Houghton Mifflin Announces Innovation Fund

In a press release today Houghton Mifflin Harcourt annouced the creation of a $100mm innovation fund which the company will use to "promote and enhance student achievement, individualized learning and effective technology integration in the classroom." Some other large publishing companies have well known innovation or investment funds so this is nothing revolutionary or new in the publishing business but represents an important strategic move for HMH.

The HMH Innovation Fund will promote and support solutions aimed at engaging all education stakeholder groups — including teachers, administrators, parents and students — by creating a process for soliciting, evaluating, developing and executing innovative ideas that solve teaching and learning challenges. The process will be uniquely collaborative, encouraging input and participation from across the education and technology industries. The Fund will also look to support new consumer applications including gaming platforms and other interactive solutions to engage students outside the classroom.

“The HMH Innovation Fund is a first for our industry, providing the capital to identify and incubate the next generation of innovation in education. We are excited about the opportunity to share in developing new solutions for teachers, students, administrators and parents,” said Barry O’Callaghan, CEO of Houghton Mifflin Harcourt. “HMH will work with, partner and fund the innovators of today and support great ideas that will have an immediate impact in promoting greater student achievement with tools that can be used both inside and outside the classroom.”

HMH has seen its fair share of problems over the past three years with a major restructuring of the company's balance sheet at the end of last year. The core operations of each business have reputedly been doing well even in the tough economic climate. This news, coupled with the news that the company is also investing $300million to develop innovation centers in the US and Ireland, will come as welcome news to those left bewildered by the company's recent financial problems.

The Innovation teams at HMH work closely with third parties including Original Equipment Manufacturers (OEMs), foundations and academia, and have already started rolling out an array of new solutions including:

• A one-year pilot program in four California school districts of the first ever full-curriculum Algebra application on the Apple iPad. More than 400 California eighth-grade students will receive instruction strictly via an iPad loaded with Holt Algebra 1 course materials including highly developed comprehension tracking tools, which provide students with customized online remediation based on quiz and test scores, and simultaneously provide teachers with student-specific performance feedback. Assessment data will be immediately available to the teacher for constant tracking and in-class remediation.
• A new all-digital language arts program in Texas for grades 2–12 called Texas Write Source, which helps students of every learning style master key writing forms and processes and grammar usage through whole-class interactive whiteboards, an online worktext and space that enables students to share personalized essays, and the ability to download video podcasts, audio-enabled interactive mini-lessons, games and trackable quizzes.

“We have a well-established and open incubation strategy for new ideas, partners and start ups that is different than anything that exists within the traditional publishing business,” said Fiona O’Carroll, Executive Vice President of New Ventures. “We have created an environment and a structure to foster and support incubation of new ideas and we feel we can be the partner of choice for big ideas due to our overall scale, market reach, positional advantage and speed in bringing things to market. This is a true incubation model.”

Houghton Mifflin Invests

A profile of Houghton Mifflin in the Irish Independent references a €350m investment supported by Enterprise Ireland for digital learning products (Link):

From simple mathematics to the intricacies of the Pythagoras' Theorem, Stevens shows how through the use of laptops in the classroom, as well as at home in their own time via social networking, kids can absorb vital knowledge at a critical stage in their development. The lessons appear as visual quizzes, puzzles and games to keep young minds engaged. Teachers can monitor their progress and ensure that struggling students are supported. Entire education clouds where teachers can share knowledge, arrange lesson plans and file reports are now being used to manage millions of students in the US. "These platforms are not just delivering content," explains Fiona O'Carroll, executive vice-president at HMH in Dublin. "They instruct their young minds and also allow teachers to assess the children and provide them with individualised learning paths. Kids with particular needs can be ushered in the direction of individualised lessons."

