DealBook: Activist Investors Take Stake in McGraw-Hill

Daniel Acker/Bloomberg NewsJana Partners, founded by Barry Rosenstein, announced a stake in McGraw-Hill.

8:57 p.m. | Updated

Activist investors are escalating their fight for change at some American companies.

The latest — and biggest push so far this year — came on Monday, when the hedge fund Jana Partners, along with a Canadian pension plan, announced a combined 5.2 percent stake in McGraw-Hill. The investment could build pressure for a breakup of the conglomerate. Several analysts have argued for a corporate overhaul, saying that while the company’s Standard Poor’s ratings agency has produced double-digit growth in sales and profit, its book publishing business has flagged.

Jana’s aggressive move follows a flurry of prominent campaigns by investors in recent weeks. Carl C. Icahn, the longtime corporate raider, has bid for Clorox, trying to get it to sell itself. The giant hedge fund Citadel is pressing E*Trade to overhaul its board. Also on Monday, the private equity firm Sycamore Partners disclosed that it had accumulated a 9.9 percent stake in the struggling women’s retailer Talbots, saying that it expected to talk to management about its strategy and operations.

With a market value of about $12.5 billion, McGraw-Hill is the biggest target of activist investors so far this year, according to data from FactSet Research. And with its rich history of publishing educational books that touch students from kindergarten to professional education, it may also be the best known. Although Harold W. McGraw III, the company’s chairman and chief executive, owns less than 4 percent of the company, McGraw-Hill has long been seen as a family business.

Jin Lee/Bloomberg NewsHarold W. McGraw III, chief executive of McGraw-Hill.

Founded by his great-grandfather, the company has been in the family for more than 100 years and has weathered a previous challenge. In 1979, the company, under Mr. McGraw’s father, was embroiled in a bruising battle with American Express.

According to the filing, Jana has already held discussions with the company about its “business, corporate structure, operations, management and board composition, strategy and future plans.” The filing adds that the hedge fund “expects to continue to have such discussions” and “may take other steps seeking to bring about changes to increase shareholder value.”

Activist investors typically buy up shares in a company hoping to unlock value by pressuring management to sell or spin off pieces, or by joining the board of directors to effect change. Styles range widely, from loud and highly public campaigns to more low-key, behind-the-scenes interaction with management.

In the case of Jana and McGraw-Hill, the talks have so far been cordial, said a person briefed on the conversations. They met about two weeks ago, and McGraw-Hill is considering all options, this person said. A second meeting was scheduled for next week with Jana and the Ontario Teachers’ Pension Plan, who are working together as well.

The most obvious option would be a break-up of some sort, analysts say. That could include spinning off the profitable financial services division, which includes Standard and Poor’s, from its flagging education business, which lost money last quarter.

Goldman Sachs analysts last month wrote that the sum of McGraw-Hill’s parts was worth more than current market value. The company was about 20 percent undervalued compared with its peers, the Goldman analysts said. Analysts at Piper Jaffray said that if McGraw-Hill spun off some businesses, its share price would be trading closer to $53 rather the low $40’s.

In a statement, McGraw-Hill said that it was “conducting a comprehensive portfolio review, which includes reevaluating its strategic core to ensure it is appropriately allocating capital to generate shareholder value. This process began in the second half of last year with the creation of McGraw-Hill Financial and is expected to continue with additional significant actions in 2011. This process is designed to unlock superior shareholder value and accelerate global growth.”

The investments by Jana and the Ontario teachers’ plan follow similar recent statements by McGraw-Hill that it was reviewing its portfolio. That process could be sped up or intensified with the company’s new major shareholders.

In June, McGraw-Hill put its television stations on the block, part of an effort to review its holdings and “ensure it is appropriately allocating capital to generate shareholder value.” The company also said it would be looking for ways to cut costs.

“There has been a strong response from financial and non-financial buyers to the announcement in June that we planned to divest our broadcasting group,” Mr. McGraw said in an earnings conference call last week. “That divestiture is part of a continuing portfolio review across the company to re-evaluate our strategic core.”

In late 2009, the company sold BusinessWeek to Bloomberg for $5 million.

McGraw Hill stock has climbed 13 percent this year, but remains well below its peak of nearly $71 in 2007, closing on Monday at $41.41. The shares jumped 5 percent in after-hours trading on Monday following the news of the investments by Jana and the Ontario teachers’ plan. Jana holds a 2.9 percent stake, while the pension fund owns 2.3 percent.

Founded by Barry Rosenstein in 2001, Jana has engaged in more than 40 campaigns against companies. It was part of a group led by Mr. Icahn that pushed Time Warner to sell AOL, a battle the activists lost, although the company later spun off the unit.

In late 2009, the hedge fund took a position in the Dutch mail company TNT N.V., and quietly worked with the company and pushed it to break into two parts.

But the hedge fund engaged in a public battle with CNet Networks to replace its board in 2008. Instead, the company was acquired by CBS.

Founded in 1888, McGraw Hill also owns J.D. Power and Platts, the news and information service.

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