by Bill Hannay (Partner, Schiff Hardin LLP, Chicago, IL)
On May 1, 2019, textbook publishers McGraw-Hill and Cengage announced that they had signed a merger agreement that would produce “a broad range of best-in-class content — delivered through digital platforms at an affordable price,” worth $5 Billion. Almost exactly a year later, on May 4, 2020, the parties announced that they had mutually agreed to terminate their proposed “merger of equals.” They ascribed the breakup to opposition from antitrust regulators in the U.S. and U.K. who demanded substantial divestitures of course offerings to avoid competition concerns.
In a press release about the termination of the merger agreement, the head of the DOJ’s Antitrust Division, Asst. Atty. Gen. Makan Delrahim, stated:
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.
At the time the merger was devised, it would have combined the second and third largest publishers of textbooks in the United States in a market long dominated by only three major textbook publishers. The leading education company is Pearson plc which owns educational media brands including Addison-Wesley, Peachpit, Prentice Hall, eCollege, Longman, Scott Foresman, and others. McGraw-Hill and Cengage were the second and third largest textbook publishers in the U.S., respectively.
McGraw-Hill, headquartered in New York City, is the second-largest publisher of course materials in higher-education, which include physical textbooks, eBooks, and digital courseware. McGraw-Hill is a private company, owned by a private equity fund operated by Apollo Global Management LLC.
Cengage had emerged from bankruptcy in the Spring of 2014, after filing for Chapter 11 bankruptcy protection in 2013. The company had struggled with the major trend affecting textbook publishing, i.e., the move from paper to digital versions of learning tools. The industry has also suffered from the vicious cycle of increased book pricing, prompting students to save money by borrowing, renting, or buying used texts. At the time, Cengage vowed to focus on electronic versions of its textbooks and developing digital study guides and other educational supplements.
Following May 2019, the proposed merger — which quickly was dubbed “McEngage” — prompted opposition from student groups and open market advocates, such as SPARC, which in turn prompted concerns among Democratic Congressmen and led to investigations into the potential effects of the merger by the DOJ Antitrust Division and Great Britain’s Competition and Markets Authority (CMA).
Critics of the merger asserted that the combined firm would control between 40% and 50% of the college textbook market in an era when major textbook publishers had dramatically raised prices in recent years. Between 2006 and 2016, the price of textbooks had risen at four times the rate of inflation.
During the winter of 2019-20, the parties to the merger disclosed that the transaction had been and remained under review by the U.S. Department of Justice as well as antitrust authorities in Australia, New Zealand and Mexico and in certain U.S. states. Early in March 2020, two members of the U.S. House Antitrust Subcommittee, Chairman David Cicilline of Rhode Island and Commerce Chair Jan Schakowsky of Illinois, wrote a letter to the DOJ asking for increased scrutiny of the deal. In addition to raising competitive concerns about market concentration, the Congressmen expressed concern that the merger would put more student data into the hands of one company. This could increase the risk of cybercrime but also potentially give the combined entity “an insurmountable lead in the development of machine learning tools for higher education.”
On March 24, 2020, the U.K.’s CMA announced that it had decided to conduct an in-depth review of the transaction, referred to as a “Phase 2 investigation.” The Phase 2 process provides for a 24-week review, which is subject to further extension by the CMA.
It became clear by the Spring of 2020 that McGraw-Hill and Cengage were prepared to divest (or spin off) a few titles or subject areas where there was substantial overlap, i.e., direct competition between the parties, but it was equally clear that the DOJ and the CMA were looking to have the companies shed significantly more overlap products. No lists were made public, but press reports suggested that the Justice Department had demanded “significant divestitures of several dozen courses” to address antitrust concerns. And the CMA said that the companies had offered divestitures that were “unlikely to be sufficient in addressing its competition concerns.”
In the end, no settlement could be reached with the government agencies, and the publishers decided to walk away from the deal rather than go to court over the dispute.
Cengage issued a press release on May 4th, stating that the deal was scrapped “by mutual agreement due to a prolonged regulatory review process and the inability to agree to a divestitures package with the U.S. Department of Justice.” The company vowed to act, on a standalone basis, “to continue to support the transition to digital and help students save significant money.” Looking ahead, as faculty and administrators move their classes online, Cengage is “now singularly focused on ensuring the Cengage Unlimited subscription and our leading digital courseware platforms continue to deliver value for students and faculty.”
The Public Interest Research Group (PIRG) which was one of the NGOs opposing the transaction raised doubts about the future benefits of the textbook publishers’ individual efforts: “While Cengage and McGraw-Hill won’t have quite as much power to jack up prices on course materials, the new wave of digital textbook products out there — from access codes to ‘inclusive access’ automatic textbook billing — still make it difficult for students to get good grades, pay the bills, and graduate on time.”
William M. Hannay is a partner in the Chicago-based law firm, Schiff Hardin LLP, and is a frequent contributor to Against the Grain and a regular speaker at the Charleston Conference. He can be reached at <[email protected]>.