VILLAVICIOSA DE ODON, Spain -- About 20 miles southwest of Madrid, past suburbs with glass office buildings, condominiums and big-box retailers consuming the land where farmers once raised wheat and wild bulls, lies the future of a Baltimore company.
Sylvan Learning Systems Inc. owns and operates a college here.
As it does in Chile, Switzerland, France and Mexico.
As it might someday in India. And maybe China.
Quietly, the company that made its name tutoring American children in strip shopping centers has become a pioneer in a quite different market: for-profit higher education around the world.
Sensing limits to tutoring a few years ago, the company began seeking other avenues of growth. A study it commissioned led it to international higher education, a market with seemingly vast potential and virtually untouched by major companies.
Last year, the international operations, including the colleges and a chain that teaches English to adults, generated slightly more than half of Sylvan's $484.8 million in revenue. Though it is still perceived by the public largely as a tutoring company for American school kids, its moves abroad have gained the interest of investors and educators.
Education might be as old as the day civilized man put chisel to slate, but profiting from it on a grand scale is a relatively new development beyond textbook publishing. For that reason, opinions about Sylvan's foreign foray range from unrestrained adulation to deep skepticism.
"It's one of the best business home runs I've seen in quite a while. It's the best of American entrepreneurship to go and export what we do best," said Kosmo Kalliarekos of the Parthenon Group, a Boston firm that consults for education companies, including Sylvan.
Not everyone is convinced Sylvan's new course is correct.
"The best business is the tutoring business, a truth that is lost on investors due to the noise surrounding the rest of the enterprise," Howard M. Block, a Banc of America Securities analyst, wrote in a report last month that sent the stock tumbling and spurred investors to trade 4 million shares in two days -- quadruple the norm for the stock.
The company is, indeed, still best-known for its K-12 tutoring centers.
The name's familiar
Some in Congress referred to the millions of dollars in tutoring grants in President Bush's education reform program as the "Sylvan amendment." Jay Leno mentioned the company in a joke the other night on his Tonight Show and got an immediate rise, and instant recognition, from his studio audience. The company even received odd praise about its teaching style from "Unabomber" Theodore J. Kaczynski: Before his capture in 1996, he wrote in his manifesto that the company had "great success in motivating children to study."
"All of a sudden, you would say 'Sylvan' and instead of people saying, 'What's that?', they'd say, 'Oh, I've heard of that,'" Joan Rainer said recently as students lined U-shaped tables at one of two centers she franchises in Philadelphia.
But Sylvan's other ventures -- from English tutoring in foreign countries to college degree programs on the Internet -- now produce more income than the after-school help for kids and an increased share of the profit.
More money, new look
Sylvan's higher-education profits climbed to $26 million last year from $2 million in 1999. K-12 tutoring profits grew to $35 million from $26 million during the same period, according to the company's most recent annual report.
Sylvan altered its corporate logo to subtly reflect the geographic and demographic shift in its trade. The silhouette of a boy with a soup-bowl haircut -- "Johnny Reader" -- was changed last year into a more abstract humanoid form that masked gender and age.
Sylvan now runs more learning centers in Europe than in North America, most under the brand name Schulerhilfe, a German company that Sylvan acquired for $29.5 million in 1998.
Sylvan also operates an English-tutoring chain overseas -- Wall Street Institute -- whose 100,000 customers are often young professionals seeking careers with multinational corporations. Last winter the company hired an Internet executive from Hong Kong to lead a push into Asia, considered vast fertile ground for English learning. It even reported post-Sept. 11 enrollment gains in Saudi Arabia, where a Wall Street Institute is across from the business owned by Osama bin Laden's family.
Heading a trend
Sylvan is part of a trend -- some say it's leading it -- of education service providers moving in several directions and on several continents at once. Others similarly branching out include Kaplan Inc., a well-known test-preparation company that has opened an online law school.
Another is the University of Phoenix, which runs the largest chain of colleges for adults seeking degrees in the United States and is pursuing that market overseas. The Washington Post Co. owns Kaplan and is an investor in the international arm of the University of Phoenix.
Whether Sylvan's bold move succeeds is still unknown. Wall Street reacted well to it last year, but a half-year of gains in the stock price were wiped out in a matter of weeks this summer after a few analysts questioned the company's accounting methods while the accounting misdeeds of Enron Corp., WorldCom Inc. and others were making headlines.
