Education’s Pied Piper With a Dark Past

Here at the Century Plaza Hotel, where corporate raiders once paid homage to a junk bond king, hundreds of eager schoolteachers now await an audience with the same man: Michael Milken.

Unlike those financiers, these teachers have little interest in the old Milken, the Encino native who revolutionized Wall Street and served time in prison for securities fraud.

They are here for the new Milken, the cutting-edge educator who in just two years has built a commercial educational empire worth an estimated $4 billion. Just like the old days, he doesn’t disappoint. After Milken appears to the 1968 hit “Time Has Come Today” and outlines why human capital is growing ever more valuable, the teachers applaud sharply.

Ready or not, America, the curtain is rising on Milken’s second act, one that if successful, could restructure another area of society, generate huge profits and just maybe turn the convicted bond dealer into a hero.

He has already been busy at rehabilitating his image. One of his foundations funds cancer research and another has awarded nearly $30 million to individual teachers. His Milken Institute, a Santa Monica think tank, does research into social trends.

Now Milken aims to ring his school bell for 1 million youths, representing one of the most potent and audacious efforts in private education. Although his stated intent is to help public education by demonstrating new methods, his success would undoubtedly expose more of its flaws.

Milken can make this work only if parents are willing to turn over their children to a brilliant felon who says that he has come up with a better way to improve the educational system. That claim, say the skeptics, has yet to be proved.

Quietly and carefully, Milken has built Knowledge Universe, a so far mysterious company designed to provide “cradle to grave” learning tools. With Knowledge Universe, Milken, 52, hopes to become a dominant player in the growing business of education, which many on Wall Street compare to health care as the next industry ripe for growth and restructuring.

In an interview, Milken said he hopes Knowledge Universe, or KU, can be a “model for the best education has to offer.”

“We’re creating a brand name in education, a series of brand names. I don’t think anyone has tried to do it from birth to post-retirement. And the needs are greater than ever. . . . Our success will be in the execution.”

Started with about $500 million invested jointly by Milken, his brother Lowell Milken and Lawrence Ellison, billionaire chairman of software giant Oracle Corp, the company owns a day-care chain with more than 250 locations. It has a minority stake in a string of elementary and junior high schools. In addition, it owns an educational toy company and the United Kingdom’s largest vocational training firm. Just this year, Knowledge Universe tried to buy the textbook publishing arm of Viacom’s Simon & Shuster.

Some plans Milken has for Knowledge Universe include:

* Own a string of commercial private schools nationwide that could teach as much as 2% of the elementary market, estimated by analysts at 1 million children in the next five to 10 years.

* Offer textbooks for free on the Internet, in hopes that a free book would spark someone to attend Knowledge University, an online college that will offer classes from top professors.

* Produce a series of high-tech toys, books and even television shows.

* Bring algebra concepts and foreign language lessons to the preschool or kindergarten level.

* Set national standards for education through new technology in the classroom.

If its current growth rate continues, Knowledge Universe has the potential to be a giant of the education industry, analysts say. But Milken believes it is essential for the firm to be one of just several dominant players in the growing industry, admitting “I can’t do it alone.”

Public education, Milken says, suffers from antiquated facilities, inadequate investment in technology and too many social problems. But Milken carefully avoids the issue of teachers unions, a prime target for many conservative critics.

About $600 billion is spent each year in America on education, more than on national defense, more than on Social Security. Yet the massive amounts of money aren’t producing well-educated children, many believe. A January poll found that a large majority of employers and college professors say that a high school diploma is no guarantee that a graduate can read, write or do basic math.

The commercial area of education, including day care, educational materials and private schools, is a fragmented backwater of tiny ma and pa companies ripe for consolidation through mergers.

Even by privately owned company standards, Knowledge Universe has kept a particularly low profile. It didn’t have listed phone numbers for its Burlingame headquarters or for offices in Los Angeles until earlier this year. And it was only in July that Knowledge Universe began offering promotional materials, brochures and a World Wide Web site.

The low-key approach is part of the strategy, Milken said. One of the biggest hurdles Knowledge Universe is likely to face is Milken himself.

The verdict on a rehabilitated Milken is still out.

Some things, however, can’t be disputed, such as the importance of the junk bond market he helped create or his imaginative, visionary quality. Neither can the current health of many of the companies and thousands of jobs his financings helped create, such as Turner Broadcasting and Fox Television.

Also undisputed: Milken-financed corporate raiders caused thousands of layoffs and pulled apart some of America’s oldest companies. Milken pleaded guilty in 1990 to six felony securities violations and spent two years in prison. He once made $500 million in one year, and even after disgorging illegal profits, he is still worth about $700 million, according to Forbes magazine. A federal ban prohibits him from ever earning money by acting as a broker or investment advisor, and just this year he paid a $47-million fine for violating those terms.

For some, that’s all they need to know.

