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Jana Partners, pension fund push for changes at McGraw-Hill

Tuesday, August 02, 2011

Harold McGraw III
Opalesque Industry Update – New York-based hedge fund firm Jana Partners LLC, together with Ontario Teachers' Pension Fund are pushing for a corporate overhaul at McGraw-Hill, the educational books publisher and owner of Standard & Poor’s. This very push could eventually lead to the break up of the conglomerate, various media reports said.

In a regulatory filing, Jana Partners said it had discussed with McGraw-Hill “business, corporate structure, operations, management and board composition, strategy and future plans.” The discussions occurred after Jana and Ontario Teachers raised their stakes in the $12.5bn publisher to 5.2%. Jana holds a 2.9% stake, while the pension fund owns 2.3%.

The company’s Chairman and CEO Harold W. McGraw III owns less than 4% of the company, although the company has been seen as a family business for more than 100 years, since it was founded by his great-grandfather. In 1979, the company, under McGraw’s father, was faced with a similar challenge when he was involved in a messy battle with American Express.

A separate report by the New York Times, citing data from FactSet Research, disclosed that McGraw-Hill is the biggest target of investors this year because of its rich history of publishing educational books used from kindergarten to professional education.

Recently, McGraw-Hill announced plans to divest some of its businesses that are not showing profits. Its Standard & Poor’s ratings agency has produced double-digit growth in sales and profit, but the firm’s book publishing business has not been performing.

Douglas Arthur, an analyst at Evercore Partners Inc., told Bloomberg that the New York-based publisher had announced in June that it would sell its broadcasting unit because its growth prospects were not encouraging. Arthur added: “This is a company that has been a mini-conglomerate of information database businesses, none of which are all that related. The education business is capital intensive, low margin and plodding in growth.”

News of the rise in Jana’s and Ontario’s stakes pushed McGraw-Hills’ shares up to $43.51 in late trading, an increase of 5% from Monday’s close at $41.41 per share. Despite the rise in value, McGraw-Hills share were still below its peak of nearly $71 in 2007.

Mounting pressure
A report by Reuters described the latest moves by Jana and Ontario as an added pressure on McGraw-Hills management to overhaul its business. Jason Ware, an equity analyst with Salt Lake City-based Albion Financial Group told Reuters: "This is a kick in the pants. It brings a little higher sense of urgency."

Peter Appert, a Piper Jaffray & Co analyst, commented that McGraw-Hill could imitate the business model of Dun & Bradstreet which spun off major business units when faced with mounting pressures from investors to increase shareholder value. In 2000, Dun & Bradstreet Corp spun off Moody's Corp, a ratings agency and a direct competitor to Standard & Poor's.

Investors often find it difficult to size up the true value of conglomerates because it requires expertise in different industries. Since the 1980s, activist investors have reportedly been raiding.

The New York Times further revealed that representatives of Jana and McGraw-Hill met two weeks ago and that McGraw-Hill is open to all the options laid out on the table. Another round of meeting is scheduled next week with Jana and the Ontario Teachers’ Pension, the report added.

Some insiders are predicting that an agreement to sell off or break up some of McGraw-Hill’s units is in the pipeline. These includes the spin off of profitable financial services such as Standard and Poor’s from the education business that has been on the decline.
Precy Dumlao


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