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Sylvan Learning to Buy National Education

Mergers: Shares of both fall on news of $675-million stock deal, which caps turnaround for National.


National Education Corp., which operates the world's largest correspondence school program, said Wednesday that it will be acquired by Sylvan Learning Systems Inc. in a $675-million stock deal that would create the country's biggest for-profit educational and vocational training business.

The deal caps a turnaround year for Irvine-based National Education, which posted a string of hefty losses in the late 1980s and early '90s but broke into the black last year.

But while executives at National and Sylvan praised the agreement to combine the two companies to serve the rapidly growing $60-billion private education and training market in the U.S., investors weren't leaping to embrace the deal. Both companies' shares fell Wednesday in heavy trading.

"This is the biggest deal in the history of the industry," said Doug Becker, Sylvan's co-chief executive. "It doesn't surprise me that there are some initial reservations." The two firms would have almost $500 million in combined sales.

Baltimore-based Sylvan, which operates a chain of 650 tutoring centers catering primarily to students from kindergarten through high school, was hit hardest. Its stock plunged 15% to close at $29.875, down $5.25 for the day, on Nasdaq. NEC's stock dropped 5% to close at $16.25, down 87.5 cents, on the New York Stock Exchange.

Both stocks had risen rapidly in recent weeks on rumors of a sale or merger. Analysts suggested that much of Wednesday's price drop was caused by speculators deciding to take their profits and get out.

But investors might also be concerned about the combined company's prospects, analysts said.

"We think it is a potential home run, but there are those who wonder why Sylvan is buying a company that was two steps from the grave not too long ago and is not growing anywhere near as fast as Sylvan," said Michael T. Moe, an analyst with Montgomery Securities in San Francisco.

National posted a $21.4-million profit on $289 million in revenue in 1996 after a reorganization led by turnaround specialist Sam Yau. But the company had been hemorrhaging cash for years before that. Its combined losses from 1987 through 1977 topped $150 million.

Sylvan went public in 1993 and has been making money since 1994. Its profit jumped more than 500% last year to $14.7 million. Sales have nearly doubled every year since the public offering, hitting $157.1 million in 1996.

The company has had problems of its own, though. Early last year, the National Assn. of Securities Dealers--which had just awarded Sylvan a $6-million contract to train stockbrokers--said it was looking into possible insider trading in Sylvan shares in advance of the contract announcement. An NASD spokesman said he was not aware of any action being taken.

Yau, NEC's president, said the sale to Sylvan "makes great strategic sense" because it combines two businesses whose products are complementary rather than competitive. Because of that, he said, the purchase shouldn't result in many layoffs among National Education's 2,000 employees.Sylvan will issue 0.58 share of its stock for each National Education share, a deal that values NEC stock at $18.34 per share at Wednesday's closing prices. NEC shareholders would have a 47% stake in the combined company.

The proposed deal, which has been approved directors of both firms, still must be cleared by shareholders and regulators.

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