“There will be a lot of suspicions about Mike Milken teaching the youth of America anything,” said Stan Lepeak, a vice president with the META Group, a technology consultant in Stamford, Conn. “It’s a big leap of faith for Mike & Co. to come in and think they can fix America’s educational system. I think it’s visions of godhood. After being vilified in the 1980s, he wants to go down in history as a savior in the next decade.”

Others are even more skeptical.

“You don’t get convicted felons and ask them to head up educational enterprises,” said Joseph Carrabino, the outspoken and conservative candidate for California superintendent of public instruction in 1994 and former president of the State Board of Education. “You wonder what he’s really up to. He’s always making a buck.”

Milken believes people care more about the product--in this case education--than his past.

“I think anyone who is a public figure always has issues,” Milken said. “I don’t think good products are related to individuals.”

Joan Buckley, associate director for educational issues with the American Federation of Teachers, one of the America’s largest teachers unions, agrees with Milken.

“America’s parents are interested in one thing: the best possible school for their kids--how safe are they and how good is the program,” she said. “I don’t think they care who is doing it.”

To defenders of public education, the prospect of putting greater emphasis on private schools, instead of focusing on public institutions, is fraught with peril. Public schools have long been regarded as an adhesive that binds different social, cultural and economic groups--still an important task with today’s high immigration rates.

But in Milken’s view, such concerns misinterpret his goals.

“I think part of our job in this effort is to show what possibly can be done, and to serve as a model that other people can look at . . . to energize the public school system,” Milken said. “I still perceive most of the children, the vast majority of the children going to public schools.”

A growing camp of educators and Wall Street specialists predict that if anyone has a chance at improving education it’s Milken, given his access to capital, his years of experience in the educational arena and his ability to spot future trends.

“If he’s effective, and I think he will be, the world will be a better place,” said Theodore R. Mitchell, who just resigned as dean of the graduate school of education at UCLA.

Focusing on the Future

Milken’s Santa Monica office paneled with pine is a far cry from the florescent lights and raised voices of Drexel Burnham’s tense trading floor in Beverly Hills, where Milken worked during the 1980s.

A warm, summer breeze comes in from an open window to where Milken, a prostate cancer survivor, sits eating a tofu salad at a rustic wooden table decorated with a border of hand-painted flowers. You can hear voices from the Third Street Promenade.

Sometimes impatient or bored with the moment, Milken will jump up during a conversation to illustrate a point with a math equation. He often uses plots from the syndicated television series “Star Trek: Voyager,” (he’s a big science fiction fan) to back up his theories of how the future will be.

The future is what Milken seems to care desperately about. And he appears impatient to get there.

“I always focused on financing the future rather than the past. And quite often the past, I felt, was weak and the future was strong,” he said.

Although he struggles to come across as just another good guy from Encino, and in fact, is warm and affectionate with those close to him, his brain sometimes operates more like the android character ‘Data’ from “Star Trek.” Right now, he’s trying to calculate the value of people.

“What type of world are we living in? One where intellectual capital is the most valuable component,” said Milken. “Let’s say the [tangible] net worth of the country is $40 trillion, yet maybe that is 25% of the [total] net worth . . . that would suggest that 75% is human capital, which would be worth $120 trillion, which would be about $400,000 to $500,000 a person,” he said.

Expecting Growth of Private Schools

Milken’s approach to education is no less intense: the best is possible. Algebra can be taught in kindergarten, calculus to fifth-graders and preschoolers can begin learning second languages. All classrooms must have access to computers and the latest technology. Everyone can be brought up a level, they can be smarter.

Analysts and Milken are expecting strong growth in the market for private schools in the next few years, where 5 million children attend parochial and commercial schools--about 10% of the market.

Knowledge Universe already owns a 20% stake in Nobel Education Dynamics, a fast-growing Pennsylvania company that runs 120 elementary and secondary schools in 14 states, and has said it may buy a majority stake. This year, for $100 million in cash, Knowledge Universe purchased the Children’s Discovery Centers, which owns 255 schools, including schools in Riverside, Redondo Beach, Whittier, Torrance and the Child Care Center at Union Station in Los Angeles.

The tuition at Milken’s private schools varies depending on what market they are in, but prices are “competitive,” executives said. According to the U.S. Department of Education’s most recent data from 1994, the nationwide average cost of a non-parochial, private elementary school is $4,693 a year. For secondary schools, the cost jumps to $9,525.

If successful, Milken’s schools could be a testing ground for learning techniques, new technology or other products, like phonic toys, that could eventually be used in public schools, he said.

“Long term, our real contribution would be in curriculum that would be available [for sale] to all,” Milken said. “The advantage of speed in a for-profit environment, if we want to try something, we can just try it,” he said. “If it works and it’s successful, it can be implemented immediately, not over a decade.”

Through his family foundation, Milken passes out $25,000 cash awards each year to 150 schoolteachers to use in whichever way they want and brings them to Century City for what has become a must-attend conference for many legislators and academics.

“You feel so valued. When someone gives you $25,000 it’s hard not to have a positive reaction--it was like a fairy tale,” said Carol Koe, 51, a high school teacher near Seattle, who described Milken as a warm man who remembered her father dying recently of leukemia.

