McGraw-Hill Co.: Keeping It Together

April 25, 2007
Media conglomerate CEO says no to spinoff strategy and resists deconsolidation.

IndustryWeek's 50 Best Manufacturer winner McGraw-Hill is known as both a publisher of educational materials and economic analyses (in its Standard & Poor's division), and magazine franchises (including its well-respected magazine title Business Week.) If it were rating itself, the New York-based company could quote a steady rise from a low of $48 per share last summer to a high of $69 in February of 2007, as well as a steady longer-term climb from well under $30 since February of 2003.

No less a popular authority than founder and TV's "Mad Money" host Jim Cramer has called McGraw-Hill a "phenomenal" diversified stock with its educational and magazine publishing franchises, bond-rating institution Standard & Poor's and even a few ABC affiliates in its pocket.

Some say this diversity is more of a drawback than a strength. A number of analysts and investors are calling for McGraw-Hill to follow the deconsolidation trend -- exemplified by blockbuster deals like tobacco conglomerate Altria's spin-off of Kraft Foods and, most relevant here, Dun & Bradstreet's spin-off of S&P competitor Moody's -- that created more manageably sized, independently-managed companies to fit the tighter, more focused profile desired by institutional investors since the turn of the 2000s.

Interestingly, this year McGraw-Hill's S&P division underwent a deconsolidation of its own, selling its mutual fund data business to Morningstar, Inc., while also picking up three index properties from Goldman-Sachs. These two transactions were designed to focus resources on S&P's core analytical services, and, according to S&P executives, supported management plans to expand the fund ratings and research business and focus solely on core competencies at the expense of extraneous holdings.

So if such a strategy works for one division, then, shouldn't it translate to the company as a whole? Consider this: Since the 2000 split, Moody's stock has risen sevenfold to the point where, despite having less revenue or market share than rival S&P, Moody's alone trades at a price higher than all of McGraw-Hill combined. Dun & Bradstreet's overall company worth hasn't been exactly hurt either, instead rising from $20 in 2000 to more than $92 per share on April 4 of this year.

McGraw-Hill Co.
At A Glance

McGraw-Hill Co.
New York, NY
Primary Industry: Publishing & Printing
Number of Employees: 20,214
2005 In Review
Revenue: $6.3 billion
Profit Margin: 14.06%
Sales Turnover: 0.94
Inventory Turnover: 7.29
Revenue Growth: 14.34%
Return On Assets: 14.40%
Return On Equity: 28.29%

With trend and precedent on the side of those calling for a spin-off, why hasn't CEO Terry McGraw given the green light? Perhaps the answer lies in his being a third-generation media player with a long-term view based on private company mentality. McGraw can point to strong and steady growth as evidence that the crown of his company has a brighter future than any single jewel can provide, and may be holding on to S&P in the hopes that further convergence of the media landscape allows for future synergies.

In keeping with this theme, at a presentation to a Bear Stearns conference this March, McGraw stated his belief that the convergence of technology and content will continue to transform enterprise thinking, and that his company's diverse portfolio will allow it to continue to offer value-added informational services to a wide range of markets.

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