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Edison Stays Afloat by Altering Course
By Diana B. Henriques

Confounding its critics in educational circles, Edison Schools, the nation's first and largest for-profit school management company, has made it to another graduation season. But in doing so, it has altered its course in ways that may mute Edison's future role in the national debate over educational reform.

When the class of 2002 was signing yearbooks last June, few people on Wall Street would have nominated anybody at Edison Schools as "most likely to succeed." The year was one of compounding horrors for the company, for its shareholders and for H. Christopher Whittle, Edison's controversial founder and chief executive.

The company settled a regulatory complaint over its accounting, and was promptly sued by its shareholders. An ugly political battle in Philadelphia cut in half the number of schools Edison was hired to manage there. In response, its stock price plunged, falling to less than 14 cents a share last October from about $20 a share in January and wiping out more than $900 million in market value.

"There's no question that we had a near-death experience last spring," said Benno C. Schmidt Jr., a former president of Yale University and the chairman of Edison. "For most companies, it would have been the perfect storm."

But Edison has survived that storm by trimming back on some of the ambitions and appetite for growth that led it into the Pennsylvania controversy in the first place.

In a recent interview, Mr. Whittle acknowledged what he called the "the big boxcar lessons of Philadelphia." The chief lesson, he said, was that there should be no more Philadelphias. Instead, he said, Edison would seek to manage public schools only in midsize markets where it was welcomed by the local institutions. "We should only do charter schools in major urban areas ‹ thereby avoiding all the kind of stuff we went through in the past two years in Philadelphia," he continued.

Besides this shift away from the urban assignments that have attracted so much attention and opposition, Edison has also substantially curbed its appetite for new business, an about-face from the strategy it had pursued up until last year. This, Edison executives said, was a somewhat belated response to the back-to-basics mood that has dominated the stock market since at least September 2001.

A Proposal to Go Private

But the biggest change at the company may be yet to come. For two months, a special committee of Edison's outside directors has been weighing a proposal by Mr. Whittle and his management team to buy the company and take it private, a tacit acknowledgment that Edison is unlikely to regain the confidence of public investors, at least for the foreseeable future.

Some educators say that, taken together, these shifts in strategy could make Edison a less visible and perhaps less potent force in the school reform movement than it has been in the past. At the least, industry analysts said, Edison's departure from the stock market after its precipitous downturn could make it more difficult for other educational management companies to raise capital on Wall Street.

"I don't see the category disappearing," said Peter Stokes, executive vice president at Eduventures, a Boston-based consulting firm that monitors the education industry. "But I do see it becoming really small."

Mr. Whittle strongly disputes these predictions. "I don't think whether we're private or public has any effect on our standing in the national debate over educational reform," he said. "I think we're going to be a very important voice."

Indeed, he continued, anything that helps Edison survive enhances its importance in the reform debate. "As a quick victory is unlikely, longevity and the ability to survive are critical to success," he said. "I will not say that we are singular in our ability to dramatically impact the state of American education in the years ahead. But we certainly must be on a very short list of those with such potential."

Without a doubt, the school year that just ended was much kinder to Edison than anyone would have predicted last year. The company's efforts in Philadelphia, which began in September, have won some modest praise from politicians and school officials; in May, Edison deflected a plan to sharply reduce its future compensation under its contract there. Test scores are improving at many of its schools in Philadelphia and elsewhere. It has exited from some unprofitable contracts, continued to build its summer-school and educational software businesses, and overhauled its management culture.

By early spring, in fact, Mr. Whittle was promising Wall Street that Edison would be profitable in the quarter that closed on Monday, the first profit in its 11-year history. Edison has not yet released results for the quarter or for its full fiscal year, which ended on the same date, but its most recent comments to analysts reinforced Mr. Whittle's predictions.

Mr. Delaney has made it clear within Edison that his tenure there will be limited, and that he expects to leave once the necessary structural changes are in place. But for now, he remains a powerful member of what Mr. Whittle calls the troika in charge.

Besides Mr. Whittle and Mr. Delaney, the threesome includes Christopher D. Cerf, Edison's president and chief operating officer. Mr. Whittle credits Mr. Cerf with meeting the difficult operational challenges that have confronted Edison in the past year, as it took over 20 troubled schools in Philadelphia. But Mr. Cerf acknowledged that Mr. Delaney's arrival has helped instill a culture of much more cautious use of cash than would otherwise come naturally for Mr. Whittle.

