McGraw-Hill and Cengage call off planned merger

Publishers McGraw-Hill and Cengage have mutually agreed to call off their planned merger.

According to Cengage's announcement, the decision was caused by "a prolonged regulatory review process and the inability to agree to a divestitures package with the US Department of Justice." McGraw-Hill c.e.o. Simon Allen said in a statement that the divestitures required by the DoJ would have made the agreement "uneconomical."

Cengage c.e.o. Michael Hansen told analysts in a conference call held yesterday (4th May) that the likely business impact of Covid-19 had also been a factor in the decision.

The merger, announced in May 2019 and initially planned to complete at the start of this year, had been delayed to September 2020 as the DoJ reviewed the transaction on competition grounds. Meanwhile the UK Competition & Markets Authority raised concerns over the move and decided to launch an in-depth investigation.

Both the DoJ and the CMA had required divestitures before the merger would be allowed to go ahead, a McGraw-Hill spokesperson told The Bookseller.

Hansen told analysts that the DoJ was looking for his company to divest itself of US Higher Education courseware - "which we have in the high hundreds" - before it would agree the merger. He said: "I would argue the Department took an outdated view of the market - there is vibrant competition out there, including from OER [Open Educational Resources], rentals, small publishers, large publishers." The required divestment made the merger "not viable" from a financial perspective, Hansen said, acknowledging that he was "disappointed" by the development.

The "highly uncertain outlook" for the next year resulting from the Covid-19 pandemic was also a factor in the decision, Hansen said, revealing that Cengage has asked staff to take temporary pay cuts and introduced selective furloughing among a number of cost-cutting measures to increase the company's liquidity ahead of the challenges to come this year.

However he added that there was also a "significant opportunity to drive digital courseware" because students now needed to work from home in greater numbers."The disruption facing the education sector is being accelerated by Covid and we have the capability to capitalise on this," he said.

Allen said that the termination of the merger "will allow each of us to focus on our respective standalone strategies for the benefit of our owners, employees, customers and other stakeholders." He added: "I want to express my deep appreciation for the efforts and incredible commitment demonstrated by McGraw-Hill’s employees over the past year and particularly in recent weeks as they have worked tirelessly to help educators make the transition to online learning.”

The decision to abandon the merger was unanimously approved by the companies' respective boards of directors and no break fee is envisaged on either side, the companies said.

At the Department of Justice, Makan Delrahim, assistant attorney general of the Antitrust Division, said: “American students were our primary concern when evaluating the possible competitive effects of this deal. The decision to abandon this merger preserves competition in the market for textbook publishing, an important industry in the education sector. Cengage and McGraw-Hill’s decision to abandon this merger also preserves innovation, as the two firms compete aggressively in the development of courseware technology.”