“I may get choked up telling you this,” said Koe, a 1995 award recipient. “But when I met him at the awards banquet, the first thing he said was, ‘I wish we could have done more for your father before he died.’ That meant so much to me.”

Other teachers told similar stories of feeling important and valued by the Milken Family Foundation. Many said they didn’t know much about Milken’s business dealings in the 1980s and were not aware of Milken’s work in the commercial area.

Building an Empire

But the profits for Milken appear to be real.

One of Milken’s Knowledge Universe companies, Emeryville-based LeapFrog, has annual sales of more than $55 million through nationwide chains. Its educational toys are used in reading centers through the Riordan Foundation, established by Milken’s old friend, Los Angeles Mayor Richard Riordan.

Tom Kalinske, the former head of Mattel and Sega who is now president of Knowledge Universe, envisions children enlisting into Knowledge Universe as early as 2 years old at its Children’s Discovery Center, then learning the alphabet through LeapFrog and later algebra from the firm’s software.

“And hopefully we’ll be involved in helping them prepare for an SAT exam. And maybe we’ll be involved in helping them select which university to attend. Then when they graduate, whatever business they are in, if they decide they need additional training, they think of us,” he said.

Milken was a master of complex financial deals, but building a company is a different discipline that requires an ability to delegate authority--not an easy task for a former junk bond king.

Some critics of Knowledge Universe say that the company still lacks a strong management team, which could jeopardize its success. Others believe that the company has failed to link its various pieces and there is no cross-pollination of the different divisions.

Kalinske agrees that the firm has a long way to go, although he said there will be ample chances to create synergy among Knowledge Universe’s various divisions in the next few years.

While not on the scale of Knowledge Universe, there have been several successful education companies, including Learning Tree International in Los Angeles and Baltimore-based Sylvan Learning Systems.

“Milken is not a newcomer to this field,” said Sylvan CEO Doug Becker. “Because of his foundation work, he’s put his money where his mouth is in the past 20 years. He’s a welcome arrival to this business, but as any competitive person would tell you, I wish him second best.”

Many analysts are betting on Milken to make a major purchase by year’s end. Names on the table include Phoenix-based Apollo Group, owner of the nation’s largest private college, University of Phoenix; DeVry Inc., the Illinois-based operator of business colleges; and language trainer Berlitz. Milken calls all three “first-rate companies,” but says any talk of purchasing them is premature.

Still, there is a lot of resistance among educators to Wall Street’s sudden infatuation with the business of education. There may be more pitfalls than profits, some believe.

“I don’t think Wall Street has a clue as to how K-12 education works,” said Howard Nelson, senior associate director of research for the American Federation of Teachers, a union especially strong in urban areas. “These investment bankers and analysts who want to do all this come from Ivy League schools. They are very susceptible to stereotypes about public schools.”

Kalinske is quick to point out that he, Mike Milken, Lowell Milken and Larry Ellison all went to public high schools and public universities.

“We all came out of public schools, and we have a warm spot in our hearts for public schools and we are familiar with the public school establishment,” he said.

As for Milken, he suggests that doing good and his legacy are both important motivators.

“I’ve always been very idealistic. When I grew up I was idealistic. I’ve had a lot of things happen to me, I’m still idealistic,” Milken said. “I think what being from California brings you is that people can be judged by their abilities, that one person can make a difference.”

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Milken’s New Universe

Knowledge Universe, the educational empire started with $500 million two years ago by Michael Milken, his brother Lowell Milken and Oracle Corp. Chief Executive Lawrence Ellison, has grown mostly through acquisitions. Here are the companies it either owns or has invested in:

* Productivity Point International, PPI, a Weston, Fla., training company that teaches computer skills at more than 130 locations.

* Bookman Testing Services, a New York-based testing company known for its TechChek proficiency tests. Founded in 1979 by Harvey Bookman, it was purchased by KU early this year.

* Children’s Discovery Centers, a San Rafael-based operator and owner of more than 255 child-care, kindergarten and first-grade centers.

* CRT Group, now called Spring: a publicly traded company that is Britain’s largest vocational-training firm.

* LeapFrog, an Emeryville-based educational toy company.

* MindQ Publishing, Inc.: This Reston, Va.,-based company, formed in 1993, markets and develops multimedia training software that turns a desktop computer into a classroom.

* Nextera Enterprises: This Lexington, Mass., business was formed in 1997 and provides business consulting. Nextera has purchased:

Pyramid Imaging Inc., a strategic consulting and customer software developer with offices in San Francisco and New York. Acquired in April.

Sigma Consulting, a management consulting firm acquired in the past year.

Symmetrix Inc., consulting firm acquired in the past year.

TEC Worldwide, CEO training.

The Planning Technologies Group, a Massachusetts-based strategy consulting firm. Acquired in April.

* Nobel Education Dynamics, a Media, Penn.,-based private school company. KU owns about 20%.