Intellectual Venture Capital

In three years, the privately held Knowledge Universe has risen to 150 on the Forbes Private 500, and, at $1.2 billion, it is twice the size of its competitor KinderCare, an education company majority-owned by an affiliate of legendary buyout firm Kohlberg Kravis Roberts. According to former Knowledge Universe CEO Costello, he and Milken divided education into several main areas: K-12, business training and continuing education (including community college and professional certification). In the United States, they estimated, K-12 is worth a whopping $250 billion and business education some $70 billion, with continuing education falling somewhere in between.

The diminutive, workaholic Milken declined a Nation interview request, but the magazine was able to speak with four people who have worked inside Milken's coalescing business empire and with a number of outsiders who have dealt with him. Most question whether he's as suited--by temperament or inclination--to the task of educational reform as he is to the financial horse-trading that characterizes his for-profit company. "He's like an addicted shopper," says Costello, who left Knowledge Universe in early 1998 over strategic differences. "They told us to buy absolutely everything that was possibly buyable in the education world," says another former staffer, who requested anonymity, noting that some former associates have been threatened with lawsuits for talking to outsiders. Milken defined education broadly, and has spoken of a "cradle to grave" role in forming the human mind. He tried to buy Simon & Schuster's textbook division and saw gold in daycare, children's toys, curriculum creation, textbook publishing, charter-type school management and, for businesses, in offering everything from information technology training to courses on sexual harassment.

Milken is following the example of large toy companies like Hasbro by swallowing up promising small firms whose products can be sold to classrooms. In 1997 Milken bought LeapFrog, an Emeryville, California-based maker of award-winning toy products such as The Book Wizard (a child points a "magical pen" at this interactive book to hear the story). LeapFrog books are provided to reading centers courtesy of the nonprofit Riordan Foundation, established by LA Mayor Richard Riordan, a close pal of Milken's. Another KU unit, Reston, Virginia-based MindQ Publishing, also markets classroom-oriented software.

Milken has talked of dominating legal training and college prep courses, according to former insiders, and grandiosely pondered taking positions in media companies, themselves on the outer reaches of the knowledge universe. Costello thought Milken was out of control, wanting to go in too many different directions at once. "They'd look at these giant things, doing some kind of a leveraged buyout of temp agencies," recalls Costello. "They were all over the map." Knowledge University, Milken's version of an online institution of higher learning, is one of KU's most prominent flops. An idea that promised Internet courses taught by the nation's top professors, it has yet to open its virtual doors. The "University" now lies in disrepair in the hands of a Chicago consulting firm, from which KU has retreated to a minority stake.

Costello, considered a golden boy for his ten-year tenure at Cadence Systems, which during his reign became the world's leading supplier of electronic-design-automation software, argued for a strategy targeting modes of education best equipped to address anticipated changes in society. Milken's vision, by contrast, encompassed both innovative educational products and services and more conventional ones. For example, Milken wanted to put $100 million into buying existing language-training companies. "I said, Jesus, why buy an old dog for a hundred million bucks?" Costello recalls. Instead, he urged spending $10-$20 million to create a new model for language training. Costello, who continues to admire Milken in many respects, left after two and a half months of working with him.

In fact, Milken seems most successful when he is not reinventing the wheel but buying existing businesses in hot categories, and then doing whatever it takes to pump up the company's value--such as offering educational "breakthroughs" like jump-starting the sandbox set with early math and language training. Still, many KU holdings remain volatile, making it difficult to predict whether Milken will realize his expansive business aims. A case in point is KU's Nextera Enterprises, a 600-employee consulting arm offering corporate strategy planning and personnel development, which grew a whopping 745 percent last year but showed a net loss of $1.6 million. Two competitors, CBT Group and Learning Tree, have three times the sales. But perhaps the most interesting thing about Nextera, which is being spun off as a public company, is the direction it is taking and what that may say about Milken's broad definition of education and about his values. Nextera recently bought Lexecon Inc., which dispatches economics and law professors to assist companies accused of wrongdoing. For example, Lexecon expert witnesses trooped into courtrooms on behalf of handgun manufacturers facing liability suits and helped Merrill Lynch executives weather scrutiny of their role in the bankrupting of Orange County.

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