Monday, May 04, 2020

Cengage McGraw Hill Education Merger is Abandoned

Announced early Monday, Cengage CEO Michael Hansen has told staff that the proposed merger with McGraw Hill is being abandoned.  As close watchers will know, this deal faced legal headwinds not just in the US but also in the UK, Europe and Australia. While that situation may be a mitigating factor - the deal close had been put off several times even before COVID-19 - it may well be that the impact of COVID-19 on the education market has raised so much market risk that the deal is no longer viable. Additionally, COVID-19 may well have significantly changed the enterprise value for each of the Cengage and McGraw Hill businesses units which was critical to the deal fundamentals.

[I actually wrote this post on Friday when there were some rumors going about.  The PR blames the regulatory hurdles]

This deal was sold as a merger 'of equals' but perhaps that has changed to much to justify completing the deal. Is it possible with this deal dead, will one will try to take over the other? There is no question both companies are going to know the intimate details of each business and that might create a deal scenario. Perhaps believing a deal needs to be done, will they turn to another company in an effort to achieve the scale they need? Macmillan or Wiley could be a 'safe-harbor' to steam into given the circumstances. The interim (and I bet soon to be permanent) CEO of McGraw Hill is the ex-CEO of Macmillan Education. Time will tell.

Where this puts both companies will be interesting to watch.  Hansen was set to become CEO of the combined company and McGraw's CEO has already left the business.  This was Hansen's deal and whether not closing it will reflect poorly on his leadership is debatable given the tectonic changes in the market. That said, some in the industry reflected early on that the anti-competitive issues the combination faced were always going to cause problems and believed that the deal should not have been pursued in the first place. As we all know, the justice department seems to wane one way or the other depending on administration priorities and this deal didn't look like it had significant opposition in the US. That was not the case in the other markets however.

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