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Daily News, March 23, 1998

MILKEN’S NEW EMPIRE

Former junk-bond czar Milken amasses education companies worth $1 billion

After finally ending his punishing decade-long legal battle over securities fraud charges, disgraced junk-bond king Michael Milken is already well on his way to building his next empire.

Milken’s vehicle is a company called Knowledge Universe that has quietly become a $1 billion player in the for-profit education and training field. “Knowledge Universe is on a quest for universal domination,” said Stan Lepeak of the technology consulting firm META Group. “It could easily become a Fortune 100 company.”

Owned indirectly through a complicated maze of partnerships by Milken, his brother Lowell and software mogul Larry Ellison of Oracle Corp., the octupuslike group has snapped up a slew of education-related firms in an effort to gain dominance in areas such as computer training, private grade schools and educational toys.

Since 1996, under the leadership of company president Tom Kalinske — who as chief executive of Mattel in the 1980s revived the Barbie doll — Knowledge Universe has moved aggressively to create a new education brand to offer products from cradle to grave.

It has built a $700 million computer-training business through Productivity Point International and Britain’s CRT Group, acquired consultant Nextera and educational toymaker LeapFrog, started an online educational program called Knowledge University and begun businesses in a handful of other areas. “We’re trying to make Knowledge Universe a global education company,” Kalinske said. “I don’t think anybody’s thought about it in the way that we have.”

Experts estimate that education is a $600 billion market. And it is growing like gangbusters because of the technology boom and the lack of skilled workers. Those dollars have a lot of corporate chieftains salivating. In the computer-training segment alone, a handful of companies like Learning Tree International and CBT Group have sprung up and are expanding rapidly. But none has tried to create an educational brand that brings all facets of the learning business under one umbrella.

“What Michael Milken is doing is looking at all these different segments and saying, ‘I want that one and that one,’” said Christianne Moretti, of the International Data Corp. research company. “He’s pulling all those different segments together, and he’s the only one who’s trying to do that.”

It all began in early 1996, when the Milken brothers and Ellison put $500 million of their own money into the venture that would become Knowledge Universe.

Milken, who headed the now-defunct brokerage Drexel Burnham Lambert, changed the face of American finance before self-destructing on charges of securities fraud. He paid $1 billion in fines and spent two years in prison. On March 1 — after reaching a $47 billion settlement with the Securities and Exchange Commission on charges of violating a lifetime ban from the securities industry — his much-extended probation finally ended. But the decade-long legal battle didn’t erase Milken’s personal wealth, estimated at $700 million. And the legal bar against his return to the securities business left open the field of education, an area in which the nonprofit Milken Family Foundation had long been a player.

“I think that Mike has been thinking about this longer than the rest of us,” said Kalinske, who sits on the foundation’s board.

Ellison, too, had his reasons to consider the education market. As chief executive of Oracle, he was already in the business of computer training. But while the impetus — not to mention cash — came from Milken and Ellison, executives at Knowledge Universe stress that neither is involved in the day-to-day operations.

Instead, they hired some of the nation’s smartest marketing execs — beginning with Kalinske. A 54-year-old marketing whiz who was inducted into the Toy Industry Hall of Fame last year, Kalinske first met Mike Milken at Mattel in 1984. The toymaker was on the brink of bankruptcy because of an ill-fated diversification, and Kalinske needed a financial angel. Milken’s Drexel pulled together a $231 million rescue package. Mattel bounced back, raising revenues more than tenfold to $1.4 billion during Kalinske’s tenure. Later, Kalinske ran Sega America, where he gained accolades for his introduction of the wildly popular Sonic the Hedgehog. After a management shakeup at Sega, Kalinske joined Knowledge Universe in the summer of 1996. Then came high-profile execs from companies such as Walt Disney and Andersen Consulting.

Though much of Knowledge Universe’s operations remain shrouded in secrecy — and it lacks a listed telephone number for either its Los Angeles or San Francisco-area headquarters — it soon made a splash with its acquisitions. The group targeted firms in turmoil that could be snapped up on the cheap and then rapidly expanded through marketing savvy and financial help. What Knowledge Universe is doing to expand Productivity Point and the consulting business Nextera are examples.

Productivity Point, the computer-training company that is Knowledge Universe’s largest domestic division, is the one training experts figure will be the first spun off to the public. “This is a space where there clearly is not a dominant brand,” said Lane Bess, Productivity Point’s marketing director who joined from AT&T Worldnet. “This is not like a soft-drink brand. This is really at the very early end of its growth.”

Meanwhile, training experts believe Nextera has its eye on Renaissance Worldwide, a far-larger competitor from which many of its execs came. “I think it’s the beginning of the harvesting of this marketplace,” said Elliott Masie, a training guru and founder of the Masie Center. “There are few companies in this marketplace that are not now in play.”

But Milken’s Knowledge Universe — which still has money in the kitty for acquisitions — is alone in its grandiose vision. “Hopefully, someday, we’ll have a lot of everything,” Kalinske said. “We want to continue to put things together that make sense,” he said. “Could it be a $5 billion company? Yes. Could it be larger than that? Maybe.”Bio photo