal of educating low-income students it is a very viable threat. New regulations seek to remove the military funds from the 10% allocation pool and deem them a part of the 90%. Anthony Guida Jr. and David Figuli point out that: Since proprietary institutions have no authority to limit student use of Title IV federal student aid, their main tool for 90/10 compliance is increasing institutional charges beyond the maximum amount of federal aid to force students to fill the ―gap‖ thus created with non-Title IV funds (2012). EDMC‘s main demographic is low-income students and therefore they have a higher 90/10 score. This score should not reflect the quality of education, but the detractors like Obama and the Department of Education disagree (Cook, 2010), (Conte, 2012). Cohort default rates (CDR). A CDR is the ratio which indicates how many students default on their loans within a given period juxtaposed to the number of students who enter repayment during the same period of time (Bennett, Lucchesi, & Vedder, 2010). A student is considered in default when they do not make a loan payment for 270 days (Bennett, Lucchesi, & Vedder, 2010). Even though this is a considerable amount of time to make a payment the default rates are rising. An institution which has a ratio above 40% in a given year or above 25% three years in a row is placed on probation by the Department of Education and the federal government (Bennett, Lucchesi, & Vedder, 2010). Right now, as of a statistic from May 2012,

COMPANY ANALYSIS OF EDMC

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for-profit colleges ―make up 11 % of the nation‘s 11 million full-time undergrads but account for 26 % of borrowers and 43 % of defaulters, according to the Department of Education‖ (Conte, 2012, para.10). The unfortunate statistics for EDMC make it a posibility they may lose federal funding and inevitably, students.

COMPANY ANALYSIS OF EDMC Financial Analysis EDMC is barely treading water; it might actually be considered drowning as its stock price plummets into the depths of despair. As of July 17, 2012 EDMC stock was trading for a meager $4.96 (Bloomberg L.P., 2012). This is a disparaging view for an education company, which only three years ago in September 2009, commenced its initial public offering (IPO) of 20,000,000 shares at $20 per share (Education Management Corporation, 2012). In 2006

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Goldman Sachs and two other private equity firms acquired EDMC for $3.4 billion and changed EDMC‘s business model (Burd, 2011b). A new CEO was brought in, Todd S. Nelson, the former CEO of the largest for-profit institution, Apollo Group to carry out the ambitious plans for growth (Burd, 2011b). Anytime a private equity group buys a company the goal is always to grow it and sell it at a higher price, through any means possible. These types of deals are not interested in the long term health and growth of the company purchased. The way things are going this is looking like a deal about to go sour. In the beginning Goldman and its private equity partners appeared to be well on their way to pulling off a fantastic coup. In the five years after the purchase enrollments doubled and annual earning tripled to $2.8 billion (Burd, 2011b). There was an entire decade of explosive growth, especially for the fully online programs, which increased 90% (Belser, 2012). Yet, in May 2011 EDMC saw its first decline in student enrollment with 7.6% fewer students and at the end of the third quarter in 2011 there was 18.5% fewer students in the online programs (Belser, 2012). EDMC is under attack from Congress, the Obama Administration, the Department of Education, and dissatisfied students. As of June 30, 2011 EDMC has $3.7 billion in property and equipment, goodwill and other intangible assets (Education Management Corporation, 2011).

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Table 1 Financial Ratios for EDMC Ratio Current TTM 1.56 2011 1.745 2010 1.342 2009 1.142 Comment Increase before TTM, liquidity has increased Inventory Turnover 137.6 154.4 120.62 119.67 Decrease before TTM, higher than the industry average Days Sales Outstanding 16.18 20.58 21.11 18.95 Decline, receivables being collected at a faster rate Total Assets Turnover Total Debt to Total Assets Profit Margin on Sales Return on Common Equity P/E ------15.2% -2.3 18.7 10.2 27.2 Increase before TTM, way below industry average Source: (Morningstar Inc., 2012) The ratio analysis for EDMC indicates poor performance and a loss of financial growth as a result of the trailing twelve months (TTM) indicators. EDMC is positioning itself to become more liquid and functional by decreasing turnover time for receivables and inventory. The 8.56% 11% 12.66% `9.5% 4.12% `7.3% Decrease, becoming less profitable Increase before TTM .64 .86 .64 .69 .57 .76 .48 1.33 Increase Decrease until TTM

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company has increased its current ratio which indicates that they are increasingly able meet its short term obligations. EDMC increased its return on assets which indicates that management is striving to become more efficient in utilizing its assets base for generating profit before the plummet this year. An increase in the return on equity before TTM also indicates how efficient the company has become utilizing it equity base. The shareholders are earning more on their investment. Total debt to assets has decreased for EDMC for the last couple of years which indicate that they are less dependent on leverage as they were previously. With this ratio going up and being rather high, it can be easily assumed that this company is considered risky. The added risk of debt on its books can easily hurt EDMC if they are ever in the position where they are unable to generate returns over the cost of capital. However, if the corporation manages to generate returns over their cost of capital, investors will benefit. Before the 2012 year when EDMC‘s market capitalization plummeted they were doing well financially. In December 2011 EDMC had a market capitalization of $3.4 billion and currently, July 2012 they have a market capitalization of $648 million (Bloomberg L.P., 2012). The pending litigations and judgments, if successful, from the U.S. government are enough to wipe EDMC and all their previous profits away. Xignite Inc. reporting on Seeking Alpha summarizes EDMC‘s current financial predicament poignantly when they say: The current suit against EDMC stands the possibility of bankrupting the company. Worst-case liability for the company exceeds several times EDMC's market capitalization and is at least an order of magnitude greater than the company's TTM earnings. Even a comparatively benign outcome for EDMC could see several years of earnings wiped away in a judgment. As always, the lengthy

