Sep
16
Sum of Parts in Hole
Filed Under B2B, Blog, Cengage, eBook, Education, eLearning, Financial services, Industry Analysis, internet, Publishing, STM, Thomson, Workflow | 3 Comments
So, having noted the Jana/Teachers activist shareholders story on McGraw-Hill recently here, no one is more surprized than me at seeing it come instantly true. I am left wondering just how that happened. So Terry McGraw gets a letter from Jana saying “You would be better off in two parts”, and doesn’t say “Who the hell are you?” but responds “Smart idea boys, we’ll do it next week!” The only explanation is that this loaf was already half-cooked, and the Jana intervention gave Chairman McGraw opportunity to do what he wanted to do anyway, and follow Thomson, Reed, Wolters Kluwer and others in the one respect that they all have in common: they all sold out of education. Of course, this is blue-blood McGraw-Hill, so you don’t sell out, you just cast it adrift, while climbing adroitly into an accompanying life boat.
As a result we have two vessels now heading in opposite directions. McGraw Markets (everything which is not education), including all the B2B and credit rating assets, is in one, and everything education is in the other. But Pat English, a shareholder and CEO of Fiduciary Management Inc, told Reuters that this was only the start: “It doesn’t make sense to have S&P ratings, S&P indices, Capital IQ, Platts, and other companies under one roof”. So what happens in October? Do we see Chairman McGraw skip down the gangplank and set sail in the SS S&P, leaving the waste barge B2B to sink in the Hudson? Anything is possible of course: we are watching one of the largest corporate deconstructions in the sector since D&B sold all of their global subsidiaries to franchise holders.
And why? The answer is a not inconsequential $3 billion. This is the difference between the valuations expected for Markets and Education apart, compared to the current, or pre-announcement, values. Education is seen to be in the slow lane and holding back an advanced valuation of S&P. No one has ever explained cogently to me why companies, however large, cannot have valuations which reflect the intrinsic worth of their parts, and why “true” valuations cannot be exhibited without break out, but clearly I am in the nursery class in these matters. And my eye also caught the Chairman’s statement that $1 billion in overheads would be saved. That I really appreciate. I can see that the corporate office of a chairman, for example, would need less aides, fewer executive jets and less travel in a global $4.5 billion company than in a $6.5 billion global company, but since Chairman Terry is going to Markets, there will have to be another Chairman at Education, also aided and abetted and privately flying around a $2 billion company. So where does the saving come in?
And where does the future come in? The US education market is grossly over-published. Margins are too low to attract investment (hence this deal). The nation hovers on the brink of radical IT solutions to address a national standards deficit, present across the developed world, which can only be tackled through individualized digital learning: everything else has failed. McGraw Education have a decent record of innovation, good assessment assets like the California Bureau, and 20 years of struggle, from Primis onwards, to show in justification. But they sit on the edge of the same decreasingly relevant mountain of textbook assets that also contains Harcourt Houghton Mifflin. They have a junior position in non-US markets, compared with their major competitor. But no one can currently compete with Pearson. Cengage have learnt to go global and diversify. McGraw could go with Harcourt, but the resulting debt pile would be bigger than the Greek economy, so this is unlikely. Maybe the “we now have the message” boys at IBM, or Intel, or Cisco, will buy them. But why? There are some good assets in medical education (Harrisons) but are we looking here at a slow death from asset sales until only the unsaleable are left? Eventually Pearsons’ major competitor in global markets will be a borne digital platform company, but these assets will not help them substantively to reach that position. On the other hand, my telescope, scanning the horizon desperately for a rescue vessel, sees the sleek global liner HP, just refuelling on high octane Autonomy. Vast interests in education there, and the potential to be the platform player to fight Pearson?
Back at Markets there are problems of a different kind. Platts, aviation and construction all have heavy data capable of real impact in workflow orientated networking. Although serious attempts have been made to leverage this, there is no evidence of much stomach for the fight, some critical people left, and the failing magazine/advertising/subscription businesses are, well, still failing. Pity that the “very best thinking” of the management team, which the Chairman quoted as the reason for the split, was not applied here some years ago. Alongside these are really good, but unrelated, businesses like JD Powers. And then this high grade financial services stuff, with high growth Capital IQ and of course the S&P play most valuable of all. I am forced to repeat the question of Mr English in other words: unless these businesses are radically changed in strategic direction, this company looks as much like a portfolio conglomerate as ever its now deceased parent did. Will this management make those changes? Or will they sell the most marginal assets next year and use the cash to buy back more shares? And is this portfolio nature a real poison pill against a purchase by another mega corp? So eventual break-up is eventually inevitable?
More questions than answers, but as we all search for value on the ocean bed of this recession, there can be no doubt that this will become a common path for beleaguered corporates in years to come. Until, in fact markets recover and growth seriously returns.
Comments
3 Comments so far
David
You write that:
“Eventually Pearsons’ major competitor in global markets will be a borne digital platform company , but these assets will not help them substantively to reach that position .”
Do you mean the MH assets, and if so, why not?
Chris
Chris I did mean MH , and the comment was intended to say that while the great content houses have begun the task og regenerating approaches to learning using their own resources , none of them has either the complete resources ( learning materials etc )or the learning platforms to do the job . Only Pearson , by acquisition and alliance , has done this . It is a tragedy that so few textbook publishers have not used strategic alliances to create market positions in future markets . MH are no different from their non-Pearson peers – but no better . David
Ok, that’s what I thought – but I took your comment to mean that even a new ‘born digital’ player would not be able to take on Pearson even if they acquired all the MH assets. If that is what you meant – and I think it is – it does make Pearson’s position look even more impressive or invulnerable (at least for now). And where does that put the likes of Wiley, etc? Very interested in all these developments as I’m rather out of the scene at the moment and in the position of a ‘mere’ observer!