The Riddle of Knowledge Universe

Jul 13 1998

Michael Milken wants a piece of your mind. The dethroned junk bond king is leveraging America's growing interest in - and anxiety about - technology to build a rapidly expanding educational conglomerate. The vehicle for this enterprise is Knowledge Universe , a secretive billion-dollar start-up bankrolled by Milken, his brother, Lowell, and Oracle chairman Larry Ellison.

Over the past two years, Knowledge Universe has acquired three computer training companies, a software designer, 248 preschools, a toymaker, a consulting firm and a stake in a chain of private elementary and junior high schools. Next up: Knowledge University, an online institution that will deliver college courses over the Internet.

Milken and his partners, of course, are hardly alone in seeing the fragmented but fast-growing private education market as an opportunity and the Net as the perfect medium for building new kinds of educational institutions. They're still struggling to figure out how an online university would work: Plans for a fall launch remain vague. But clues to Milken's ambitions and strategies are starting to emerge from the enigmatic Knowledge Universe.

In KU president Tom Kalinske's vision, the child of the early 21st century may attend a Knowledge Universe preschool and play with Knowledge Universe interactive toys. She could later attend a Knowledge Universe junior high school, studying a curriculum enhanced with Knowledge Universe educational software. In college, she may turn to the familiar brand name to supplement her education with online courses from Knowledge University. A Knowledge Universe company will provide Web-based computer training courses and executive seminars once she enters the workplace.

"On one side we want to be relied on by consumers, and on the other side we want to be relied on by business," says Kalinske, a former CEO of Sega of America and Mattel . "The brand goes on to postretirement."

Few observers doubt that Knowledge Universe has the deep pockets to pursue such grand ambitions. "Milken is a very smart man. There's an opportunity here for someone to build a brand for cradle-to-grave educational experiences and software," says Bryan Barnett, director APEX, Microsoft cofounder Paul Allen's online education venture.

The hurdles include government regulation and opposition to the privatization of education from teachers unions and politicians. Then there's the matter of whether parents will entrust their children's education to a convicted felon who in many people's eyes symbolizes the excesses of the 1980s.

Just this February Milken paid a $47 million penalty to settle a Securities and Exchange Commission complaint that he violated his probation by brokering a deal between MCI and News Corp.

The former financier has spent the better part of a decade trying to morph from Gordon Gecko into Horace Greeley. His teaching expeditions into inner-city schools have been well publicized, and he's poured money into the Milken Family Foundation, a $304 million nonprofit that works with policymakers and educators to promote technology in the schools. Lowell Milken, a real estate investor, serves as the foundation's president. Knowledge Universe president Kalinske sits on the board of directors.

But old habits die hard. As Michael Milken uses the foundation to advance public awareness about the need to wire the nation's schoolhouses, his penchant for secrecy surrounds Knowledge Universe. The firm's ownership structure resembles a set of Russian nesting dolls: Each company opens up to reveal yet another, until at the core one finds the Milken brothers and Ellison. And while the trio have recruited such high-tech players as Larry Geisel, a former Netscape VP who's now Knowledge Universe's CTO, they've also installed longtime lieutenants in other positions, according to SEC records.

For a company in the information business, Knowledge Universe maintains a low profile. KU's official headquarters is in an unmarked building on a tree-lined boulevard in Los Angeles' Bel Air district. The office houses the law firm of Milken's attorney and childhood friend, Richard Sandler, as well as the half dozen subsidiaries and holding companies associated with Knowledge Universe. Sandler's law partner, Stanley Maron, serves as Knowledge Universe's secretary. The company's vice chairman is Steven Fink, who also is VP of the MC Group, a Milken investment vehicle named in this year's SEC complaint. Fink previously sat on the board of software maker 7th Level, a company in which Milken holds a large stake.

The Milken brothers and Ellison are the sole directors of Knowledge Universe and put up $500 million for its initial capitalization. Although in SEC filings Michael Milken identifies his position at Knowledge Universe as his principal business occupation, Kalinske says the financier spends only about 20 percent of his time on the company's business.

Kalinske himself works from KU's Northern California office in an anonymous glass tower near San Francisco International Airport. He says there's been too much made of Knowledge Universe's stealth and elaborate corporate structure. "We have a holding company for everything we own in the different areas - the kids area, the business area, the education area."

There are practical reasons for KU's below-the-radar operations. The price of acquisitions could rise if targets knew Larry Ellison and Michael Milken were behind a bid rather than something called the KBI Acquisition Corp. Even the Knowledge Universe Web site flashes "Under Construction."

