Messy Merger Forecast for ‘McCengage’

Merging two giant educational publishers was never going to be smooth sailing, but the process has been rockier than Cengage and McGraw-Hill Education expected.

February 19, 2020
 
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When publishers Cengage and McGraw-Hill Education announced merger plans last May, they hoped to have the process wrapped up by the end of this March.

As that date fast approaches, it seems increasingly unlikely the companies will achieve their goal.

In an investor call last week, Michael Hansen, CEO of Cengage, said the publishers continue to “make good progress” on the merger, but he conceded that securing U.S. regulatory approval would require more time than anticipated.

The merger has faced fierce opposition from consumer advocacy groups, students and even college bookstores, but a fast-changing publishing environment and challenging negotiations have added complexity to the process.

Opponents to the merger worry the new mega-publisher, to be called McGraw Hill, will significantly reduce competition in the textbook market and enable the company to drive up prices. The publishers strongly refute this, saying the merger will enable them to pass on savings to students and make their products more affordable.

Officially, the merger is still expected to take place in the first half of this year. Last month, however, Cengage and McGraw-Hill Education extended the cutoff date on their merger agreement to May 1. The deal was set to expire this month. A further extension to Aug. 1 is possible by mutual agreement, though this would take the publishers dangerously close to the start of the fall semester -- an important sales period. 

Several factors are slowing down the merger process, sources close to the matter who spoke on condition of anonymity told Inside Higher Ed.

When two large publishers merge, it is common for the Federal Trade Commission or the Department of Justice to request that the publishers sell areas of their portfolio that overlap. Decisions are made on a course-by-course basis using a market concentration measure known as the Herfindahl-Hirschman Index.

Since Cengage and McGraw-Hill Education have so many competing textbook titles, it was anticipated that they would be required to sell a large proportion of them. The Justice Department is rumored to have asked the publishers to make a divestiture worth around $175 million -- the upper limit of what the companies stated they were prepared to do in their merger agreement.   

As the publishers’ portfolios overlap significantly and include some 44,000 titles, figuring out which products to keep and which to sell is not a straightforward process. These divestiture decisions are thought to be further complicated by the fact that many of the publishers’ most popular textbook titles are linked to proprietary digital learning platforms and tools, which may have to be sold or leased to the publishers’ competitors in order to comply with the Justice Department's request, sources told Inside Higher Ed.

A spokesperson for both McGraw-Hill Education and Cengage said that conversations with the Department of Justice regarding potential divestitures are ongoing. “No final decisions have been made, and the companies will not speculate about potential business changes. Until the merger is completed, we remain separate companies and operate as independent businesses,” the spokesperson said.

In the recent Cengage investor call, Hansen was asked if there was a scenario -- perhaps if the companies were asked to divest “too many assets” -- when continuing with the merger would no longer make sense. Hansen replied that there are scenarios in which the logic for the merger no longer holds, “but as I said in my prepared remarks, we are continuing in very constructive and thoughtful discussions and frankly we would not have entered the agreement if we thought that would be a big possibility.” He added, “We don’t see this as a real big scenario at this point, but the situation is fluid. We continue in discussions with the DOJ and we will see.”

As both McGraw-Hill Education and Cengage recently have laid off hundreds of employees in anticipation of merging, questions have arisen about how day-to-day operations at the publishers will be impacted if the merger continues to be delayed or perhaps even abandoned. A slimmed-down staff may look good to investors, but it’s difficult to see how it will benefit customers. In the short term, it is anticipated that the publishers will stop developing new products or making large investments.

On The Layoff, an anonymous discussion board for rumored company layoffs, some commenters theorized that it would be in McGraw-Hill Education’s interest to delay the merger given Cengage’s relatively weaker financial position. The merger was conceived as a merger of equals, but perhaps it could turn into a takeover, they suggested.

If the merger proceeds, observers and industry analysts will be watching closely to see whether any of McGraw-Hill Education’s titles become part of the Cengage Unlimited subscription offer, where students pay one flat fee to access all course materials. So far, neither party has publicly made a commitment one way or the other, possibly fearing an adverse reaction from textbook authors. On this issue, the spokesperson for the companies said simply, “both parties maintain their commitment to continuing and growing their inclusive access and Cengage Unlimited subscription programs.”

During the investor call, Hansen said, “Given the most recent industry developments and ongoing affordability pressures, the rationale for the merger remains strong. The core objectives of the merger-- to improve affordability, extend choice and deliver high-quality products -- will deliver significant benefits to faculty, institutions and, importantly, students.”

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