Cengage Learning Using Bankruptcy to Restructure for Future Growth
by Nancy K. Herther
Cengage Learning filed for Chapter 11 protection in Bankruptcy Court for the Eastern District of New York on July 2, 2013. The company comprises three major units. The Academic & Professional Group (APG) is a publisher of print and digital information services for the academic, professional, and library markets, including textbooks, educational software, and training programs. Gale provides a wide variety of reference and e-research and educational products to libraries, schools, and businesses. This includes more than 600 databases and their licensing of content to others (such as Dow Jones) for integration in web-based information services. Cengage’s International division, not a part of this bankruptcy action, is responsible for the adaption of their domestic products for distribution to more than 110 countries around the world.
In announcing this, the company stressed that “our customers can be confident that they will continue to receive high quality educational content, products and industry leading services and support they are accustomed to without interruption. Our vendors can expect to be paid in full for all goods and services provided from the date Cengage Learning filed for Chapter 11 forward. Our employees will be paid in full and will continue receiving their benefits in the same way.” The company employs an estimated 5,500 employees in 20 countries across the globe.
A Little History
Until 2007, Thomson was also a major worldwide provider of higher education textbooks, academic information solutions, and reference materials. Thomson (now Thomson Reuters) amassed its portfolio largely through acquisition. In September 1998, Gale Research Co. and The Thompson Group merged, with Gale maintaining its name and significant operating independence. In October 2006, the company announced its intention to break up and sell the renamed Thomson Learning market group.
In May 2007, Thomson Learning was acquired by Apax Partners and soon renamed Cengage Learning. “The name Cengage Learning reflects our commitment to promoting engagement and improving results for all of our customers,” noted then-CEO Ronald Dunn. Apax, a private “independent global partnership focused solely on long-term investment in growth companies,” noted that their financial success is “rooted in a culture that has always been outward looking, pioneering and committed to growing businesses.” In the case of Thomson Learning, Apax, together with funds advised by OMERS Capital Partners, may have been a bit over-eager, paying $2.75 billion over the estimated value of the company of $5 billion.
The floundering company brought in a new CEO, Michael Hansen, in September 2012, calling him “a seasoned executive with significant experience in guiding digital transitions in publishing businesses, and we feel he is highly qualified to lead the company through the next stages of its growth strategy.” However, red ink was a major priority. Cengage now estimated to be worth $4 billion was carrying a debt of $5.8 billion at the time of the Chapter 11 filing.
In May of this year, the company announced that it was considering both restructuring and Chapter 11 to address its financial situation. “We will seek to negotiate the terms of a comprehensive restructuring transaction with our key creditor constituents and quickly implement the restructuring plan,” CEO Hansen explained in May. Chapter 11 bankruptcy involves restructuring as the goal—very different than a Chapter 7 bankruptcy which involves liquidation of assets. In this case, Cengage has proposed to eliminate its equity holders (also called shareholders, those with a financial stake in the company) and have their debtors brought on as the new equity holders (owning a share of the company—but no more than a total 35% stake).
“The Chapter 11 process can be an effective way of achieving a fast and efficient debt restructuring with minimal disruption to the business, particularly where agreement is reached with key financial stakeholders on a plan—on the outlines of a plan—prior to the filing.” Also in March, Cengage announced that it had drawn down most of its revolving credit lines and hired restructuring adviser Alvarez & Marsal. “The next component of our transformation is the restructuring of our corporate balance sheet and reduction of debt to support our long-term business strategy. The reduction of our debt and the improvement of our capital structure will give Cengage Learning a greater capacity to move forward as a digital education leader and world-class information provider.”
Some Honest Reflection and Commitment to Vendors and Users Alike
The private company has been very transparent in their disclosures in this process, listing the names of creditors and detailed information on its current market position and operating plan. In the plan, the company admits that “the traditionally stable higher education publishing make has recently gone in decline, furthermore, Cengage is underperforming the market primarily driven by its digital execution.” Changes include “resetting our cost structure” and “creating stare of the art product management and development functions.” If anyone comes out of this looking poorly, it would appear to be Apax Partners for overpaying for the company and then not addressing financial issues more aggressively from the start with their management team. For a company that’s purported purpose is “identifying potential investments, growing our portfolio companies or realising their value at the right time, our strategy is geared to releasing potential.” Hopefully there are lessons to be learned here.
