Sylvan Learning Systems Inc. of Columbia said yesterday that it will acquire a Minnesota company that provides computerized testing services to government agencies, technology companies and scientific institutions in a cash and stock deal worth up to $140 million.
That figure is three times Sylvan's 1992 sales of $47 million, a similar multiple of Drake's expected $42 million in fiscal 1995 sales, and up to 40 times Sylvan's 1994 earnings of $3.3 million, but Wall Street's reaction was strongly positive anyway. Sylvan stock jumped $2.50 to $27.25.
Sylvan designs and delivers customized tutoring services to school-age children through 540 franchised and company-owned centers throughout North America and offers computer-based testing through more than 260 Sylvan Technology Centers.
"We have a Wall Street valuation based on the assumption that we are going to get a lot bigger," said Sylvan Chief Executive Douglas Becker, who put his company's market value at $250 million, based largely on analysts' estimates that Sylvan's sales would climb to $90 million this year.
"As a $47 million company to buy a company the same size it would look like we are swallowing a lot. As a $90 million company, it looks a little more rational."
Mr. Becker said the price Sylvan will pay for Drake Prometric LP of Bloomington, Minn., depends heavily on whether the targeted company can keep up sales growth that hit 43 percent during the first nine months of Drake's current fiscal year.
Drake serves nearly 40 companies, professional associations and government agencies.
Since its 1990 founding, the firm has delivered more than one million computer-based exams for big companies and has served organizations including the National Board of Medical Examiners, the Federal Aviation Administration, the Federal Communications Commission, and the Environmental Protection Agency.
Sylvan will pay at least $75 million for Drake, including $20 million in cash and $55 million of Sylvan stock. An additional $25 million of Sylvan common stock will be paid if Drake meets certain financial targets from 1996 through 1998. Another $40 million in cash or Sylvan stock will be paid if other financial targets are exceeded in calendar year 1998 or 1999.
"The only way they are going to see that $140 million top price is to have very substantial growth," Mr. Becker said.
He said the top targets call for growth close to this year's pace, but not quite as high.
Two significant securities firms follow Sylvan's stock, but neither Alex. Brown Inc. analyst Steven L. Eskenazi nor Robertson Stephens & Co. analyst Keith Benjamin could be reached yesterday. Drake is privately held.
The deal is a bet that each company can keep up its torrid pace once joined, which the two sides expect to happen in the fourth quarter.
"In some ways, it's somewhat conservative," Mr. Becker said. "There are very strong fundamentals in this business."
He said the deal will add to the value of Sylvan's stock as early as this year, because the price Sylvan is paying is a lower multiple to Drake's earnings than Sylvan stock commands in the Nasdaq market.
Mr. Becker added that Sylvan will give two board seats to the two owners of Drake, both private investors.
But he said the new shareholders will not exercise direct control because they have agreed to put any Sylvan shares above a 20 percent stake in a voting trust for 10 years, meaning management will control how those shares are voted on shareholder issues.
Drake's partners also agreed not to buy any more shares of Sylvan for a decade.
DEAL AT A GLANCE
... .... .... ... Sylvan Learning Systems Inc. ... Drake Prometric L.P.
Headquarters: ... Columbia, Md. ..... ..... ...... Bloomington, Minn.
Est. 1995 Revenue: $79 million .... .... .... ..... $42 million
Testing Locations: 280 ..... .... .... ..... ...... 740
Countries: ... ... 31 ..... ..... ..... ..... ..... 70
Market: ..... .... Academic admissions ..... ...... Business and industry
Ownership: .... .. Public ..... ..... ...... ...... Private
Source: Sylvan Learning Systems Inc.