The stock has outperformed the Standard & Poor's 500 index by as much as 30 percent during the past year, until last month when it dropped below it for the first time.
The stock closed up 25 cents Friday at $14.46.
"The jury's still out on this international initiative," said Gerald A. Heeger, president of University of Maryland University College, one of the largest programs to offer degrees worldwide over the Internet.
"Legislators, trustees and regents are stern taskmasters, but they tend to give a university time to execute," said Heeger, who describes himself as a fan of Sylvan's move. "I'm not sure that Wall Street analysts are as forgiving."
Ailing subsidiary
Assessing Sylvan's future has been complicated by an arm of the company, apart from the colleges, that invests in start-up companies that combine education and technology.
That subsidiary, Sylvan Ventures, lost more than $50 million each of the past two years, more than wiping out the gains in tutoring and higher education. Because of that, Sylvan's profit picture the past three years has been erratic: A $305 million windfall earned on the successful sale of a testing company in 2000 was sandwiched between losses of $17 million in 2001 and $15 million in 1999.
In fact, Sylvan's corporate balance sheet often comes in two flavors: sweet, without Ventures losses, and sour with them.
Douglas L. Becker, Sylvan's chairman and chief executive officer, vows that the Ventures unit will turn profitable by 2004 as more of its offshoots succeed.
Sylvan will also likely split into three companies in the next few years, to focus on their distinct businesses, Becker said: one stock for international higher education, another for online higher education and a third for the traditional tutoring for kids.
All three companies would likely remain in Baltimore, where Sylvan currently employs 470 people full time and 150 part time. Worldwide, it has about 5,600 full-time and 8,000 part-time employees.
The numbers don't fully reflect the company's symbolic importance in the city, where Sylvan's logo looms from atop one of the new waterfront towers of the revitalizing Inner Harbor East.
In a city that has watched its roster of business headquarters dwindle as finance and insurance companies were gobbled up by larger companies elsewhere, Sylvan has filled some of the corporate civic void. It was the first company to open a national headquarters in downtown Baltimore in 20 years when it relocated from suburban Columbia in 1997.
That move was characteristic of the company, according to some observers: daring, novel, aggressive. But those tendencies have also raised questions about its accounting and the risks of its overseas strategy.
The hazards became evident this summer -- first when Sylvan delayed breaking ground on a new college in India because of fears there of war with Pakistan and then when it postponed spinning off the universities as a separate stock because of Wall Street's gyrations. Now it's uncertain when it will do either.
Most Wall Street analysts who follow the company look past the venture losses and believe the core business is strong. Fifteen analysts rate the stock a "buy" or a "strong buy," and a few have recently raised recommendations.
"It's a buying opportunity," said Alexander P. Paris Jr. of Barrington Research Associates Inc. in Chicago, who upgraded his rating to "strong buy" from "accumulate" last month and thinks the shares will be worth $33 within a year. "They have one of the best brand names in education."
Others, however, are less certain about the company's web of venture investments and untested strategies.
"[Wall Street] looks past the losses in that venture business, but I couldn't do that," said Lisa Z. Ramirez, a vice president at Denver Investment Advisors LLC in Colorado, one of the largest shareholders to sell out this year. Denver sold 1 million shares in February that were worth $25 million and constituted 2.5 percent of Sylvan's 40 million shares outstanding.
"My preference for stocks is simple businesses, easy to understand," Ramirez said. "I was a little nervous with what happened with Enron, Tyco, these businesses that are very difficult to follow and know exactly what's going on with the accounting."
Marketing experience
In the Internet era, when many "can't-miss" new ideas missed spectacularly, a company embarking on an ambitious plan only marginally related to its area of expertise -- and never attempted before -- is enough to give anyone pause.
But Sylvan had already pulled off this trick once, with tutoring: It took what was mostly a cottage industry and, in a few short years, marketed and managed its way into becoming the largest provider in the world.
Banners around Sylvan's college in Spain -- Universidad Europea de Madrid -- reflect the marketing prowess of the new owner: Dramatic signs with faces of students and an uplifting tagline, Vision de Futuro.
