DealBook: McGraw-Hill to Break Into Two

Scott Eells/Bloomberg NewsMcGraw-Hill headquarters in Manhattan.

McGraw-Hill announced plans on Monday to break into two companies, after calls for change from activist shareholders.

One company will be focused on the markets, with the Standard Poor’s unit, while the other will center on education, including textbook publishing. McGraw-Hill expects to spin off the education group by the end of 2012. As part of the broad makeover, the company also said it would cut costs and repurchase $1 billion worth of shares this year.

“After thorough analysis, the board determined that the creation of these two independent companies is the best and most reliable way to generate superior shareholder value,” the chairman and chief executive, Harold McGraw III, said in a statement. “Because both companies will be sharply defined, they will create two pure-play investment opportunities and present a more transparent capital markets profile, enabling investors to better assess their value, performance and potential.”

Activist investors and analysts have been pushing for McGraw-Hill to split up the company, as its stock has stagnated. Shares, once more than $70, now trade for less than $40.

Daniel Acker/Bloomberg NewsHarold W. McGraw III, chief executive of McGraw-Hill.

Last month, Jana Partners and the Ontario Teachers Pension Plan took a stake in McGraw-Hill, disclosing they might take “steps seeking to bring about changes to increase shareholder value.” The investors met with management a few weeks later, pushing for a four-way breakup of the company.

McGraw-Hill has been conducting a comprehensive review of the businesses, a process it said was “designed to unlock superior shareholder value and accelerate global growth.” It also hired the investment bank Evercore Partners to explore the options for the education business. In June, it announced plans to sell broadcasting assets.

McGraw-Hill Markets, which will be headed by Mr. McGraw, will house the index and ratings business Standard Poor’s; Platt’s, the energy industry data provider; and J.D. Power and Associates, the research service. The group, which should have revenue of $4 billion in 2011, with some 40 percent coming from outside the United States, is expected to produce double-digit growth.

The second company, McGraw-Hill Education, should generate revenue of $2.4 billion this year, focusing on students from kindergarten through college. Robert Bahash, currently president of the education unit, will stay on in the role until the company can find a new chief.

“Our growth and value plan will transform a multifaceted corporation into two powerful companies, each with highly focused strategies, aligned customer bases and interconnected markets,” Mr. McGraw said in a statement.

McGraw-Hill is being advised by Goldman Sachs and Evercore Partners.

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