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nature of litigation and the fact that the suit is still in the very earliest stages could force EDMC shorts to wait awhile before they see any gains (Xignite Inc., 2011, para. 12). EDMC‘s stock‘s P/E ratio is currently negative, making its value useless in the assessment of premium or discount valuation, but its price-to-book ratio of .39 indicates a significant discount versus the S&P 500 average of 2.15 and a significant discount versus the industry average of 3.90 (Morningstar Inc., 2012). Their stock is volatile and so is the regulatory environment EDMC operates in.

COMPANY ANALYSIS OF EDMC Recommendations Despite the former growth EDMC experienced over the previous decade their current

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state of affairs is in shambles. They are facing controversy and criticism. Many are questioning the tactics they use for growth and this is making EDMC‘s future certainly rocky. Based upon the high default rates, the high pressure recruiting, and misrepresentation of information for the SEC reports, critics are questioning the quality of EDMC‘s educational services. Educational services are EDMC‘s bread and butter and without a positive reputation they will lose out to their rivals in the industry. The criticisms from civilians are only a part of the reign of fire being heaped on EDMC‘s head. The relationship with the federal government is becoming increasingly more antagonistic and will continue to pose a risk to EDMC and other for-profits. In order to comply with these numerous regulations EDMC will need to change strategies and revamp its recruiting practices. Under the gainful employment guidelines EDMC will need to start being more selective in the students who are admitted. These regulations will also mean EDMC will need to invest more in their programs, spending more on the faculty and physical facilities in order to raise their value. EDMC must rise above and be more of an authority in the education sector and not its blemish. The most unfortunate part is that EDMC does fill a gap that traditional universities have ignored since the beginning; the non-traditional, low-income, minority students that have been neglected by the traditional colleges. When EDMC came along 40 years ago they found a niche market and have grown more than any other institution in the industry, but this has come at the heavy price of their reputation. In education, reputation is everything.

COMPANY ANALYSIS OF EDMC References Adams, S. (2011). Names you need to know: For-profit college rules. Forbes.Com, p. 18.

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Bankston, C. (2011, Winter). The Mass Production of Credentials: Subsidies and the rise of the higher education industry. The Independent Review, 15(3), 325-349. Belser, A. (2012, July 3). EDMC's enrollment at 'low water-mark'. Pittsburgh Post-Gazette, pp. http://www.post-gazette.com/stories/business/news/edmcs-enrollment-at-low-watermark-634349/. Bennett, D. L., Lucchesi, A. R., & Vedder, R. K. (2010). For-profit higher education: Growth, innovation, and regulation. Retrieved June 1, 2012, from Center for College Affordability: http://www.centerforcollegeaffordability.org/uploads/ForProfit_HigherEd.pdf Bloomberg L.P. (2012, July 17). EDMC: NASDAQ key statistics. Retrieved from Bloomberg: http://www.bloomberg.com/quote/EDMC:US/key-statistics Bloomberg News. (2010, March 22). ITT 'buying accreditation' strategy makes critics uneasy. Retrieved June 8, 2012, from Indianopolis Business Journal: http://www.ibj.com/ittstrategy-of-buying-accreditation-makes-critics-uneasy-/PARAMS/article/18816 Burd, S. (2011a, October 13). The transformation of EDMC. Retrieved from Higher Ed Watch: http://higheredwatch.newamerica.net/node/59018 Burd, S. (2011b, October 20). How EDMC went bad. Retrieved from Higher Ed Watch: http://higheredwatch.newamerica.net/node/59329 Burke, L. (2012, July 7). District Court Limits "Gainful Employment" College Regulations. Retrieved from The Foundry: http://blog.heritage.org/2012/07/07/district-court-limitsgainful-employment-college-regulations/