The immaculate campus resembles many small suburban colleges in the United States. Students wearing Reebok backpacks drain cash from a bank machine before dashing to their next class. Others bound across a wide footbridge over an ornamental pond that joins the modern buildings, ringed by olive trees and violet hills.
'A good reaction'
"When Sylvan bought this, everybody knew it. It was a good reaction. It's good to know that your small university belongs to a bigger structure," said Fabian Gonzales, 22, an exchange student from Chile who previously attended a university that Sylvan bought in his homeland.
"Schools here are part of a network so there are opportunities. Also, teachers here are full time. In Chile, teachers are part time. In Chile, my teacher also worked at the Central Bank."
To understand Spain's effort to remake its higher education, one needs only to compare the ages of its public and private universities.
The 51 government-run schools date back as far as 1218; the largest began before Columbus set sail for the New World.
Most of the 17 private institutions, on the other hand, are less than a decade old. The Spanish government, disgruntled by civil servants' opposition to reform of the universities, passed laws to encourage their formation. They are often run by churches or as mom-and-pop businesses.
Enrollment in them is still a tenth of that in historic public universities in Spain, but the gap is shrinking. Public university enrollment declined by 3 percent last year; private institutions' enrollment grew by 10 percent.
Universidad Europea was among the first of this new crop of private colleges, beginning with 1,400 students in 1995. Soon, the co-owners began to argue over spending, according to university employees who worked there at the time.
Sylvan already had a connection with the school because it did contract work there with a testing company it owned called Prometric Inc. The majority owner of the university, to his partner's dismay, sold his 54 percent stake to Sylvan for $51 million in 1999.
"To a degree, they've been subtle about changes, but I've heard comments about how great it is that the Americans are coming in. Unlike the owner before who promised a sports center for years, Sylvan came in and did it," said David Folkers, a St. Louis transplant who taught English at the college before Sylvan arrived.
Under Sylvan, the college is spending $11 million on a new sports complex with an indoor swimming pool, basketball and squash courts, and $5 million for new clinics where dental and podiatry students will practice.
Sylvan also set up wireless antennas so students have access to course material or the school library from their laptop computers anywhere on the grounds -- the first "wireless campus" in Europe, it said.
"This is much better here now," said Claudio Fevre, 21, a transfer student from Chile. "America has a good name."
Universidad Europea isn't cheap: Tuition is about 10 times the cost of public tuition. Students in Madrid's public universities will pay $750 to study health sciences during the coming school year. Their peers will pay $8,500 at Sylvan's college.
Paying can be difficult
That might not present a barrier in growing Madrid or Barcelona, but it would in much of Spain where household incomes average $21,500 in U.S. dollars. Spanish workers also face the highest unemployment and lowest wage gains in the European Union. And grants and loans for students are only half as common in Spain, where 17 percent receive them, as in most industrialized nations.
Several students at Universidad Europea said they were happy to be there but lamented that their parents had to pay so much because their grades weren't high enough to qualify for the public institutions.
"I didn't want my father to have to spend a lot of money, but I realize it is important," said Eduardo Huelin, a 24-year-old student from Barcelona. State-of-the-art broadcast studios at the school will help prepare him for a job at a television station in Spain, he said.
"Public universities have been here forever, from the 13th or 14th century. You only have to pay a little bit, but the public universities haven't made enough investment in the last 30 years for new degrees," said Miguel Carmelo, who became general manager at the school after a long career at Unilever, the Dutch consumer products manufacturer. "There are plenty of spaces for doctors, for example, even though Spain has enough of them, but not enough classes for physical therapists.
"Parents suffered in their career because they didn't know about English or technology, or they didn't travel enough. They wanted better for their children. ... We're building a structure, what we call the 'Sylvan Signature,'" he said.
In steps of the saint
The concept of an international group of universities actually dates back centuries, said Juan Salcedo Martinez, rector of Sylvan's university network. The Jesuits, the Roman Catholic order founded by St. Ignatius Loyola in 1534, sought to assemble a worldwide system of higher education 300 years ago -- minus the stock offering.
"They didn't have the technology of this moment, the Internet, the computer, the modern world. The Jesuits were visionary, but they didn't have the tools to do it," Martinez said.
Sylvan has said it plans to acquire up to a dozen schools, some general-education and others specializing in a skill, such as a business school it purchased in Paris last winter. The five universities so far have begun sharing curricula and expertise and offer some transfer opportunities for students, who now total more than 50,000.
