Textbook Publishers McGraw-Hill and Cengage Call Off Merger After Failing to Overcome Regulatory Hurdles

The official word is that the merger would have been “uneconomical.”

This time last year textbook publishing powerhouses McGraw-Hill and Cengage announced a merger in an all-stock deal. The companies have mutually agreed to terminate the merger with no penalty or fees paid by either side. Simon Allen, CEO of McGraw-Hill, said in a May 4 statement that the merger was “uneconomical,” but it seems more likely that regulatory hurdles in the United States and the United Kingdom were the reason for the change of plans.

“Because the required divestitures would have made the merger uneconomical, McGraw-Hill and Cengage have decided to terminate the merger agreement. This will allow each of us to focus on our respective stand-alone strategies for the benefit of our owners, employees, customers and other stakeholders,” said Allen.

“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,” Allen added.

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In its own statement, Cengage took a different approach to sharing the news about the failed merger. Rather than calling the merger “uneconomical,” Cengage blamed the termination of the merger agreement on the prolonged regulatory review process and an inability to agree with the U.S. Department of Justice on appropriate divestitures.

“Cengage entered into the merger agreement as a leader in helping students access affordable course materials and digital courseware,” said Michael E. Hansen, Cengage CEO. “Although we are disappointed that we were unable to finalize the merger, the opportunity ahead remains significant.”

“The COVID-19 crisis has accelerated the need for students to learn wherever they are. On a standalone basis, Cengage is very well-positioned to continue to support the transition to digital and help students save significant money. Looking ahead, faculty and administrators everywhere will be moving their classes online — and we are now singularly focused on ensuring the Cengage Unlimited subscription and our leading digital courseware platforms continue to deliver value for students and faculty,” added Hansen.

On March 24, the Competition and Markets Authority (CMA) in the U.K. failed to give the merger its blessing. Instead, the CMA referred the merger to its chair for a Phase 2 investigation under the Enterprise and Regulatory Reform Act of 2013. Despite planned divestitures, the merger would “result in a substantial lessening of competition (SLC) within a market or markets in the U.K.

Several U.S. legislators also had concerns about the merger, reports E-Learning Inside. House Antitrust Subcommittee Chairman David N. Cicilline (RI-01) and House Consumer Protection and Commerce Chair Jan Schakowsky (IL-09) wrote to the Department of Justice’s antitrust division, requesting that the DOJ closely examine the terms of the agreement which would bring together two of the top three college textbook publishers, giving them more than 40% market share.

“We are deeply concerned that as a result of this significant reduction of competition, the proposed merger will likely drive up costs for students and families who are already facing financial barriers to achieving higher education,” wrote Chairs Cicilline and Schakowsky. “Textbook prices have risen 184% since 1998, in part because students are a captive market with virtually zero control over their textbook assignments. And because many students cannot afford their textbooks, about two-thirds of students do not acquire all of their required course materials, undermining their educational opportunities.”

“In sum, it appears that the proposed Cengage-McGraw-Hill merger will significantly reduce competition in the college textbook market, creating a duopoly that may increase the financial burden on American students, jeopardize their privacy, and unduly influence their education,” the chairs concluded.

The chairs said, under antitrust laws and horizontal merger guidelines, this consolidation is “presumptively illegal” because it would give the combined company a market share larger than 30%. The chairs also referred to the evolving textbook subscription model that provides all-inclusive access to textbooks for subscribing students and pending class action litigation.

Insider Take:

It has been a full year since McGraw-Hill and Cengage entered into a merger agreement, and it is clear that regulators were not willing to approve such a merger under proposed conditions and divestitures. While they undoubtedly invested significant time and money into seeing the merger through, we wonder how much exploration the publishers did in advance. It seems they would have known that they would come under scrutiny and would have to divest assets and make other accommodations to give regulators any degree of comfort that they were not unfairly eliminating the competition. Obviously that didn’t happen, so their investment in this process was wasted.