Houghton Mifflin Owner EMPG set for Refinancing

The Irish Independent is reporting advanced debt for equity discussions with loaning banks of troubled Houghton Mifflin Harcourt owner Education Media Publishing Group. The refinancing is likely to significantly reduce CEO/Chairman Barry O'Callaghan's 38pc ownership in EMPG. (Independent)

Other items of note:

• Operationally EMPG appears to be doing well with 'strong cash flow'
• Synergy and savings are pushing EBITDA close to $1bill up 20%
• The company has pulled out of the ratings service after downgrades
• Lending banks have agreed to relax some of their covenants
• Bertelsemann offered to invest $300mm in EMPG but was rejected
• The debt to equity swap will further dilute Reed Elseviers share
  

Harcourt Houghton Mifflin in Anti-Trust Suit

There is no back up to this news item at this point but updates if and when they are available; however the news gets no better for Harcourt Houghton Mifflin. The state of California is investigating the merger of Harcourt and HM in 2007. As part of that agreement Harcourt devolved some assets at the request of the Feds but this action assumes that that wasn't enough. From the Courthouse News Service:

California filed a federal antitrust complaint over the $4 billion merger of textbook publishers Houghton Mifflin and Harcourt Education Group, claiming "The merged entity now commands over 50 percent of aggregate primary and middle school textbook sales in the U.S." Combined with its competitors Pearson and McGraw, the three giants now "account for roughly 87 percent of the aggregate commerce in U.S. primary and middle school textbooks." California claims that December 2007 merger will reduce competition, raise prices and "the value of the materials and services likely will decline."

Not the news that HHM would be in the mood for. (Post: Credit Rating)

Update: In the complaint (and there is a link to it on the Courthouse web page at the bottom) on page 9 the complaint is dated May 15, 2009. This is being contested under the Clayton Act which is more stringent that the Sherman Act. (And I know that sounds like I know what it means but I really don't). Here is more on the Clayton Act. Look for references to section 7.

Houghton Mifflin Harcourt Lose Credit Rating

Speculation about the financial health of Houghton Mifflin Harcourt took another turn for the worst when Moody's debt rating agency removed its' rating on HHM's debt. According to the report in the Irish Times the action by Moody's will impact virtually all the company's debt and it likely to both further raise the cost of their borrowing (although they were already at Caa3 with a negative note) and increase the expectation the company will default. From the Irish Times report:

Moody’s said that it took into account “the business risk and competitive position of the company versus others within its industry; the capital structure and financial risk of the company; the projected financial and operating performance of the company over the near-to-intermediate term, and management’s track record and tolerance for risk”.

Last month, Moody’s downgraded some of HMH’s debts to Caa3 from Caa1, and put it on a negative outlook. The move meant that it classed the company’s debts as high risk.

Earlier this year, long time HMH executive and current CEO Tony Lucki retired and was replaced by Barry O'Callaghan.

HMH CEO Tony Lucki to Retire

The WSJ is reporting that Tony Lucki will retire on April 15th. In an email to staff he noted he had been involved with Harcourt or Houghton Mifflin for 30yrs and continued,

"Recent steps we have taken put the company in an even stronger position to deliver value to our customers and to build on our market leadership. We are on sound operational and financial footing and have great potential to grow our trusted brands and businesses," he said

The company has appointed 39yr old Barry O'Callahan as CEO who is the current CEO of corporate owner Education Media & Publishing Group. EMPG has approximately $7billion in debt resulting from the acquisition of both Harcourt and Houghton Mifflin. Reports earlier this year indicated that the company was attempting to sell their trade business but there was debate whether the company could achieve fair value (in their view) given the current economic environment.

MediaWeek (Vol 2, No 4): Houghton Harcourt, Ebsco, Google

This is my 1001st post - wow. Riverdeep, the owner of Houghton Mifflin Harcourt is the subject of a profile by The Boston Globe this morning. The newspaper reports what many have supposed - not least the Irish Press which has been dogging Riverdeep almost since the day they consummated the Houghton sale. In the article, they strongly suggest that the company is now worth far less than the amount of debt owned to their lenders. Any sale of all or parts of the company would be unlikely to cover these obligations and while there are rumors that Hachette maybe discussing acquiring the trade division, I wonder if this could occur if the value is so low and the resulting deal would be a humiliation not just for Riverdeep but also the banks holding the debt. Assuming a sale below book value, that would trigger a revaluation of the whole balance sheet and this in turn would trigger any number of covenants. Missing from the Globe article is that in selling Harcourt to Riverdeep, Reed Elsevier retained a $300mm interest in the business. (Link) What of the value of that and how is it handled on the RE balance sheet.

