The Princeton Review REVU – The Writing was on the Wall

About the company

If you have ever had to prepare for the SAT, ACT, LSAT or any other tests before being accepted to a postsecondary educational institution, you are most likely familiar with The Princeton Review because either you or someone you know had probably used the company’s test preparation materials. However, you may not realize that the company is more than just a test preparation provider because it operates through four divisions: Test Preparation Services, Supplemental Educational Services, Penn Foster, and National Labor College.

Through the Test Preparation Services Division, the company provides test preparation courses and tutoring services. It also publishes books through Random House. Through its Supplemental Educational Services Division, the company provides free after-school tutoring to students in need of improvement. These services are funded through the No Child Left Behind Act of 2001. Recently, the company announced that it is exiting this division. The Penn Foster Division is relatively new because it was acquired in December 2009 to provide online academic programs through Penn Foster Career School, Penn Foster College and Penn Foster High School. The National Labor College Division is built on a strategic relationship with the National Labor College to develop and start new programs for the AFL-CIO’s members and their families.

Even though the company has such a recognizable brand name in the test preparation industry, its performance has delivered nothing but disappointment and frustration to the investment community. This company’s financials are such a mess that I shake my head with disbelief. From 1997 to 2009, the company has lost money every single year except in 1998 and 2003. The financials are filled with impairment and restructuring charges, and losses from discontinued operations. While today’s investors might still have hope, I am afraid that this is all they have left because the company’s problems are very deeply rooted.

History

The company was founded in 1981 by John Katzman. During his years as a student at Princeton University, he worked part time at a grocery store. One day, he saw an ad for teachers of an SAT preparation course at a coaching school known as Pre-Test Review, operated by Bob Scheller. Because the position paid significantly more than what he was making at the grocery store, applying for it and taking the position was a no-brainer.

Scheller developed a unique way to prepare students for the SAT. He used the old SAT tests and ran a computer analysis to find ways to outsmart the test. In simple terms, he was teaching students how to cheat and not how to develop skills. His approach was completely opposite to the teaching methods of Stanley Kaplan, the pioneer of the test preparation industry.

When Katzman graduated from Princeton University with a degree in architecture, he took a job that lasted several weeks and he started his test preparation business in the fall of 1981 with 19 students. He continued the teaching methods that he learned from Scheller, and instead of teaching students the basic fundamentals, he focused on shortcuts. In addition, he took the stance that the SAT was just a sham and didn’t really measure anything. This was music to students’ ears. The word spread and his business started to flourish. He soon partnered with Adam Robinson who also used to work for Bob Scheller. Together, they taught students how to raise their test scores without working on their fundamental knowledge.

Because students much preferred a quick fix, Kaplan, which is a division of Washington Post (WPO), was losing market share to its aggressive competitor. The Princeton Review employed some very unethical practices to gain business from the pioneer of the industry. For example, The Princeton Review was running rude ads about Stanley Kaplan. It registered www.Kaplan.com in order to be vicious, and both companies had to go to court to resolve the issue. In 1985, The Princeton Review was sued by the Educational Testing Service (ETS) for stealing SAT questions.

While Katzman and Robinson seemed like a great match to battle everyone including Kaplan and the Educational Testing Services, they could not even get along with each other and finally parted ways.

On June 19, 2001, The Princeton Review became a publicly traded company.

Conclusion

Ever since going public, the company had only one profitable year, which was 2003. Investors are simply fed up with this company. Some of their comments are as follows:

  • “Shareholder value has been totally destroyed.”
  • “This company is a mess. Incompetent management and a dead business model.”
  • “This company has been mired with problems for years.”
  • “What a shame a bunch of knuckleheads allowed a company with such a strong brand to slip into the dumpster.”
  • “Terrible moral, reckless spending and lack of strategic planning.”
  • “The Princeton Review is a case study of what not to do to stay alive as a public company, long term.”

While I feel sorry for investors who lost a lot of money investing in this company, the writing was on the wall. The founders created a company that was based a philosophy of cheating and focusing on short-term fixes versus long-term skill building. If they thought this way, then how were they going to think about long-term shareholder value? They didn’t and that’s probably why this company never delivered anything to shareholders other than losses. Also, if they were capable of stealing SAT questions to get ahead, what makes you think they would not steal from you, the shareholder? If the founders could not even get along with each other, what makes you think that they cared to get along with you, the shareholder?

Even though they no longer manage the company, I believe that the damage has already been done because the company’s culture was poisoned from the beginning. If the company is able to turn around, investors might make money, but for me, I would rather make nothing than be part of an organization that has such unethical roots.

Disclosure: Author does not own REVU or WPO

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