In 1981 recent college graduate John Katzman founded The Princeton Review to help fifteen high school students do better on the SAT. For some years it attempted to rival Kaplan, founded in 1937 and purchased by the Washington Post in 1984. In 2001, The Princeton Review joined the NASDQ (REVU) with a less than acclaimed intial public offering of 20% of its stock. Without going into the history of this school improvement industry segment, suffice it to say that many years ago The Princeton Review lost the race to expand from tutoring students to ace the SAT, LSAT and GMAT to every other kind of support service in education. Today Kaplan has a national scope in name recognition, test prep and work with school districts. The Princeton Review is arguably best known in the upper right-hand quarter of the United States.

The firm, managed by a fairly insular board, has had its financial and management problems. More than once, filing delays put REVU in jeopardy of delisting on the NASDQ. No surprise that it recently changed accounting firms.  Still, the firm has a recognizable brand, qualitatvely good services, and some well-known products, like its annual review of American colleges.

Samantha Marshall of Crain's New York Business explains (see also her article here) that at least two private equity firms believe there's something worth building on - or rebuilding, if the founder steps aside. Bain Capital Ventures and Prides Capital put in $60 million in the form of preferred stock, convertible at $6.00 a share with a 6% annual dividend accruing over four years. The stock has fluctuated from $4.61 to $6.80 in the past year.

For Katzman, the price of saving his baby was giving up the CEO slot. He remains the Chairman of the Board, although it's worth pointing out that the firm named education/turnaround specialist Howard Tullman to the new post of Executive Chairman in March, so Katzman may be on the way out from there as well. In all likelihood, Katzman saw this coming and at least acquiesced. He's certainly appeared graceful in the press.

The new CEO is Michael Perik - a 49 year old serial ed-tech company founder and executive (in reverse ordfer: Houghton Mifflin Assessment - chairman, Achievement Technlogies - CEO, The Learning Company - cofounder) whose resume includes chief of staff for the government of Ontario, foreign exchange trader, and venture capitalist. Perik was brought in as a consultant at the same time as Tullman. The new chief executive was granted 1.7 million stock options with an exercise price of $4.69, the fair market vallue on July 24. The options vest quarterly over four years and expire in ten years.

What is the plan to make this invesment worthwhile to the investors and Perik? Marshall writes:

Mr. Perik says he has high hopes for growing the brand by improving marketing of Princeton Review’s test-prep services and expanding its geographic reach. “The opportunity is to make sure that the financial exec and operate exec side of the biz closes that gap between the company’s performance and the perception that the brand has with the customers...."  

And....

He now wants to expand the Princeton Review’s product portfolio and leverage the brand into more specialized areas, like preparation kits for medical school exams. He also wants to add centers in regions like the Midwest. To achieve that, he says, the company must be more “disciplined” and cut down on “corporate overhead activities.”

So Part A is to take market share and/or market growth from Kaplan. But isn't that what Princeton Review has been trying to do from day one?  The real answer seems closer to Part B - better management and, of course Part C - more money.  But is the firm's strategic problem management - i.e., things will improve as Katzman lets go - as talk around the deal implies, or is it trying to compete in a market with an outfit that is part of a media giant above it and a bizillion local low-cost providers below it?

What to take away from this? First: weak finances and management, with stong brand and product, a plausible turn-around plan, and a well-conected turn-around manager can attract equity investment. Second, Princeton Review's story offers a template of the process for attracting equity investors. Third, from the standpoint of the school improvement market, whether Princeton's strategy involves pressing on with SES and other public school services, or focusing on consumer-market test prep is unclear. More later.