Due Diligence and Kaiwen Education
Information that has been requested of Rider University by the New Jersey Office of the Attorney General, if provided, will reveal that by mid-November 2017 Rider’s Board of Trustees, heavily relying on PwC (PriceWaterhouseCooper), had completed sufficient due diligence in relation to Kaiwen Education to select this company as Westminster Choir College’s (WCC) potential and future owner.
The information will show that a major part of the due diligence carried out by PwC was determining whether this potential buyer had the financial resources to meet Rider’s particular needs, and its willingness to retain the professional help in the U.S. necessary to evaluate the purchase, provide legal assistance, and secure the various accreditations and approvals that would eventually be required.
At this point, mainly “reverse due diligence” – evaluation of the opportunity by the buyer - was being carried out by Kaiwen, and the Board was eager for this to be completed quickly. A revised term sheet for the transaction was also under discussion by the parties.
It is important to note that in April 2017, well before November, a draft set of the Guiding Principles, criteria developed by the Board to select Westminster’s future owner, had been distributed to Board members. This draft was identical in every respect to the set of Guiding Principles eventually distributed to the Rider University community in 2018.
Among other requirements, the Guiding Principles indicated that organizations interested in acquiring Westminster were to be evaluated on the ability to provide short- and long-term financial stability for WCC; and on organizational mission, reputation, objectives, student outcomes, accreditations, enrollments, performance statistics, endowment and giving record, and financial resources.
How adequate was Rider’s due diligence? It’s well to keep these Principles in mind as we consider below the state of Kaiwen as a company in November 2017. Here is some of what thorough due diligence would have discovered about Kaiwen at the time from respected and easily available public resources:
The information will show that a major part of the due diligence carried out by PwC was determining whether this potential buyer had the financial resources to meet Rider’s particular needs, and its willingness to retain the professional help in the U.S. necessary to evaluate the purchase, provide legal assistance, and secure the various accreditations and approvals that would eventually be required.
At this point, mainly “reverse due diligence” – evaluation of the opportunity by the buyer - was being carried out by Kaiwen, and the Board was eager for this to be completed quickly. A revised term sheet for the transaction was also under discussion by the parties.
It is important to note that in April 2017, well before November, a draft set of the Guiding Principles, criteria developed by the Board to select Westminster’s future owner, had been distributed to Board members. This draft was identical in every respect to the set of Guiding Principles eventually distributed to the Rider University community in 2018.
Among other requirements, the Guiding Principles indicated that organizations interested in acquiring Westminster were to be evaluated on the ability to provide short- and long-term financial stability for WCC; and on organizational mission, reputation, objectives, student outcomes, accreditations, enrollments, performance statistics, endowment and giving record, and financial resources.
How adequate was Rider’s due diligence? It’s well to keep these Principles in mind as we consider below the state of Kaiwen as a company in November 2017. Here is some of what thorough due diligence would have discovered about Kaiwen at the time from respected and easily available public resources:
- By November 2017 Kaiwen had operated its Beijing Haidian K-12 school for a little over a year and had an enrollment of about 370 students, 25% of school capacity. The company had just opened its second K-12 school – Beijing Chaoyang - with 248 students (6% of school capacity), though it had predicted it would enroll 1780 students in its first year. By November 2017 Kaiwen would not have graduated a single student, in contrast to many of its many competitors, which had successfully placed their students for years in U.S. colleges and universities, a key Kaiwen goal.
- These activities comprised the sum of Kaiwen’s experience in education. While perhaps meeting Chinese K-12 instructional standards in its two schools, the company had no experience whatsoever in higher education and higher education accreditation.
- In November 2017 Kaiwen was slowly building its business, brand, and reputation, something it claims to still be doing today, according to its recent report to the China Securities Regulatory Commission.
- Kaiwen had completed its fiscal year 2016, ending December 31, with a net loss of 96 million Yuan on revenues of 316.9 million Yuan – a net loss of 30.3%.
- By the end of 2017 Kaiwen would have operated profitably in only one out of the eight previous quarters. It was able to notch a small profit in 2017 in the very last quarter by selling assets from its unprofitable previous business, a business it was eager to leave. Otherwise, it would have had a 20% net loss for the year.
- Though it was able to divest itself of its previous steel fabrication business in November 2017 the sale required Kaiwen to remain a legal guarantor of that firm’s performance on a series of outstanding contracts. Kaiwen’s liability as a guarantor on June 30, 2018 was 915.2 million Yuan, then 43% of Kaiwen Education’s net worth as a company, calculated by subtracting its total liabilities from its total assets. A portion of this liability (303 million Yuan) currently remains and will continue through 2019.
- In none of the quarters in 2016 and 2017 did Kaiwen have on hand sufficient cash and cash equivalents to satisfy its current liabilities – short-term debts and accounts payable. Kaiwen’s current liabilities were on average, and remarkably, five times larger than the cash on hand to settle them. For one quarter, current liabilities were ten times larger. These obligations were settled through government subsidies and additional loans, an unsustainable strategy.
4/29/19