Wednesday, 14th September 2011
Nancy Davis Kho
Under pressure to return to a growth position and increase shareholder value, McGraw-Hill (NYSE: MHP) on Monday announced that it would be splitting into two separate public companies: McGraw-Hill Markets, which will focus on capital and commodities markets, and McGraw-Hill Education, where the company's services for education and digital learning will reside.
The company positioned the decision as an aggressive response to its falling stock price, which has declined 40% since 2006. By bifurcating itself, McGraw-Hill says a main goal is "creating two 'pure-play' companies with the scale, and the capital and cost structures to fully leverage their world class franchises, iconic brands, and leading market positions". Another tactic in shoring up shareholder value has been a share repurchase programme first announced in June, authorising the repurchase of up to $1 billion in outstanding shares. Thus far 14.1 million shares have been repurchased, for a total of $540.6 million.
But there were other reasons why the company's Board of Directors may have recommended the change. MHP's Standard & Poors Rating Agency has been buffeted by criticism from all sides, first for the role it may have played in the US financial crisis that gathered steam in 2008, and then for the unit's decision to downgrade the US debt rating. Additionally, activist shareholders, including the hedge fund Jana Partners and the Ontario Teachers' Pension Plan, were reportedly pushing the company to split itself into four separate companies: an education division, an information and media division, a financial division, and an index business.
McGraw-Hill Markets will comprise the following entities: Standard & Poor’s, S&P Capital IQ, Platts, J.D. Power and Associates, and franchises in the construction and aerospace industries. The company is expected to have 2011 revenues of US$ 4 billion, 40% stemming from international markets. Terry McGraw has been named Chairman, President and CEO of the company.
McGraw-Hill Education, for which a CEO is still being recruited, will offer education services and digital learning for the entire K-12 and higher and professional education markets globally. Its 2011 revenues are expected to be $2.4 billion.
Together with the split, the company announced efforts to reduce costs in order to ensure "efficient operating structures" for the two newly formed companies. Whether the cost of running two companies instead of one can truly be lowered remains to be seen. But it's clear that MHP recognised it needs to use every arrow in its quiver to address its ongoing revenue decline.
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