[Updated 5/1/19, 4;10 pm. See below.] Textbook and edtech companies Cengage and McGraw-Hill are merging to become the second-largest provider of educational materials in the US to compete in what’s proven to be a tough sector for traditional publishers being transformed by digital books and online learning.
The deal, announced Wednesday, sets out an all-stock merger of equals with the owners of Cengage and McGraw-Hill each taking a 50 percent stake in the combined company, which will be called McGraw Hill and led by current Cengage CEO Michael Hansen. McGraw CEO Nana Banerjee plans to leave after the transition.
Together, the company will have about 44,000 titles, 9,000 employees, and estimated revenues of $3.16 billion. Both companies have struggled to maintain profitability. In the latest quarter, McGraw reported a $115 million net loss, and Cengage had a $47 million net loss.
The size of the combined firm will help it rival the size of London-based education publisher Pearson, currently the world’s largest education publisher. The companies say they expect to find $300 million in cost savings in the first three years together.
The deal has the potential to put competitor Pearson—which reported 2018 sales of $5.4 billion—on its heels. Boutique investment bank Liberum tells Reuters, “While a combined Cengage-McGraw Hill entity would match Pearson in terms of market share, the biggest risk for Pearson is that it raises the risk of significant price deflation and loss of share.”
Cengage and McGraw have focused on advancing subscription or rental models for higher-ed materials, where instead of students shelling out list price for a textbook—and recouping only a fraction if they trade it in at the end of the semester—they pay a subscription fee for its use during the term of the class. Cengage says its subscription program saved students $60 million in the past academic year, and McGraw says its digital materials program helped students pay $55 million less last year. [Updated to clarify McGraw’s rental model.]
Hansen tells Xconomy the merger will help both companies in their goal to put technology into more classrooms and in the hands of more students—all at an affordable price—to fix the “educational process, which is still in the 19th century.”
“The learning experience today is certainly not a 21st-century experience for the vast majority of higher ed students,” Hansen says. “It’s not different from when my parents went to school. There’s not much technology innovation in the higher ed space, and part of the reason is students were struggling with the cost.”
Hansen says the innovation question doesn’t start in the stratosphere of complex technologies like artificial intelligence. The first step—and a big one—is getting basic technologies like adaptive learning tools that have been around for years more evenly distributed across the education landscape.
AI “definitely is part of the equation” for the combined efforts of Cengage and McGraw eventually, Hansen adds. “I would say there is plenty of great technology available,” he says. “However, scaling that technology to the vast majority of the hundred million or so course experiences every year that students have in the US is the challenge. You need to bring it to millions of students.”
Hansen says he and Banerjee haven’t touched on the question of where the company will be headquartered if the deal closes as expected by early 2020. He says it’s not “really a super meaningful designation” given both companies’ many offices across the US. Cengage has its headquarters in Boston and McGraw-Hill is based in New York.
The major difficulty in the merger, Hansen says, is neither the technology nor bringing together the libraries of tens of thousands of textbook titles; it’s the cultures.
“The technology platform is the easy stuff,” he says. “I think the biggest challenge is to grow the cultures together. Every culture is unique, and we are going to spend a lot of time listening to each other and determining what the respective cultures are and how we can form a combined culture of the organization.”
