I was reading through 2U’s recently published Form 10-K to try to learn more about the edX acquisition. I was also curious to see if I would find clues to validate my theory regarding the company’s recent stock price drop.

A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a company’s financial performance.

Breakdown of edX Acquisition

2U’s 10-K Form includes a table that gives an indication of how they came up with the purchase price for edX.

The edX “trade name” was valued at $255 million, while edX’s university and enterprise partnerships were valued at $104 and $14.3 million, respectively. 

The acquisition was assigned a “Goodwill” of $423.5 million. If I understand correctly, the fair market value for edX was determined to be $350 million, but 2U is willing to pay an extra $423.5 million to acquire edX.

Edx also receives around 50 million visitors per year from Google’s search engine, which is probably one of the biggest reasons for 2U to acquire edX. But somehow that wasn’t explicitly mentioned.

Edx was constantly referred to as “edX Marketplace”, and integrating other 2U products like their online degrees, Trilogy Bootcamps, and GetSmarter online courses is a key part of 2U’s growth strategy.

We have already seen this integration happening, and maybe we will get to see the impact (if any) during 2U’s Q1 2022.

The 10-K Form also provided a table (for illustrative purposes) of what their revenue and losses would have been if the edX acquisition had occurred on January 1st, 2020. I have reproduced the table below as well as the actual revenue and loss numbers as reported by 2U.

This shows the extent of the risk 2U took with the edX acquisition: 2U losses jumped by over 50% while having minimal impact on revenue.

The other reason I had to read the 10-K was to see if 2U explained why their enrollments dropped in Q3 and Q4. Last month, I mentioned that Google might be to blame for this drop, since it’s something that impacted Class Central as well.

Though it didn’t explicitly say so, I found a hint as to the reason in the “Risks Related to Our Operations and Our Growth Strategy”.

2U mentions that they could be impacted by changes in search engine methodologies and state: “we have experienced fluctuations in our search result listings and website traffic based on changes to search engine algorithms”. 

The same phrase exists in their 2020 10-K, so unfortunately, it doesn’t tell us much.