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Collis, D. (1999). When Industries Change:Scenarios for Higher Education. (D. Collis, Ed.) San Francisco, CA: Jossey-Bass. Conte, A. (2012, May 16). EDMC:Party's off at for-profit juggernaut. McClatchy-Tribune Business News. Cook, C. (2010). Obama raises pressure on for-profit universities. Financial Times. Coulter, M. (2010). Strategic management in action. Boston: Prentice Hall. Council for Higher Education Accreditation. (2012). Regional accrediting organizations 20112012 . Retrieved June 6, 2012, from chea.org: http://www.chea.org/Directories/regional.asp Council of Regional Accrediting Commissions. (2003). Regional accreditation and student learning: Principles for good practices. Retrieved June 2, 2012, from Middle States Commission on Higher Education: https://www.msche.org/publications/Regnlsl050208135331.pdf Deggs, D. (2011). Contextualizing the perceived barriers of adult learners in an accelerated undergraduate degree program. The Qualitative Report, 1540-1553. Deming, D., Goldin, C., & Katz, L. F. (2012, winter). The For-Profit Postsecondary School Sector: Nible Critters or Agile Predators? Journal of Economic Perspectives, 26(1), 139164. Dictionary.com. (2012). Higher learning. Retrieved June 8, 2012, from Dictionary.com: http://dictionary.reference.com/browse/higher+learning?s=t EDMC. (2012). Top Issues: Government Relations. Retrieved from EDMC: http://bipac.net/page.asp?content=top_issues&g=EDMC Education Management Corporation. (2011). EDMC 2011 Annual Report.

COMPANY ANALYSIS OF EDMC Education Management Corporation. (2011, October). Investor Relations: EDMC. Retrieved

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from Education Management October 2011 Student Enrollment: http://media.corporateir.net/media_files/irol/87/87813/EDMCOct11Enrollment.pdf Education Management Corporation. (2012). About EDMC: History. Retrieved from EDMC: http://www.edmc.edu/About/History.aspx Education Management Corporation. (2012). Q2 2012 Education Management Corporation earnings conference call-final. Fair Disclosure Wire. Fried, V. (2011, June 15). Federal Higher Education Policy and the Profitable Nonprofits. Policy Analysis, 678, 1-13. Guida Jr., A. J., & Figuli, D. (2012). Higher education's gainful employment and 90/10 rules: Unintended "Scarlet Letters" for minority, low-income, and other at-risk students. University of Chicago Law Review, 79(131), pp. 131-158. Hechinger, J. (2010). What's this degree worth? Goldman Sachs mad millions through its stake in EDMC, whose schools peddle arts degrees costing up to $100,000. Some debt-crippled students are crying foul. Businessweek, pp. 66-69. Institute of Education Sciences: U.S. Department of Education. (2011). Fast Facts:Enrollment. Retrieved June 08, 2012, from National Center for Education Statistics: http://nces.ed.gov/fastfacts/display.asp?id=98 Jaeger, J. (2011, November). Schools face whistleblower liability over pay rule. Complianceweek.com, pp. 20-21,66. Kroll, A. (2010, May 27). Steve Eisman's next big short: For-profit colleges. Mother Jones. Lechuga, V. M. (2008). Assessment, knowledge, and customer service: Contextualizing faculty work at for-profit colleges and universities. Review of Higher Education, 31(3), 287-307.

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Ledderman, D. (2011, June 13). The True Significance of 'Gainful Employment'. Retrieved from Inside Higher Ed: http://www.insidehighered.com/news/2011/06/13/explaining_the_true_significance_of_g ainful_employment_rules Lewin, T. (2011a, August 9). Education Management Corporation accused of widespread fraud. The New York Times, p. A1. Lewin, T. (2012b, July 1). Judge strikes main element of for-profit college rules. The New York Times. Malloy, D. (2011, June 12). EDMC recruiting pressure continues CEO uses tactics that caused trouble. Pittsburgh Post, p. A1. Mintz, S., Savage, A., & Carter, R. (2010). Commercialism and universities: An ethical analysis. Journal of Academic Ethics, 8(1), 1-19. Moody's Investors Service. (2012). U.S. Higher Education Outlook Mixed in 2012. Boston: U.S. Public Finance. Morningstar Inc. (2012). Education Management Corporation. Retrieved from Morningstar: http://financials.morningstar.com/valuation/priceratio.html?t=EDMC&region=USA&culture=en-us Natale, S., & Doran, C. (2011, July 7). Marketization of Education: An Ethical Dilemma. Journal of Business Ethics, 187-196. Radford, A. W., Tasoff, S., & Weko, T. (2009). Choosing a Postsecondary Institution: Considerations Reported by Students. Robinson, N., Petrunich, B., & McLaren, R. H. (2012). Industry Analysis of Higher Education. MBA Thesis, Shorter University, Atlanta.

COMPANY ANALYSIS OF EDMC Simba Information. (2011, August 15). EDMC, Apollo Group face scrutiny. Educational Marketer, pp. 7-8. The Street Wire. (2011, December 26). Education Management Corporation Stock Upgraded (EDMC). Retrieved from The Street: http://www.thestreet.com/story/11356763/1/education-management-corporation-stockupgraded-edmc.html

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West, E. (2012, March 27). Barclays Capital High Yield Bond and Syndicated Loan Conference. Retrieved from Education Management Corporation: http://phx.corporateir.net/phoenix.zhtml?c=87813&p=irol-calendarPast Xignite Inc. (2011, August 22). Litigation risk makes EDMC a sell. Retrieved from Seeking Alpha: http://seekingalpha.com/article/289038-litigation-risk-makes-educationmanagement-corp-a-sell Yahoo! Inc. (2012, July 6). Education Management Corporation. Retrieved June 10, 2012, from Yahoo! Finance: http://finance.yahoo.com/q/ks?s=EDMC+Key+Statistics