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McGraw-Hill Plans To Split Into 2 Firms

McGraw-Hill Cos., which provides the index for the world’s biggest exchange-traded fund, the SPDR S&P 500 ETF (NYSEArca:SPY), plans to split into two firms by the end of the year—one focused on financial markets, the other on educational publishing, in a move aimed at reducing costs and spurring growth.

The McGraw-Hill Markets unit—the current working name for the bigger of the two new units—will include the S&P index and rating businesses, the newly launched multiasset class data and research unit S&P Capital IQ, as well as Platt’s, a publisher of news and data on the energy and commodities markets. It also includes JD Power and Associates, a firm that provides ratings on various products such as cars.

The markets unit should have $4 billion in revenues this year, 40 percent of which comes from international markets, the company said in a press release. The other unit to come out of the planned split, McGraw-Hill Education, is expected to pull in revenue of $2.4 billion this year, the company said.

McGraw-Hill has been under pressure from activist shareholders to split into different companies, in part because state and local funding cutbacks in education have held back growth at its educational publishing business. The company noted that the so-called Growth and Value Plan stems from a comprehensive review of the company’s businesses that began in the second half of 2010.

“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,” Harold McGraw, CEO of the current McGraw-Hill, said in the press release.

The New York-based company also said in the press release that it plans to speed up its share repurchase program to $1 billion in 2011. It has bought back 14.1 million shares worth about $540 million so far this year. It also noted that it has flexibility to continue share buybacks in 2012 under current authorization.

The Two New Units

The McGraw-Hill Markets unit will be headed by McGraw, who will serve as chairman, president and chief executive officer.

“When our premier brands are combined into one focused operating company, McGraw-Hill Markets immediately becomes the player with the greatest breadth of capabilities in the financial markets,” McGraw said in the prepared statement.

The company also said a search is under way for an executive to permanently head the newly independent McGraw-Hill Education unit. Until that search ends with an appointment, Robert Bahash will continue to serve as president of the unit, the company said.

Regarding the educational unit, the company noted it will have more flexibility to develop and deploy new products and services to address broad trends toward digital education platforms and to pursue higher-margin opportunities in educational services such as online instructional and school digital services.

It also said it will be able to more intensively focus its efforts on building new business in countries such as China, India, Brazil and other emerging markets that are projected to continue to grow at double-digit rates.

The company said it is in the midst of a cost reduction program focused on holdings of both the educational and market units that amount to more than $1 billion in corporate, administrative and technological costs. The cost savings program will separate shared services and establish two corporate centers. McGraw-Hill said it will provide updates on its cost reduction plan.

Completion Of The Deal

McGraw-Hill said it expects to complete the transaction by the end of 2012 through a tax-free spinoff of the education business to McGraw-Hill shareholders.

The plan is subject to final approval by McGraw-Hill’s board and a tax ruling from the Internal Revenue Service.

McGraw-Hill said that while it intends to complete the separation, there’s no guarantee it will be successful in doing so or that the terms it is now contemplating will remain the same once the separation is completed.

The world’s biggest ETF—SPY—has more than $82 billion in assets. It was launched in January 1993.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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