“The bankruptcy is a balance sheet problem,” explains publishing consultant Joseph Esposito. “The company simply took on too much debt when it was acquired by Apax Partners. To service that debt the company tried to raise prices beyond what students would be willing to pay. The company’s owners had too rosy a view of the textbook market. It’s a good, solid, profitable, but mature market. The company will be restructured (meaning the creditors will take a haircut on their loans). Some assets will be sold to pay down debt further. Then Cengage will be back in the marketplace, small and chastened, but still a good company with valuable products.”
The operating plan is cautious, advising that Cengage Learning will continue to downsize and reorganize through 2015, with a period of slow growth to FY 2018 to be marked by sales only 5% greater than FY 2013. However, the plan includes some useful observations on the state of this industry and Cengage Learning’s competitors that make it essential reading. The plan is focused on current competitors in key market segments, but doesn’t directly address some of the disrupting factors that continue to impact this sector. Digital Book World recently estimated, for example, that Amazon—not publishers or bookstores—are now the primary source for college textbooks. This is an area that Hansen claims as a company strength: “Faculty and students rely on our content and have relied on it for decades. I don’t see that changing. The content is our competitive advantage.” However, the sands continue to shift.
Seeking New Paths in Unsettled Times
“I’ve met with senior leaders at Cengage several times over the past few years about etextbooks,” notes Indiana University Kelley School of Business professor Alan Dennis. “As have people from my company, Courseload. Unlike other publishers, Cengage was very slow to consider and adopt new ideas in the etextbook space. They told me that Cengage’s strategy was to price their books at a 20% premium over other publishers offering similar content, because they believed their books were better and commanded higher prices. They invested a lot of money in MindTap, which was a flawed effort to tie up end users in a wholly contained Cengage digital world. I doubt that it will ever generate an RO in this increasing open standards world.”
Dennis, co-founder of Courseload and Editor-in Chief of Foundations and Trends in IS, sees a different future: “I’m a strong advocate of 100% sell-through models (where the university buys etextbooks direct from the publishers at low cost and provides a copy to each student in a course by charging a course fee) and open access materials. I think once the model shifts to 100% sell-through and open access, the cost of books will drop to mode reasonable levels, and learning will actually improve as every student will have a copy of the book. I think we’ll also see more boutique publishers that specialize in books for specific disciplines, books that are cheaper and also provide a higher royalty rate to authors.”
The Name of the Game is Change
There is no issue with ongoing access for their customers in this process. Cengage participates as a member of Portico, which provides a safety net in case this, or any other company involved in selling digital collections, does fail in the marketplace. Since 2002, this membership organization has worked to “build a sustainable digital archive to serve the academic community and to enable publishers and libraries to feel secure and to realize tangible benefits as they transitioned to greater reliance on digital content.” Cengage has made it clear in letters sent out to customers, vendors, and authors that it will be business as usual as they work to liquidate debt, restructure, and work to move to a more competitive position in their markets.
“Let me reassure you, there will be no interruption in the solutions or quality of services we provide to our customers, including our Gale customers. In addition, our library customers can continue to rely on our agreement with the Portico archiving program that ensures the security of our content. The details of our archiving agreement with Portico are available at http://gdc.gale.com/assets/files/Portico_FAQ.pdf,” notes Cengage Learning’s Kevin Stone, chief sales and marketing officer.