"They are the pioneers in this form of higher education," Marjorie Peace Lenn, executive director of the Center for Quality Assurance in International Education in Washington, said of Sylvan. "They are the first to actually purchase existing institutions instead of creating them, and in that there is a brilliance because it is not easy to start major institutions from scratch."
But others foresee limits because of resistance to tuition and to foreign ownership of universities.
"Their strategy is buying up existing universities, and there are not many universities on the market. It doesn't seem to me a very clear business strategy of just buying up what's available," said Kurt Larsen, who studies education trends for the Organization for Economic Cooperation and Development, a group of 30 major industrial countries.
Tuition an alien idea
"We certainly don't approach the level of fees of the Stanfords and Harvards, but the students can't understand the concept" of tuition, said Andree Sursock of the European University Association, an industry group in Switzerland. "It will be very much a marginal market."
The World Bank in Washington concurred that "cost-sharing" between the state and parents isn't likely to succeed in many countries without a "functioning student loan program to assist students," a report said.
Several companies have long operated for-profit colleges in the United States, mostly technical and trade schools. But they said a lack of student aid overseas, like the kind that has fattened American college enrollments during the past half-century, deters them from international expansion.
"We've had inquiries from other countries. The desire is there, but the financial wherewithal doesn't appear to be," said Rene R. Champagne, chairman and chief executive officer of ITT Educational Services Inc. of Indianapolis, the largest operator of post-secondary technical schools in the United States. "Perhaps Sylvan will break ground for others like us."
Sylvan's Becker remains confident of the strategy. To succeed, the company needs only to capture a sliver of international markets that even skeptics describe as underserved, he said.
"International universities are one of the least risky businesses I've seen," he said in one of several interviews for this article. "We picked a low-risk country to start. This was a university on training wheels for us. We have very deliberately gone about this."
Sylvan's shift into higher education began quietly six years ago.
Becker and his business partner and boyhood friend, R. Christopher Hoehn-Saric, liked the tutoring business but began to see its growth limits. They had bought Sylvan in 1991, in their 20s, with millions they made from an invention that stored medical records on a plastic swipe card.
Tutoring might eventually produce several hundred million dollars a year in revenue, they realized, but they wanted billions.
Growth in for-profit colleges intrigued them, so they commissioned a study in that area. But the findings were discouraging: Sylvan was unlikely to become a leader in the field in the United States, which already had several large established companies operating colleges. Top among them was the Apollo Group Inc., whose University of Phoenix now has 116 locations, including three in Maryland.
The study did reveal a crack, though. Developing nations were beginning to seek answers to their lack of college opportunities for a growing middle class. Sylvan had experience overseas with Prometric, the testing company it later sold for a large profit that administered driver's license tests in Britain, among various exams.
Becker and Hoehn-Saric's ambition was to have Sylvan become one of the biggest education services companies in the world. Owning universities in other lands could help them do it, they thought.
Accounting questioned
But there were more problems. In 1999, analysts began questioning the company's accounting of its myriad businesses. Sylvan's stock began to plummet, from nearly $34 a share in February 1999 to just over $11 by autumn.
Becker and Hoehn-Saric shuttled between their adjacent offices overlooking Baltimore's Inner Harbor and worried about the future.
"This is not worth dying over," Becker told his partner, but the stress was taking a toll. Becker warned his new bride, Erin, that he might have to cut short their honeymoon to deal with the concerns about the company.
Through that autumn, the partners devised a plan: Sell off the companies whose clients were institutions and corporations, such as Prometric. Keep only those that sold directly to consumers because those could be measured similarly by investors and required like skills.
Those businesses included the tutoring centers, the international universities and a chain based in Barcelona that tutored adults in English. Becker imagined himself inside a wind machine with dollar bills blowing around, as in a TV game show, with a goal to pick only the few big bills and leave the small denominations behind.
Then-Deutsche Banc Alex. Brown shopped Prometric for Sylvan. It received a bid from Canadian media conglomerate Thomson Corp. at a price that Sylvan's executives had hoped for but didn't expect: $775 million -- more than the market value for all of Sylvan.
Time for celebration -- and another problem.