"He has been an invaluable participant," Mr. Cerf said of Mr. Delaney.

Meanwhile, Mr. Schmidt ‹ who has shared the spotlight at Edison with Mr. Whittle ever since he left Yale to join the fledgling company in 1992 ‹ has largely stepped out of day-to-day management to deal with strategic issues and government relations.

"I guess you could say I am the company's ambassador," Mr. Schmidt said in a recent interview.

And his message lately has been that Edison "has done quite a bit more than just survive," he said. "I think this year will turn out to be our most effective year ever."

Reaction from Wall Street

But the stock market has greeted these improvements with yawns. True, shares of Edison have climbed from their October nadir of 14 cents to close at $1.54 on Wednesday. At that level, though, Edison's market value is just $81.41 million, two-fifths of what it was in March; at that time the company had cash and other current assets alone worth $146 million. Not even the news of the management buyout plan has produced any sustained improvement in the stock price.

But if Wall Street has lost faith in Edison's prospects, Mr. Whittle and his management team have not, as their pending proposal to take the company private indicates.

The senior executives, citing securities regulations, declined to discuss the details of the proposal. But Mr. Whittle explained in a recent interview why he thought it was beneficial to Edison to withdraw from the public marketplace.

"For one thing, it gets rid of all the noise that can swirl around us and be manipulated by our critics," he said.

Going private would also permit Edison to take advantage of more efficient financing than it can obtain as a public company, Mr. Whittle said. And as it is now, he said, the stubbornly depressed stock price deprives Edison of a "reliable incentive system for its executives."

Some educational industry specialists agree that going private would be a stabilizing factor for Edison. "Go back a year ago and think about the consequences of that share price depreciation for Edison," said Mr. Stokes, the analyst from Eduventures. "That had the potential to bankrupt the company."

He added, "Going private protects it from the death spiral of harm that kind of reaction can cause."

OTHER ARTICLES by John Merrow from The New York Times Taking the Measure of a School Speaking in Tongues Oops! One More Time

Facing Political Challenge

But Mr. Leeds said that Edison's primary challenge now is not just financial, but political.

"It's going to have to sue for peace and start working more amicably with other stakeholders in and around the public school arena," Mr. Leeds said, citing the vociferous opposition Edison faced from the teachers' union and some community groups in Philadelphia. "As a private company, it may be in a position to focus more of its efforts in those areas, to be more accommodating."

Henry M. Levin, director of the National Center for the Study of Privatization in Education at Teachers College at Columbia University, has long been skeptical of Edison's ability to turn a profit solely by managing public schools. But he noted that Edison's recent turnaround has included steps to diversify into after-school and summer-school management ‹ it has more than 40,000 students in its summer schools this year ‹ and educational software sales. "Those are all areas where it can compete more effectively," Professor Levin said. "That is a very smart move."

But Professor Levin and other Edison critics say that Mr. Whittle's current plans do little for Edison's credibility because they are such a sharp departure from the ambitious future he mapped out in 1991 when he announced plans for Edison's formation.

"Our goal is to reshape education in America by providing state-of-the-art schools to communities nationwide and a state-of-the-art example for others to follow," Mr. Whittle said at that time. He predicted that the company would operate 200 new schools by 1996, and 1,000 campuses with a million students by 2010.

With roughly 150 schools and about 80,000 students today, Edison is far short of its founder's dreams. Mr. Whittle concedes that. "But it seems only fair to measure our accomplishments against the expectations of our detractors, as well as against our own expectations," he said. "We may be behind our original projections, but we are far ahead of what opponents ever imagined."

He added, "In 1991, we were a wonderful and exciting dream. Today, we may not be as `spring like,' but we undeniably have more substance and power."

Mr. Whittle notes that Edison has outlived many earlier predictions of its imminent demise, and said he was convinced that it ultimately will make a substantial contribution to American education. Whether its power to promote change will diminish as Edison steers its new, quieter course is not yet certain.

But what is certain, according to Professor Levin, is that the company's failure ‹ so narrowly avoided a year ago ‹ would have a significant impact.