M&A

Pressured by activist shareholders, McGraw-Hill opts to split company

By Sean Callahan

McGraw-Hill Cos., like most business media and information companies, continues to remake itself.

In 2009, the company sold the struggling BusinessWeek, which it founded in 1929, to Bloomberg. Earlier this year, it announced plans to sell its broadcasting group.

This month it made the blockbuster announcement that it plans to separate itself into two public companies: McGraw-Hill Markets and McGraw-Hill Education. The company, which has been under increasing pressure from dissident shareholders, and has faced a barrage of negative publicity in the wake of the downgrade of the U.S.' credit rating by its Standard & Poor's unit, said the move was intended to “accelerate growth and increase shareholder value.”

MARKETS UNIT MAKEUP

McGraw-Hill Markets will be made up of Standard & Poor's, Platts, J.D. Power and Associates, McGraw-Hill Construction and the Aviation Week brand. Harold “Terry” McGraw III, currently chairman and president-CEO of McGraw-Hill Cos., will hold the same title at McGraw-Hill Markets.

McGraw-Hill Education will become an independent business operating in the K-12, higher education and professional education markets. McGraw-Hill is searching for a CEO to run this business. Robert Bahash, currently president of McGraw-Hill's education business, will continue in his role until a new CEO has been appointed.

“After thorough analysis, the board determined that the creation of these two independent companies is the best and most reliable way to generate superior shareholder value,” McGraw said in a statement.

In addition to the split, McGraw-Hill said it plans to cut costs and to buy as much as $1 billion worth of its shares by the end of this year; the company has already reacquired $540 million of its shares so far this year.

Many observers believe McGraw-Hill's decision to split the company was precipitated by pressure applied by Jana Partners, an activist investor group, and the Ontario Teachers Pension Plan Board. Together these groups own 5.2% of McGraw-Hill's outstanding shares, and they demanded actions—such as spinning off the education group—to boost the share price.

“This is an intelligent move,” said Robert Crosland, an industry consultant. “It's a capitulation to the investors—to intelligent investors. I think management realized there is value to be unlocked in this company.”

“The idea of splitting the company is not a surprise, and it probably makes sense,” said Ed Fitzelle, managing director at Whitestone Communications. “There's slow growth in the education sector.”

Standard & Poor's decision to downgrade the U.S.' credit rating and the fallout it created may have triggered the additional pressure. In that case, the move may have been made to protect the education group from bad publicity stalking S&P. “These are businesses that are not dependent on each other,” said Mike Parker, managing director of AdMedia Partners.

McGraw-Hill's split has also raised speculation about the company parting with b-to-b brands that are still reliant on advertising. Over the past several decades the company has shed brands that were dependent on cyclical ad dollars in favor of those supported by subscription revenue. Industry observers say the Aviation Week brand and McGraw-Hill Construction, which includes Architectural Record, may be shopped.

In a conference call explaining the rationale for the split, McGraw responded to a question from an analyst about the possible divestment of Aviation Week and McGraw-Hill Construction. “Every aspect of the portfolio has been scrutinized on the basis of the contribution of growth and profitability that it can bring. If any asset is impaired and cannot do that, it has to be dealt with. But at this point, (they're) part of McGraw-Hill Markets.”

“They'll probably follow the path of BusinessWeek and ride it into the ground as a cash provider as long as they can (and then sell it),” said media industry consultant Crosland. “The question is: Who would buy this stuff? There are just not a lot of buyers out there.”

Comment