Moody's last month reported that Houghton, with a debt load estimated at more than 10 times gross earnings, is "a likely default" unless its loans are renegotiated. S&P last month placed parent EMPG on its list of weakest links - companies in greatest danger of debt default. "The debt level is our biggest concern," said S&P analyst Hal Diamond, "given the state of the economy and state budget constraints. While they can reduce costs, they can only go so far."

The Globe's request for an interview with Houghton Mifflin Harcourt chief executive Anthony Lucki or other senior executives was declined. Houghton issued a statement disputing Moody's 10-times-earnings figure, and insisted the company is gaining market share and has ample cash to cover its loans. Spokesman Josef Blumenfeld also said that since Houghton's reported decision last fall to suspend acquisition of new titles, it is signing new books again. He declined to comment on rumors that French-based Hachette Book Group, owner of Little, Brown & Co., might be a suitor.

EBSCO have added a Federated search capability to their suite of offerings and is designed to integrate with their EbscoHost2.0 product they released last year. (LJ)

With Integrated Search, the company aims to capitalize on users’ familiarity with the features and design of EBSCOhost 2.0, which debuted in July 2008, and carve out a role for its interface as a comprehensive destination for user searches. Integrated Search is slated to go live in early summer 2009.

Integrated Search will use connectors to remote content sources similar to those employed by other federated search products, like MetaLib (Ex Libris), Research Pro (Innovative Interfaces), and 360 Search (Serials Solutions). The hook: EBSCOhost will not charge customers for connectors to any EBSCO databases to which they subscribe. For connectors to non-EBSCO sources, the basic cost will be $200 per database annually. There will also be a $1000 annual base fee per site and per configuration. Customers already subscribed to a number of EBSCOhost products could see this translate into significant savings.

Librarything has added a Twitter ap. which looks interesting. (Blog):

We've added integration with Twitter, the popular SMS/microblogging site. Basically, it's an easy way to add a book to your LibraryThing while standing in a bookstore, library or friend's house.

A good summary of the Google Book agreement was presented at a session at ALA (ALA):

ALA’s Committee on Legislation and Office for Information Technology Policy hosted a panel session Saturday at the ALA Midwinter Conference in Denver. The session was called “Google Book Settlement: What’s In It For Libraries,” and aimed to educate librarians on the initial terms of the settlement, hear from leading a few leading library and legal experts, and offer time for audience members to pose questions to the panel participants.

Library Journal reports on the finances of the American Library Association.

As with private investors and endowed institutions, the American Library Association (ALA) suffered significant endowment losses in the past fiscal year, 24.1%, but, thanks to budget adjustments and some new sources of revenue, net operating income in Fiscal Year 2008 actually exceeded expenses more than in FY 2007, ALA officials said yesterday at the Midwinter Meeting in Denver.

Fiscal Year 2008, which ended last August 31, left ALA with net assets of $34.4 million, compared to $33.3 million at the end of 2007. Three months later, net assets declined to $24.1 million, primarily due to endowment losses. ALA has adjusted by reducing expenses, but continued losses in the endowment—which is not relied on for operating income--could cut into scholarships and awards. And the longer term remains a question mark.

ABC-Clio Acquires Greenwood Publishing Rights

In a deal announced this morning, Houghton Harcourt Mifflin has agreed to grant ABC-Clio a perpetual license to use the imprints and publish the titles of Greenwood Publishing Group, including Greenwood Press, Praeger Publishers, Praeger Security International and Libraries Unlimited. The announcement goes on to say HHM will transfer certain intellectual property, contracts and assets to ABC-CLIO and that the agreement is effective immediately. Terms have not been announced.

