McGraw-Hill Cos. will split into two companies focusing on global markets and textbook publishing, under pressure from activist investor Jana Partners LLC and after scrutiny of ratings by its Standard & Poor’s unit.
The transaction may be completed by the end of 2012 through a tax-free spinoff of the education unit, the New York-based company said today in a statement. McGraw-Hill Markets will include S&P and J.D. Power and Associates and be led by Chief Executive Officer Harold “Terry” McGraw III.
McGraw-Hill, whose S&P division played a central role in the 2008 global financial crisis and last month downgraded U.S. sovereign debt, began a strategic review last year of the company’s businesses. On Aug. 22, Jana Partners, a New York-based hedge fund, proposed a plan to break up the company after education revenue fell for three straight quarters.
“It’s a smart move for enhancing value,” Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco, said of McGraw-Hill’s plan. “There’s more opportunity for them as two focused businesses.”
While Jana and the Ontario Teachers’ Pension Plan proposed McGraw-Hill separate into four parts -- S&P, the S&P index business, information & media, and education -- McGraw said two was the right number.
The company consulted with many investors and was well along in its review when Jana made its presentation, McGraw, 63, said in an interview.
“When you’re talking about Jana, we were in the 11th hour when that came along,” McGraw said. “We’re not doing this for one or two people, we are looking at a broader universe of appeal.”
McGraw-Hill rose $1.54, or 4 percent, to $40.26 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 29 percent in five years, compared with a drop of 11 percent for the S&P 500 Index.
The company also said it will speed up its stock repurchase program and reduce costs across its businesses.
Jana and Ontario Teachers’ will review the proposed split, the shareholders said in a joint e-mailed statement.
“The separation, cost-cutting program and accelerated buyback will all be vital steps in reversing years of underperformance at McGraw-Hill, and are critical parts of what we were seeking for shareholders,” the shareholders said.
As part of the split, McGraw-Hill said it will seek to cut corporate expenses and administrative and technology costs off a base of more than $1 billion, without specifying the extent of the reduction. The company is also searching for a CEO for McGraw-Hill Education, which expects to have revenue of about $2.4 billion this year.
McGraw-Hill Markets will include Platts, a provider of information and indexes in energy, petrochemicals and metals. The new company anticipates 2011 revenue of about $4 billion. McGraw-Hill said earlier this year that it would sell its broadcasting group because of the unit’s limited growth prospects.
McGraw-Hill will accelerate the pace of its share buyback plan to $1 billion for the year, with $540.6 million repurchased year-to-date.
On Aug. 5, S&P sent shockwaves through the markets with its decision to downgrade U.S. credit to AA+ from the top AAA rating. Rather than cause a selloff in Treasuries, the move boosted demand for the debt, driving 10-year note yields to a then record low. Treasury Secretary Timothy Geithner slammed the move, as did Berkshire Hathaway Inc. CEO Warren Buffett, who said the U.S. should be rated “quadruple-A.”
Founded in 1888
McGraw-Hill said Aug. 22 that S&P President Deven Sharma will step down at yearend and be replaced by Citibank NA Chief Operating Officer Douglas Peterson.
McGraw-Hill, founded in 1888 by McGraw’s great-grandfather, James H. McGraw, earned about 87 percent of its $358.8 million in operating income in the second quarter from S&P and its financial-information unit. The company has been publishing college textbooks since 1927, and it formed the TV unit in 1972.
In 2009, McGraw-Hill agreed to sell BusinessWeek magazine to Bloomberg LP, the parent of Bloomberg News.
Jana Partners, which manages about $3 billion, held a 5.2 percent stake in McGraw-Hill, together with the Ontario Teachers’ Pension Plan, according to an Aug. 1 regulatory filing.
McGraw-Hill “has consistently underperformed its potential and traded at a sizable discount,” Jana said in an Aug. 22 filing that showed an increased stake of 5.6 percent. The education unit is a “drag” on the company’s value, it said.
Goldman Sachs Group Inc. and Evercore Partners Inc. advised McGraw-Hill.
(The company held a conference call at 8:30 a.m. New York time. Go to: http://www.mcgraw-hill/investor_relations for a replay.)