Education Week - December 12, 2012 - (Page 10)

10 EDUCATION WEEK n DECEMBER 12, 2012 n INDUSTRY & INNOVATION > Tracking business trends and emerging models in K-12 McGraw-Hill Education Sale Highlights Publishing Trends By Jason Tomassini When the McGraw-Hill Cos. agreed late last month to sell its education division to a privateequity firm, it was the culmination of a yearlong plan to reorganize and separate the publisher’s education business from its financialinformation business. It was also, in many ways, a landmark in a period of significant transition in the educational publishing world that saw each of the “big three” publishers reshuffle its business over the past 15 months. Schools are increasingly moving away from printed textbooks toward technology platforms to deliver curriculum, and instructional-material adoption is slowing as states reconsider how they spend precious resources, especially in advance of wholesale curricular changes brought on by the Common Core State Standards. “There is continual disruption occurring in the educational space,” said M.C. Desrosiers, the chief of program development for ascd , a nonprofit professionaldevelopment group for educators, based in Alexandria, Va. “The shift of print to digital is turning the whole space upside down.” For months, McGraw-Hill planned the spinoff of its education division into an independent company, but kept mum on details of a sale. In the end, it agreed to sell the company for $2.5 billion to investment funds affiliated with Apollo Global Management, an international firm based in New York City. The deal is expected to close early next year. verse mix of products; in financial filings, the company said 20 percent of its education revenue currently comes from “digital and hybrid solutions.” As a result of the “reimagining,” the company will make 138 staff reductions. Despite those changes, and while many people associate private-equity firms with layoffs and profit-driven opportunism, this acquisition “is not a turnaround operation,” said Peter Appert, an education analyst with Piper Jaffray, a Minneapolis investment bank. Mr. Appert expects McGraw-Hill’s K-12 business to emulate its successful higher education division. That includes moving toward subscription-based business models that eschew lengthier adoption cycles, designing products for endusers like students, and developing digital content, he said. bust period caused by tightening budgets, changing adoption cycles, and outdated business models. K-12 publishing revenue declined by 6.2 percent between 2008 and 2010, according to the Association of American Publishers, based in Washington. At McGraw-Hill, last year’s revenue from K-12 education declined to $949 million, a 14 percent drop from the previous year. In response to financial pressures, the company cut 540 positions last year, according to financial filings. McGraw-Hill attributes those declines to a slowing textbookadoption market. The company expects a 40 percent decrease in state adoption of instructional materials in 2012 because of “budgetary pressures” and “a cyclical downturn in scheduled purchasing,” because of wariness about the coming common standards. In Louisiana, for instance, the state is considering delaying textbook adoption because it believes none of the content on the market is aligned closely enough with the common standards. In its 2011 annual financial report, McGraw-Hill lamented the failure to win contracts in typical boom states Florida and Texas. It also said that the winding down of federal stimulus funds and slow spending of federal Race to the Top grant dollars contributed to reduced sales. ‘BIG THREE’ MARKET MOVES McGRAW-HILL EDUCATION n Sept. 12, 2011: The McGrawHill Cos. announces plans to split into two independent, publicly traded companies, one focusing on its higher-revenue financial-information business, and another focusing on its education businesses, which were experiencing stagnant growth. n June 8, 2012: Lloyd Waterhouse, a former executive at IBM and Houghton Mifflin Harcourt, is named chief executive officer of McGraw-Hill Education, replacing acting President Robert Bahash. n Nov. 26, 2012: The McGraw-Hill Cos. agrees to sell McGrawHill Education to Apollo Global Management, a private-equity firm, for $2.5 billion. PEARSON n Jan. 30, 2008: Pearson completes acquisition of Harcourt Assessment and Harcourt Education International from Reed Elsevier for $950 million, after announcing the deal in May 2007. n Aug. 3, 2010: The company acquires, for $80 million, America’s Choice, a school improvement company that was a for-profit subsidiary of the nonprofit National Center on Education and the Economy. BILLIONS April 27, 2011: In an effort to bolster its technology platforms, Pearson acquires Schoolnet, an education software company, for $230 million. n Sept. 15, 2011: Pearson acquires Connections Education, a virtual school operator, for $400 million from Apollo Global Management Group, the same firm that just acquired McGraw-Hill Education. n Oct. 3, 2012: The company announces its longtime chief executive officer, Marjorie Scardino, will step down at the end of the year. She will be replaced by John Fallon, the chief executive of Pearson’s international education division since 2008. n ‘Faster Transformation’? If anything, industry experts said, private-equity ownership could allow the company to focus on and invest in those innovations without catering to public shareholders or a broader corporate strategy that does not put a priority on education. McGraw-Hill Education will be privately held under Apollo Global Management, though some of the firm’s funds are publicly traded. “As a result, we can expect to see investment and faster transformation of the products and services to meet the changing educational environment,” Charlene F. Gaynor, the ceo of the Wilmington, Del.based Association of Educational Publishers, said in an email. “That will be better for schools and better for the industry.” Apollo operates several investment funds with billions of dollars in equity across several industries. In education, companies such as the higher education publisher Cengage Learning, Sylvan Learning’s K-12 spinoff Laureate Education, and the for-profit higher education provider Delta Educational Systems are already a part of Apollo’s $2.7 billion Investment Corp. portfolio. Private-equity firms have made inroads in the education sector lately, acquiring the publisher Houghton Mifflin Harcourt and the learning-management-system company Blackboard, as well as the school improvement firms Editure and jbhm Education Group. Apollo Global Management’s bid suggests the firm sees a stagnating industry that could rebound, Mr. Appert said. “Private equity is interested because basically you are buying this thing at what you hope is a cyclical trough in the market, at a point of technological change,” he said. Mr. Appert believes the education market is experiencing an unusually long, eight- or nine-year HOUGHTON MIFFLIN HARCOURT n Dec. 13, 2007: Houghton Mifflin Riverdeep aquires Harcourt Education and other publishing divisions from Reed Elsevier for $4 billion. n Sept. 19, 2011: Linda Zecher, the former head of Microsoft’s Worldwide Public Sector, is named chief executive officer. She replaces Barry O’Callaghan, who had been named CEO in 2009. n June 22, 2012: Announces it has emerged from its Chapter 11 bankruptcy filing. Just a month earlier, it had filed for Chapter 11 to restructure $3.1 billion in debt created by previous acquisitions. $10 K-12 PUBLISHING MARKET REVENUES Market Demands Mr. Waterhouse said that he was fully aware of the sale plans at the time he was hired to lead McGraw-Hill’s education business, and that he is comfortable with where the company is headed. The company will be taking on a minimal amount of debt, which should allow it to invest in product development, he said. “The mistakes some people have been making is they tend to think about portions of [the digital content] formula,” Mr. Waterhouse said. “We really want to put it all together in a focused way.” How that fits in with the somewhat-divergent plans of the other two of the “big three”—Pearson and Houghton Mifflin Harcourt— remains to be seen. The former is acquiring technology to create platforms for its content, while the latter is focusing on creating content and partnering with technology companies. Those companies are not without their own transformations. Houghton Mifflin Harcourt named Linda Zecher, a former Microsoft executive, its ceo in September 2011, and underwent a massive debt restructuring through Chapter 11 bankruptcy. Pearson announced in October that longtime ceo Marjorie 8 $8.2 Total $7.1 Total Changes Outlined McGraw-Hill will be left with its financial information properties, which generated about $4 billion of the company’s $6.4 billion in revenue in 2011 and includes Standard & Poor’s Ratings Service. The company, founded in 1888 by James H. McGraw, will be renamed McGraw Hill Financial and led by its current chief executive officer, Harold McGraw III. Lloyd Waterhouse will lead McGraw-Hill Education under its new ownership after being appointed to the position in June. Specifics on how changes to the company would affect McGrawHill Education’s operations had been scarce until last week, when the company released a statement to Education Week that briefly outlined efforts to “reimagine” how it does business. Sales and marketing will be more focused on the customer, and product development will be more collaborative and innovative, according to the statement, from McGraw-Hill School Education President Dan Caton. There are hints at a more di- 6 OTHER SCHOOL SPECIALTY SCHOLASTIC EDUCATION LOSS OR GAIN 1% -12% 2% -11% 4 McGRAW-HILL 2 PEARSON -3% HOUGHTON MIFFLIN HARCOURT 0 2008 -13% 2011 SOURCE: The Parthenon Group Scardino would step down at the end of the year, with the company’s international education chief, John Fallon, succeeding her. Meanwhile, companies such as media giant News Corp. are moving into curriculum development. The companies appear to be jockeying for position in a changing industry, but onlookers believe they are still only at the starting line. “Any implication that the sale [of McGraw-Hill Education] marks the end of K-12 publishing as we know it is not the case,” said Ms. Gaynor of the publishers’ association. “But publishing will keep changing and evolving to meet the demands of the market.” Editorial Intern Nikhita Venugopal contributed to this article. A grant from the Bill & Melinda Gates Foundation helps support coverage of the education marketplace and new approaches to schooling in Education Week and on