The company had to reinvest the money. It wouldn't attract investors by sitting in a bank account. Becker also feared the windfall made the company prey to a hostile takeover by a larger firm that would skim the cash.
His inner circle devised a two-pronged solution that the board approved in January 2000: The company began buying back $200 million worth of its shares to spur demand and increase the stock price. It also created a $400 million pool of capital to invest in new education-related companies.
Its venture partners included Apollo Management LP, a $10 billion private equity firm that committed $100 million. It has no relation to Sylvan's similarly named competitor, the Apollo Group. Sterling Partners LP, a Baltimore fund led by Becker's older brother, Eric, was among several smaller investors in Sylvan Ventures.
"It was like the end of The Godfather, when all the scores get settled at the same time," Becker said. Though no blood was shed, Becker felt he had remade the company in a way that would ease the move into more promising areas, such as adding universities.
Becker hasn't yet achieved the simplification he desired, however.
Sylvan profits have been dragged down the past two years by losses in the venture subsidiary it launched at the height of the investment frenzy in technology. The handwriting is on the floor, not the wall, in the case of Sylvan's predicament: An indoor basketball court was planned, and marked off, at Sylvan's year-old headquarters, but it was never finished because the play/work ethic of the "new economy" dot-com companies became unfashionable almost as soon as Sylvan moved in.
One ill-fated venture investment in a corporate-training company called Caliber Learning Network Inc. ended in bankruptcy -- and in so much bad blood that Sylvan dropped its partner in the venture, WorldCom Inc., as its corporate phone company.
Millions in red ink
Sylvan would have made 67 cents a share last year, but it ended up losing 46 cents a share, or $17.4 million, because of the red ink in ventures. Its fledgling companies range from a Web site that administers bulk purchasing for universities to a joint project with Owings Mills-based Aether Systems Inc. to develop handheld wireless devices for classrooms.
"As in any portfolio, some investments have exceeded expectations and some have not," said Larry Berg of Apollo Management, Sylvan's main co-investor in Sylvan Ventures. "Overall, venture portfolios are not perceived as highly today as when we started."
The company has also stumbled in Spain with its English-language tutoring business, an example of the risks of exporting education.
Six years ago, Sylvan spent $21 million to buy a Barcelona-based chain with an English sounding name, the Wall Street Institute. Sylvan more than doubled the number of centers to 450 and spread to 23 countries, from Chile to China.
But the company miscalculated in Spain, where it eventually added 66 centers to the 100 it started with. The chain's blue signs became almost as ubiquitous in Madrid as McDonald's golden arches are in Baltimore. To make matters worse, one of its executives jumped ship and started a similar chain called Opening English School that further saturated the market.
Sylvan announced last month that it will bail out of the unprofitable business in Spain, likely selling its centers to a franchisee or another buyer.
Quest for dominance
Yet as recently as last winter, Sylvan executives seemed oblivious to the problem.
"Doug thinks it's one of the best investments he's made," Rick Arevalo, then president of Wall Street Institute, said in an interview in late 2001. "Berlitz is more traditional. They might say 10 centers in France is saturation. We'd say 100 centers are. We want market dominance."
With that mindset, Sylvan poured $6 million into advertising and another half-million into glitzy center redesigns to make them more appealing to an upscale audience. Some Madrid centers were renovated to resemble chic coffeehouses, with exposed brick and large wall graphics of international cities.
"A train wreck," Becker called the situation recently. "In Italy, we have 40 to 50 centers in the whole country. In Spain, we have 160 centers and [our competitors] have 150 to 160 centers. The number of centers doubled since we bought it, but demand didn't double. It was insane to think that it would."
While Becker acknowledges the English-tutoring meltdown in Spain, he believes that the university there is part of a larger success story that's about to reap rewards. The heartbreak of Caliber Learning Network's premature spin-off into a quick bankruptcy is behind Sylvan, he said.
"Caliber was a very bitter lesson, but the universities are the anti-Caliber," Becker said. "The universities are a $200 million company that is profitable. We have proceeded incredibly carefully on this. It's ready."
Coming tomorrow
Douglas L. Becker (top) and R. Christopher Hoehn-Saric, the duo behind Sylvan and its journey into higher education, didn't finish college themselves but made millions in business by their early 20s. Tomorrow, The Sun looks at their past, as uncommon as their company.