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Sylvan in online deal for teachers

THE BALTIMORE SUN

Sylvan Ventures announced yesterday that it is investing $15.9 million in a partnership with textbook publisher Houghton Mifflin Co. and venture fund Inception Capital to create an online resource for teachers.

The new company, to be called Classwell Learning Group, will offer Houghton Mifflin's library of educational material online to elementary and secondary-education teachers on a paid-subscription basis.

Combined, the three are investing $30.4 million in cash in Classwell, with Baltimore-based Sylvan kicking in the largest amount for a 32 percent stake.

Inception, a Boston venture fund that supports start-ups born in older organizations, will invest $7.5 million for a 16 percent stake.

Houghton Mifflin, also based in Boston, will contribute $7 million in cash and $8.8 million in other assets - including its content and its ability to license and distribute it online - for a 32 percent stake. The remaining ownership stake is reserved for Classwell's management team.

David Cappellucci, a former Houghton Mifflin executive, will be president and chief executive of Classwell, which will be located in the Massachusetts capital.

R. Christopher Hoehn-Saric, chairman and co-chief executive of Sylvan Ventures, said Classwell will provide child-specific tutoring, which will become crucial as class size grows and more teachers retire.

"The whole process gets dramatically streamlined and lets teachers customize lessons one-on-one for 25 kids," he said.

WR Hambrecht & Co. senior analyst Trace Urdan said the partnership is a wise move for both Houghton Mifflin and Sylvan. Just as it did in July, when it launched a wireless-in-the-schools initiative with Aether Systems Inc., Sylvan found a brand-name leader in Houghton Mifflin. Urdan said that's crucial in the schools, where administrators are loyal to the suppliers they know.

"I like that strategy very much; they're making big plays," Urdan said of Sylvan.

As for Houghton Mifflin, Urdan said Wall Street suffers from a double standard that expects Internet companies to lose money but panics when traditional companies do. "This is something Houghton Mifflin absolutely has to do," Urdan said. "I'd be concerned if they weren't doing it."

Sylvan has been struggling to bolster its steadily eroding stock price, which is sharply off its July 1998 high of $36.875. It closed yesterday at $14.75, down 6.25 cents.

In March, it established Sylvan Ventures after selling its Prometric testing business, which netted $775 million, so it could fund and cultivate Internet education companies. It put $300 million of its own cash into the fund and raised $200 million more.

Yesterday, it extended the deadline for its "Dutch auction" offer to buy back up to 6 million shares for $13.50 to $15 from last night to Wednesday. The buyback follows another Dutch auction for 7 million shares in May. In a Dutch auction, the price for the shares is lowered until buyers are found.

Shares of Houghton Mifflin dropped $6.6875 to $43.625 yesterday. Wasserstein Perella & Co. analyst Edward J. Atorino downgraded the stock from "strong buy" to "buy." While Atorino said the Inception-Sylvan-Houghton partnership is "very nice conceptually," he worries that it will drag down Houghton's earnings - a factor that Houghton can ill afford, given the rapidly consolidating education industry.

"They're making a way large bet where the payoff is a ways down the road," he said.

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