Table of Contents for the Digital Edition of Education Week - December 12, 2012

Education Week - December 12, 2012
Test Designers Tap Students for Feedback
Race to Top Draws Out New Suitors
Common Core Taught Through the Arts
Federal Attention on ELL Needs Seen to Wane
News in Brief
Report Roundup
NAEP Seeks to Test New Measure Of Student Poverty
In Rural Areas, After-School Efforts Must Stretch to Provide Services
INDUSTRY & INNOVATION: McGraw-Hill Education Sale Highlights Publishing Trends
K-12, Higher Ed. Unite to Align Learning In Minnesota
States Pledge to Expand School Hours, Days
Absenteeism Linked to Low Achievement In NAEP Time Study
Union Pushes Higher Standards For New Teachers
Brand-New NAEP Report on Vocabulary Shows Same Old Gaps
Psychiatrists Revising Manual On Mental Disorders
DIGITAL DIRECTIONS: N.C. Law Protects Educators From Online Harassment
Blogs of the Week
Education May Not Benefit From Brighter Financial Outlook
K-12 Education Advocates Lobby To Avert Fiscal Cliff
Policy Brief
Louisiana’s Ambitious Voucher Effort Unclear Following Judge’s Ruling
BARNETT BERRY & FREDERICK M. HESS: Expanded Learning Time: An Avenue to Greater Change
DAVE POWELL: Confusing Achievement With Aptitude
ANITA N. VOELKER: Smokeless Santa? Sanitizing a Child’s World
TopSchoolJobs Recruitment Marketplace
JAMES S. LIEBMAN: Ending the Great School Wars

Education Week - December 12, 2012