From the announcement:

"By combining Greenwood Publishing’s impressive and extensive list of titles with our experience in publishing widely respected databases, reference books and eBooks, ABC-CLIO is expanding its role as a leader in the publishing industry,” said Ron Boehm, CEO, ABC-CLIO. “We believe that we will launch the next generation of high-quality reference, professional development and other resources for education and libraries.”

This looks like a good deal for ABC-CLIO. They gain a strong list of reference titles, a reputable publisher with a history of stable consistent operations and a reliable brand particularly in the library and educational community. Greenwood was part of Reed Elsevier for many years and was incorporated into the Harcourt business unit after Harcourt was purchased by Reed. That business was sold and Greenwood ended up at HHM.

Perhaps this is how deals will be done in the short term to compensate for the lack of credit.

Reed & Riverdeep Deal: Further Information

From the London Times:

Reed is also taking a $300 million stake in Houghton Mifflin Riverdeep Group, which will leave it with an 11.8 per cent of the common stock in the enlarged company. Houghton Mifflin Riverdeep is privately held, with a range of backers including the Irish stockbrokers J & E Davy. Existing investors put up $23 million of equity financing to help to meet the $3.7 billion cash requirement for the purchase.

Also of note, there was never a deal book circulated which recalls the initial analyst commentary when Reed announced the sale earlier in the year and O'Callaghan was heard commenting that he wanted the business. Given the timing of his 'reverse acquisition' of Houghton Mifflin there was general belief that he wouldn't be able to do it. Nevertheless here we are.

It will be an interesting company to watch: Riverdeep has a background in electronic publishing which represents the challenge facing both HM/Houghton and Thomson Learning as they attempt to catch Pearson. The dynamism of the educational publishing market will accelerate over the next five years as these three business transform the way educational material is delivered, the manner in which students learn and the way education is organized and measured.

Reed Sells Harcourt

Essentially on-time, Reuters is reporting that Riverdeep will purchase the remaining Harcourt assets from Reed Elsevier for $4.obill. Reed earlier announced they had sold the assessment segment to Pearson for $950mm.

Reuters.
MSNBC

Harcourt finished 2006 with revenues of Eur 1.4bill ($3.0bill) and operating profit of Eur190bill ($140mm). 2006 operating profit was boosted by currency fluctuations. Reed have sold the education business for a revenue multiple of about 1.7 which isn't bad going.

Earlier this year, Riverdeep performed a reverse takover of Houghton Mifflin in a deal worth $5.0mm, Apax Partners purchased Thomson Learning for $7.7bill and Bridgepoint bought Wolters Kluwer education for $1.5Bill.

Under the headline "Wheeler Dealer," the Irish Independent profiles Barry O'Callaghan and how he got here.

Houghton in The Caymans

It used to be that opening a bank account in the Caymans was a rite of passage for the exceedingly wealthy but now even struggling multi-national publishing companies like Riverdeep are establishing accounts there to manage their treasury function. Oh, and to avoid 'onerous reporting' requirements in their home countries. According to the Irish Independent, Riverdeep is establishing a corporate presence in the Cayman Islands:

HMR, formed from Riverdeep's reverse takeover of Houghton Mifflin last year to create a $5bn (€3.7bn) group, is asking shareholders to approve the setting up of a holding company called Education Media and Publishing Group at an extraordinary general meeting to be held on July 9.

With more and more companies looking to establish a corporate structure in foreign lands - Bermuda (Stanley) and Dubai (Haliburton) and more companies considering going private because of current financial reporting requirements (SOX), Riverdeep is just another example of the trend.

The Independent has seen documentation regarding the scheme that will enable HMR to achieve more flexibility in dividend payments and also greater confidentiallity regarding corporate accounting.

"Irish law largely restricts companies to make such distributions out of realised profit less realised losses. The definition of profit available in the Cayman Islands is much broader and so allows for greater flexibility in making distributions out of share capital subject to limited restrictions," comments Barry O' Callaghan the group's executive chairman.

