Aug
3
Learning a lesson from Jana and Teachers?
Filed Under B2B, Blog, Cengage, Education, eLearning, Financial services, Industry Analysis, internet, Publishing, Thomson, Uncategorized, Workflow | Leave a Comment
Activist investors from hedge fund Jana and the Ontario Teachers Pension Fund (“Teachers”) have bought 5.2% of McGraw-Hill Corporation with the avowed intent of forcing the division of the company into a financial services company and an educational/B2B company.
When the activists arrive, they always show an immediate profit: this announcement triggered a sharp rise in McGraw’s share price (http://dealbook.nytimes.com/2011/08/02/mcgraw-hill-shares-rise-after-activist-stake/), and a great deal more interest in what many media market investors have long regarded as an unspectacular mid-market performer. Disincentives in large media players have always included unified Chairman/CEO roles, and divided equity classes with limitations on voting shares. Incentives have always included the thought of break-up in conditions where the sum of the parts may be found to be greater than the value of the whole. McGraw now faces this scenario, and has known for at least a year that it was likely. Hence the strategic portfolio review launched last Fall, and the creation of a McGraw-Hill Financial Services division. But now that the real question has been asked by Teachers and Jana, how can management react without appearing to be running the company on the agenda of a powerful but still small shareholder?
Over the last decade the great principle in developing B2B assets has always been Portfolio. Sir Crispin Davies practised this at Reed, building a four legged table in the sure and certain knowledge that not all markets would go bad at once. Problems only arose when the education leg fell off, and the last recession provided his successors with the assurance that all markets can go wrong at once. Thomson Reuters’ reaction was different; move away from Portfolio into Wide Vertical – a huge construction from law and regulation to financial services and transactions where a broad base of clients can be inter-related and cross sold, and where service and content assets can be optimized. Will it work? Well, its work in progress and good progress is being made. And the not wanted on board assets like Healthcare are on the block.
These are options. But what about the McGraw-Hill asset base? What are its strengths and where does it dominate? The first thing to say is that, in comparative terms, great changes have taken place in the past few years which have surprised observers of this often fiercely conservative company. The sale of BusinessWeek and the acquisition of J D Power are cases in point. But in terms of the wholesale creation of the group asset base in digital first terms? Progress is there, but is seen by outsiders as slow and patchy, part of niche and product strategies rather than the platform and standards driven thinking of some of the market leaders. There is no doubting the pre-eminence of Standard and Poor’s, however, and the activists, by attacking at this point, may be more likely to set up a bidding war for this (Hearst are already in Fitch, Bloomberg and Thomson Reuters lead these markets) than create a successful IPO.
What about the other assets? B2B has huge positions of strength, but they are all under pressure. McGraw have long dominated construction, but now finds that while it did all the right things to get Sweets and FW Dodds into workflow networks, recession (and an ill-judged law suit with Reed Construction) has lost it concentration and time to market. Alongside it, Platts rested on its laurels for too long as the leader in oil price indexation (losing market position with Aramco to the tiny British player Argus Media) and is now rushing to catch up in other asset classes (its latest buy was the Steel Index) and broadening a portfolio which should be doing very well at this time. One hopes that Platts is seen as much as anything as a part of financial services (who bought New Energy Finance and Point Carbon? Bloomberg and Reuters), but probably it is seen as the counterbalance to construction and the aerospace/aviation holdings (who lost out to Reed in bidding for Ascend Worldwide), both of whom continue to require careful nursing to bring their brand strengths into full recognition in the digitally networked marketplaces in which they exist.
But you cannot invest in everything at once. McGraw-Hill Education is a case in point. This side of the company created digital firsts 15 years ago (think of Primis) but then was allowed to graze as a cash cow when other priorities in the portfolio became more important. With Pearson now emerging as the unassailably dominant player in North American education, but the whole market suffering a hangover now that school spending cuts from 2009 are hitting spending with full force, McGraw-Hill has nowhere to go. Its overseas holdings are tiny, and mostly in Higher Education: Pearson is now getting considerable and sustaining returns from non-US markets which have taken a decade to create. Meanwhile McGraw seem at last, after constant strategic re-appraisal and constant changes of CEO (to the point where they are now run by the former veteran group CFO) to be heading in a digital first direction, launching really interesting environments like Campus and ensuring that all of their content is digital and licenced from the very beginning. Is this too late? We can only tell when markets recover, but outsiders might well think that US education was over-published. How things will consolidate (the assets are Harcourt Houghton Mifflin, McGraw and Kaplan) may be one of the outcomes of the Jana move.
McGraw’s latest announcements indicate 11% growth in income in the second quarter but a 5% drop in education revenues. Neither of these is in the least surprising, and may indicate some signs of recovery. But now the question has been asked, every piece of emerging evidence will be used to support a break-up theory. And now two points of caution for those prone to jump to conclusions: Teachers is not the same as the Ontario Municipal workers pension fund which co-owns Cengage with Apax, and the David McGraw who is CFO of Teachers is …no relation. Now that the News of the World is closed and hacking has ceased you will just have to take my word for it!