“CLOCKSS & Portico are set up to continue access in cases where vendors fold,” Notes University of Minnesota copyright librarian Nancy Sims. “The open textbook catalog is currently evolving.” Sims notes efforts at the University of Minnesota to create a system for professional reviews of etexts. Early results having found that those who make the effort to evaluate Open Access textbooks often go on to use them in their own classes. “Although we currently primarily host textbook reviews and links, we’ve certainly considered the need for a location to store new open texts, and new modifications to those texts. I do think this situation and some other recent news highlight how helpful it can be to have the materials that are key to scholarship or teaching be held within the academy—although there can also be drawbacks to that as well.”
The Future of the Textbook Market
According to financial analyses by Publishers Weekly, “Cengage Learning has transformed its reference content into the digital word, with Gale as major brand. Most of the revenue in the library reference segment came from digital solutions. Gale applies the so-called “digital-first” product development model by launching digital products ahead of printed derivations. Almost three-quarters of its revenues are collected from recurring subscriptions.” A 2011 survey by the U.S. Public Interest Research Group found that “seven in 10 college students said they had not purchased a textbook at least once because they had found the price too high.” Academic libraries traditionally haven’t been central to the provision of textbooks on their campuses; however, with increasing costs of books and tuition, libraries across North America have been working closely with academic units and bookstores to find alternative solutions to the textbook problem.
One major new effort is relying more on course packs of articles or materials instead of requiring books that may not be used entirely and are estimated now to cost college students more than $1,100 per year. Another alternative getting more attention is the creation of Open Source textbooks—created by academe for academe and estimated to save 80% on textbook costs.
Flat World Knowledge is the first commercial publisher of college-level open access textbooks. Established in 2007, their books are published under a Creative Commons Non-commercial Share-Alike license. “Educators choose the book—students choose the format and price,” is their motto. The company intends to have open textbooks available for the most popular 125 college-level courses by next year.
Last September, California Governor Jerry Brown signed legislation for state funding to cover the cost of 50 open source digital academic textbooks and creating the California Digital Open Source Library to host these new resources. Libraries are getting involved in providing copyright support for course packs, by working with university presses and other outlets for class-related materials and by using their digital repositories for housing and hosting these resources.
British Columbia’s government last fall passed legislation to become the first Canadian province to offer students “free online, open textbooks for the 40 most popular post-secondary courses” by this fall. John Yap, BC Minister of Advanced Education noted that, “British Columbia is proudly leading Canada in committing free, open textbooks to students and joins other international jurisdictions in taking a leadership role that puts technology to work for students.”
Former University of British Columbia librarian (now at the University of Minnesota as associate university librarian for content & collections), Joy Kirchner believes the Cengage Learning bankruptcy “will undoubtedly send a strong signal to other publishers. There has been an annual 12% rise in the cost of college textbooks from 1978 to 2013. Students report they can’t afford it and try not to buy textbooks and administrators are reacting to this lack of affordability.”
With Open Access, the rise of the internet as a publishing medium, and constant technological change, publishers of all types are needing to keep a careful eye on their companies, products, and customers. No one, no brand, no company is safe today. Innovations and new opportunities are causing everyone in the information food chain to balance the need for change and innovation with an eye on the bottom line. Cengage appears to now have a dedicated restructuring management team in place, some seasoned financial advisers, and a solid product line. Hopefully, this combination will keep the company in the mix for the future.
Change and Continuity
“We are embracing a team approach by discipline and market segment,” Stone reports, “with dedicated editorial, technology and production resources assigned to each product group. This will increase our customer focus, encourage greater collaboration within the company and between market-aligned teams, and it will increase our speed to market.” Over the next 2-5 years, Stone sees the company focused on both innovation and organizational change: “Our focus over the next few years will be to strengthen our engagement with customers and a big part of our success in this area will come from our newly integrated sales and marketing teams, which report directly to me. By aligning sales and support resources as close to the customer as possible, we are allowing for more seamless customer engagement. Cengage Learning takes great pride in providing outstanding personal service to our customers from sales and implementation through to training, and this new structure ensures that resources are dedicated to support the customer. We intend to continue providing attentive support and personalized service without interruption.”
Nancy K. Herther is Sociology/Anthropology Librarian at the University of Minnesota, Twin Cities campus. Her email is email@example.com.