Net income seems to be more concept than precept down in the Caymans. According to the article, the company needs 75% of shareholder and High court approval. Currently they have exceeded the shareholder level (with O'Callaghan owning 48%) so it will be up to the High Court to approve. Doesn't seem in much doubt.

2/1/99: McGrawHill, Primedia, HoughtonMifflin, Dow Jones,

Publishing News: February 1, 1999
The McGraw-Hill Companies Reports 15% Increase in 1998 Earnings
Internet sales Gain at WH Smith
EarthWeb Announces Online Publishing Deals with Seven Leading Book Publishers
Primedia's 1998 Annual Sales Grow to $1.5Billion
Houghton Mifflin Company Reports 1998 Fourth-Quarter and Full-Year Results
EU Probes FT/Dow Jones/Knight Ridder 1996 deal
Mirror Group CEO is Out

The McGraw-Hill Companies Reports 15% Increase in 1998 EarningsThe McGraw-Hill Companies today reported a 15.1% increase in diluted earnings per share to $3.35 for 1998 compared to $2.91 in 1997. Net income for the year grew to $333.1 million and revenue increased 5.5% to $3.7 billion. Excluding an extraordinary loss and other one-time items, diluted earnings per share were $3.37 and net income was $335.4 million.
Educational and Professional Publishing: Revenues in this segment increased 3.0% to $1.6 billion in 1998 and operating profit improved by 7.7% to $202.1 million. Excluding the write-off for CEC in 1998 and the facilities charge in 1997, operating profit increased 11.1% and operating margin improved to 13.5%. "Revenue in the seasonally slow fourth quarter increased 1.9% to $344.7 million and operating profits climbed by 26.0% to $22.4 million. Despite a lighter adoption schedule in the elementary school market in 1998 and challenging comparisons created by a 25.4% increase in revenue last year, our elementary-high school operations produced a 7.6% gain in revenue to $831.5 million. Outstanding results at Glencoe/McGraw-Hill, our secondary school publisher, SRA/McGraw-Hill, our supplementary publisher, and CTB/McGraw-Hill, our testing division and a better than expected performance by the School Division all contributed to this record. Glencoe produced market-leading performances in math and social studies, scoring well with multi-media programs in both adoption states and open territories. SRA/McGraw-Hill and the School Division combined to take 34% of the California reading market in the second year of the adoption and led the market after two years with a 35% share. The School Division's social studies program also performed well, helping it to overcome a disappointing performance in math. In Higher Education, solid results with both the front and backlists combined to produce a 7.0% gain in revenue to $359.4 million. Revenue for the Professional Publishing Group declined by 4.8% to $429.5 million, reflecting the continuing weakness at CEC. Softness in the Asia-Pacific markets also held back International Publishing operations, although our Spanish-language programs in Mexico and Spain showed solid gains.
Source: Businesswire 1/26/99

Internet sales Gain at WH Smith
British retailer W.H. Smith Group on Wednesday reported a modest sales increase over Christmas and New Year, but saw orders surge at its newly-acquired Internet Bookshop. The Internet Bookshop, the online bookseller Smith bought last July for 8.8 million pounds ($14.54 million), saw sales jump by 70 percent to 1.7 million pounds since September 1 last year, with orders up 170 percent in December. The firm's shares have been swept along on a wave of Internet fever, sparked by investors scouring the UK stock market for Internet plays, which look cheap against U.S. cyber-stocks like rival online bookseller Amazon.com and search engine Yahoo!. Home electronics retailer Dixons, owner of Internet service provider Freeserve, has been the main beneficiary so far. It shares have surged some 70 percent since Freeserve's success first became apparent in November, boosting Dixons' market value by some three billion pounds. Analysts said there has been intense speculation about how Smith might expand its online business, including rumors it might do its own ``Freeserve.'' When Smith bought Helicon it said this marked another step along the way in developing its electronic commerce business and said it would reveal more about Internet plans in the spring.
Source: Reuters 1/27/99