The same might be said for its Internet strategy. "We have many, many different concepts and ideas under way," allows Kalinske, whom Milken recruited to Knowledge Universe in 1996. With the Milken brothers and Ellison keeping quiet about their plans for Knowledge Universe - they were unavailable for interviews for this article - Kalinske has become the public face of the company. He met Milken in the 1980s when the financier put together a rescue package that revived Mattel when it was on the verge of bankruptcy.

Kalinske says he is considering a range of options for Knowledge University, and hopes to begin rolling the service out this fall. One possibility: packaging courses taught by the nation's academic stars. "The concept is why should you get a grad degree from Harvard or Stanford when you can take courses from the best professors from Harvard, Stanford, Wharton, whatever?" Kalinske says. Undecided is whether Knowledge Universe will create its own stand-alone virtual university or deliver instruction to existing colleges.

Knowledge Universe will face no shortage of competition from private firms and traditional universities. But at least one potential rival endorses Kalinske's approach. "If I had all the money in the world, how would I do online education? I probably would go to the parking lot at Harvard and offer $100,000 to each professor and put their courses online," says Rob Helmick, CEO of Real Education, a Denver company that packages and delivers classes over the Internet for the University of Colorado and 28 other schools. "It might be a good model. If you don't need accreditation and you're just after the knowledge, come to Knowledge University."

Other observers aren't so sure. "If they can leverage their name and fortune to get name professors, that would be great," says Meta Group analyst Stan Lepeak. "[But] the bigger names in the academy already have existing loyalties, book contracts and the like." The extent to which people will accept electronic substitutes for live teachers is also unclear.

Kalinske doesn't rule out acquiring a company to handle the online education venture - "Tell them to bring their money to Denver," Helmick jokes - but he says the Internet project is being developed in-house for now.

While packaging the wisdom of a Milton Friedman or Edward O. Wilson may have great marquee value, Knowledge Universe may be better positioned to exploit online corporate training. A recent International Data Corp. report estimated that the market for Web-based training will grow from $197 million last year to $6 billion by 2002. "I would expect them to be a key player," says IDC analyst Ellen Julian, referring to Knowledge Universe's acquisition of Productivity Point International and other computer-training firms.

But an executive at a San Francisco start-up that provides Web-based software training says that Knowledge Universe will have to convert its existing classroom programs to an online format. "Knowledge Universe doesn't really bother me. I would be concerned if there was a competitor that could be bought by Knowledge Universe," says Steve Zahm of DigitalThink , which has contracts with Federal Express, Johnson & Johnson and other corporations. DigitalThink itself might be an attractive target, and Zahm says the company has met with Knowledge Universe officials.

Technology executive Joseph Costello called KU's strategy into question earlier this year when he abruptly left the company after two months. Costello, former CEO of Cadence Design Systems , did not return several phone calls and e-mails. But he told Business Week in February that he quit because he thought Milken was more interested in doing deals than delivering education.

Kalinske downplays Costello's departure. "Joe's strategy is 'Let's start everything from ground zero.' Our strategy is that we wanted a faster start than that. We thought making acquisitions and building them was a sounder approach."

At least one analyst who tracks educational services says she's stopped following Knowledge Universe. "I focus on high-level educational and training services and that's not what they're about," says Dataquest's Ellen Kitzis. "They're about commodities, acquisitions."

Paralleling Knowledge Universe's educational empire-building has been the Milken Family Foundation's educational initiatives. Last year the foundation created the Milken Exchange on Education Technology to advance the use of appropriate technology in the classroom. The foundation's annual education conference attracts policymakers like Education Secretary Richard Riley and former Federal Communications Commission Chairman Reed Hundt. Among the foundation's beneficiaries: the University of California, which received nearly $500,000 in 1996, according to California state records.

"Each of the Milken Family Foundation's major initiatives in education is directed toward the goal of responsibly addressing the issues that are stalling the implementation of learning technology into America's classrooms," Lowell Milken said in a June 25 speech at the foundation's education conference in Los Angeles.

Cheryl Lemke, the foundation's VP for education technology, says the nonprofit "has almost no contact with Knowledge Universe. We share information with a multitude of companies."

The Milken brothers are not the only Internet entrepreneurs whose nonprofit ventures converge with their business interests. Paul Allen, for instance, funds the Paul G. Allen Virtual Education Foundation, which promotes online learning.

Meta Group analyst Lepeak thinks the foundation will help Milken's efforts at Knowledge Universe. "I think that's given them some practical hands-on experience. It helps to build his name in this area. He has more credibility than people think."

Lepeak may be right. Last year the National Association of State Boards of Education announced its annual Friend of Education Award. The recipients? Michael and Lowell Milken.