Cengage and McGraw-Hill cancel merger plans

Cengage and McGraw-Hill Education’s goal of creating one giant educational publisher has been abandoned, the publishers announced yesterday.

The planned "merger of equals," announced in May 2019, was supposed to be completed by March this year. But the process did not go as planned.

The U.S. Department of Justice took almost a year to review the merger and asked the publishers to sell off so many assets that the financial return on the deal diminished, said Michael Hansen, Cengage CEO, in a call to investors yesterday.

“We are disappointed by this outcome. A lot of people across both of our organizations dedicated a lot of time in the past year to try and make this happen,” Hansen said in the investor call.

The DOJ was rumored to have asked the publisher to divest assets worth around $175 million -- right at the upper limit of what the companies said they were prepared to do in their merger agreement, reported Inside Higher Ed in April.

The merger faced regulatory challenges outside of the U.S., too.

In Britain, an initial investigation into the planned merger by the Competition and Markets Authority concluded in March that the deal raised competition concerns and could “lead to students paying more for essential textbooks and educational materials.”

A second, more detailed investigation by the authority was postponed at the request of the publishers in late March. The publishers were considering their next steps, they said. The Competition and Markets Authority agreed to postpone its investigation in early April, stating “that the arrangements in question might be abandoned.”

Competition agencies in Australia and New Zealand also raised concern about the merger. All four countries' agencies are said to have worked closely together to scrutinize the deal.

“Because the required divestitures would have made the merger uneconomical, McGraw-Hill and Cengage have decided to terminate the merger agreement,” said Simon Allen, CEO of McGraw-Hill, in a statement. “This will allow each of us to focus on our respective stand-alone strategies for the benefit of our owners, employees, customers and other stakeholders.”

Neither party will pay a breakup fee as a result of the merger termination. Hansen, who had been pegged to lead the merged publisher -- which was planned to be called McGraw Hill -- will remain at Cengage. Allen, who was interim CEO at McGraw-Hill Education, was promoted to CEO yesterday.

Several consumer advocacy groups celebrated news of the deal’s demise yesterday. Many had voiced concerns that the merger would result in higher prices and less choice for students -- a claim the publishers always denied.

“Defeating this merger is a win for students, faculty and preserving competition in the textbook marketplace,” said Nicole Allen, director of open education for SPARC, in a statement. “In an industry already rife with anticompetitive practices, preventing this merger averts dire harms that could have caused textbook prices to rise, innovation to dwindle, and student data to be exploited.”

Cengage and McGraw-Hill said their merger would allow them to offer students more affordable textbooks and course materials. A heavily promoted website touting the benefits of the merger has already been taken down from public view by the publishers.

“We’re glad to see that the U.S. Department of Justice and regulators in other English-speaking countries raised serious questions about the wisdom of allowing this merger to move forward, and that student advocacy, media pressure, and legal action pushed the publishers to abandon their plan to consolidate the college textbook market further,” said Kaitlyn Vitez, director of U.S. PIRG’s higher education campaign.

Both publishers laid off hundreds of staff in anticipation of the merger, raising questions about how the operations of the companies will be affected now that the merger is not going through. In yesterday's investors' call, Hansen acknowledged that Cengage will be limited in how much it can invest in new products and innovation. He painted an optimistic picture about the publisher’s ability to weather the COVID-19 financial crisis, however, noting that many more faculty members may see the advantage of switching to digital courseware.

“Between the beginning of March and the end of March, 18 million students had to move online. The vast majority had faculty who were not prepared at institutions that were not prepared,” Hansen said. “This was actually a pretty miserable experience. You're sitting at home and if you were lucky you got a bunch of Powerpoint slides and maybe a video lecture and that was it. That's a far cry from what digital platforms like MindTap and WebAssign can do.”

The limited availability of used print books is likely to cause a bump in digital textbook sales, provided that students can still afford them, said Alastair Adam, CEO of low-cost textbook publisher FlatWorld. But he questioned whether Cengage and McGraw will gain much market share with a diminished sales force.  

"We're finding that a lot of faculty in this current environment are really open to trying something new," said Adam. "Our field reps are now sitting at home working as inside reps and, fingers crossed will continue to get a lot of traction."  

Publishers, like the higher education institutions they serve, are preparing for significantly lower student numbers in the fall. Cengage has already furloughed staff, trimmed spending and deferred payments to save $200 million and offset potential sales losses.

“The layoffs at both McGraw-Hill and Cengage over the past few months might have improved finances, but there has to be an impact on capacity to further develop platforms and learning analytics capabilities as both companies seek to more fully migrate to digital content,” said Phil Hill, partner at Mindwires Consulting, on his blog Phil on Ed Tech.

Digital courseware may gain popularity in the fall, but if there aren’t students who can pay for those platforms, many publishers may find themselves even further in the red. Consumer advocates, too, are pushing for faculty members to consider free open educational resources.

“Rather than invest time and resources into a partnership with a publisher, colleges should invest in professional development and support for faculty and staff to learn how to use, and then share, open educational resources via permanently free homework platforms instead,” said Vitez, of U.S. PIRG.

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