EarthWeb Announces Online Publishing Deals with Seven Leading Book Publishers EarthWeb announced today that it has entered into agreements with seven leading Information Technology (IT) publishers to provide the complete text of their technical books on EarthWeb's ITKnowledge. The deals give EarthWeb licensing rights to over 3,000 technical books for its subscription-based online library of IT information. The ITKnowledge roster of publishers comprises many of the most respected companies in the technical publishing industry including: IDG Books Worldwide and its imprints, M&T Books and IDG Books; Macmillan Computer Publishing and its imprints, Hayden, Macmillan Technical, New Riders, Que, Sams, Waite Group Press and Ziff-Davis Press; The Coriolis Group and its Coriolis and Ventana imprints; Wordware Publishing; CRC Press and its Auerbach and St. Lucie Press imprints; 29th Street Press (formerly Duke Press); and ASP Publishing.
ITKnowledge (http://www.itknowledge.com) is EarthWeb's first subscription service and contains the largest online collection of technical books for IT professionals.
Source: PRNewswire 1/26/99

Primedia's 1998 Annual Sales Grow to $1.5Billion
Primedia reported annual sales rose to $1.53 billion, up 26.3%, and EBITDA, rose 15.6% to $323.1 million. According to company sources the company will strengthen our market positions as we accelerate organic growth through market penetration, international expansion and new products, particularly delivered via the ultimate targeted medium - the Internet." Some of PRIMEDIA's brands include Seventeen, HPC Apartment Guides, Horticulture, IntelliChoice, Telephony, Channel One Network and Weekly Reader. During the week there was some media speculation which referred to Primedia as a potential acquition target. The management group which sold Petersens have loads of cash and will apparently be looking to repeat their success.
Source: Businesswire 1/28/99

Houghton Mifflin Company Reports 1998 Fourth-Quarter and Full-Year Results Houghton Mifflin Company today reported results for the fourth quarter and full year 1998. Net sales in 1998 reached a record $861.7 million for the full year compared to $797.3 million in 1997, an increase of 8.1%. Income from operations was $40.8 million, or $1.40 per fully diluted share, compared to $42.7 million, or $1.48 per diluted share, in 1997. The 1998 results included $.07 per share of operating losses attributable to the Company's July 1998 acquisition of Computer Adaptive Technologies, Inc. and a $.02-per-share charge for the cost of the Company's unsuccessful bid for a portion of Simon & Schuster's publishing assets. Net income for 1998 was $63.6 million, or $2.19 per fully diluted share. This result included other earnings related to the Company's investment in INSO Corporation (INSO) totaling $28.4 million after tax, a $2.0 million after-tax loss on the disposition of certain long-term investments, and a $3.5 million charge for in-process research and development. Net income in 1997, including special items related to INSO totaling $7.2 million, was $49.8 million, or $1.73 per fully diluted share.
Source: Businesswire 1/28/99

EU Probes FT/Dow Jones/Knight Ridder 1996 deal The European Commission said on Friday it was probing a 1996 agreement between Financial Times Information Ltd, Dow Jones Information Publishing Inc and Knight Ridder Business Information, now called Dialog Corp Plc, to set up an electronic database for financial information. The European Union's competition watchdog said in a notice published in the bloc's Official Journal that the agreement was filed for regulatory clearance in June 1997. It added that it could fall under EU regulation 17 which bans anti-competitive agreements and abuse of a dominant position. The Commission called on interested parties to comment within a month. FT Information is controlled by Pearson Plc. Dialog was created in 1997 by the merger of M.A.I.D. Plc and Knight-Ridder Information Inc. The three financial news service providers agreed in September 1996 to cooperate to develop and maintain a new worldwide electronic database for historical business and financial information, the Commission said in the short notice.
Source: Businesswire 1/29/99

Mirror Group CEO is Out
As reported last week, disgruntled investors acted out their threats this week by requesting the resignation of chief executive David Montgomery. Institutional investors cited under-performance and “poor strategic decisions by its senior management” as reasons for the action. Chief among these were management’s decision to invest in the Independent newspaper and establish its Live TV subsidiary.
Source: Financial Times 1/29/99