Textbook publisher mergers and acquisitions: What authors need to know

mergers and acquisitionsIf you’ve been published (or simply signed, for that matter) by a US publisher in the last dozen years, there is a fair to excellent chance that the master to whom you are now answering is not the master to whom you indentured yourself when you signed your original publishing contract. Among the larger transactions:

2019 proposed merger of Cengage and McGraw-Hill
2016 Cengage acquisition of WebAssign
Elsevier acquires social science and humanities repository SSRN
2015 Macmillan Higher Ed and Macmillan New Ventures merge to become Macmillan Learning
Bertelsmann Education acquisitions of HotChalk, Relias Learning, and RediLearning
2011 Cengage acquisition of National Geographic School Publishing
2008 Cengage acquisition of Houghton Mifflin Harcourt College Division

What Is This Shuffle All About?

There is no one-size-fits-all answer. In a few instances, the target is nothing more than an attractive investment and will be left largely alone to continue its profitable ways. More likely, however, the acquisition fits neatly into a void in the acquirer’s list or represents an opportunity to pick up talented and experienced staff, new distribution channels, an expanded (or consolidated) sales force, access to new markets, or market share in key genres or disciplines. And more often than not, the acquirer expects to maintain or grow the revenue stream from its target while at the same time slashing the costs of producing and marketing the list by consolidating back office, sales, and even editorial functions.

In the Cengage-McGraw-Hill merger, for example, as stand-alone companies they were each a distant 2ndand 3rdin size to $8B giant Pearson in the higher ed market in the US. Combined, however, they will be a $5B competitor with 44,000 titles delivered through a variety of digital platforms. This increase in size and reach, coupled with a projected cost savings of $300 million over the next three years will make them much more competitive with Pearson, which appears to be racing downhill to meet them on their way up.

What Does It All Mean for You?

Well you won’t be surprised to learn that it might be a bad thing. When you enter a publishing contract with a publisher, you essentially enter a partnership – you exchange certain rights in the product of your intellectual labors for a contract right to share in the proceeds from the publisher’s commercial exploitation of that work. There are certain obligations that you take on – the obligation to produce a manuscript that is professionally competent and acceptable to the publisher, a manuscript that meets certain, often highly subjective and difficult to measure, requirements. The publisher, on the other hand, takes on the similarly amorphous obligation to provide editorial, pedagogical, and literary direction, support, and design as well as the obligation to market and promote your work. While the contract does memorialize certain expectations, there is much that is left to the good faith and discretion of each party, much that simply can’t be quantified or objectively measured.

Typically, the publisher protects its trust in you by providing in the contract that your obligations are personal and non-assignable – the publisher made its deal with you, because of your special talents, demonstrated skills, and reputation in your field . . . and it will accept no substitutes. But, unless you have extraordinary leverage (or a very naïve publisher), this is a one-way street.

For its part, the publisher generally reserves the right to “sell” your contract, alone or as part of the business, to some other when that other places a higher value on the property to be acquired than it is worth to your publisher. The publisher generally justifies this position as a business necessity, a part of its fiduciary obligation to its owners to maximize the value of the business as a whole by leaving its assets (your contract among them) unencumbered. But there is an inescapable downside for you. As a result of any sale that includes your contract, you may find that the person in whom you placed your trust, your editorial champion, is no longer in charge of your title (or if he/she is, that his/her authority to make decisions that affect you has been eroded or compromised).  This will surely be one of the results from the Cengage-McGraw-Hill merger as a promised $300 million in expense cuts will largely come from staff cuts and consolidations – that’s a lot of salaries, maybe 750 to 1,000 positions to be eliminated.

Thankfully, you are not powerless through this process. There are things that you can do to minimize or ameliorate the downside. And there may, under certain circumstances, even be an upside if you know what to do and when to do it.

The Downside and How to Deal with It

One of the ways to minimize the impact of losing your editor is to reduce the extent to which you must rely on his/her judgment, commitment to you and your title, and personal representations and promises. Fill those gaps in your publishing contract by quantifying what you can, reducing the publisher’s discretion where possible, and memorializing every representation and promise:

  • Nail down the manuscript acceptability clause to an objectively measurable standard
  • Make sure the publisher has to provide you with a reasonable opportunity to revise an unacceptable draft and with concrete direction in revisions
  • Make sure the publisher has to publish within a finite time after the manuscript is complete and acceptable
  • Provide for a kill fee or forfeiture of the advance if the manuscript is rejected for any reason other than your failure to complete it
  • If the work is one that must be periodically revised in order to keep it fresh and current, make sure the publisher has an obligation to revise it on a set schedule
  • Try to quantify the publisher’s marketing and promotion obligations
  • Try to secure a right to approve any change in editors
  • Make sure that rights revert in timely fashion

And while you’re negotiating that contract, bargain for some leverage. Most publishers will give ground here only very reluctantly, but the one sure thing is that you won’t get what you don’t ask for. So try to negotiate for some sort of right to approve any assignment of your contract. (This will help in asset sales and list sales, but not in mergers and stock purchases – “McCengage[1]” is an example – for those, you would need a right to approve any change of control).

Special Considerations in Larger Deals

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”), proposed transactions with a value of $90 million or more are subject to pre-merger antitrust review. Parties to qualifying transactions must report certain information about the proposed transaction to the Federal Trade Commission and the Department of Justice at least 30 days prior to the proposed closing date. Based on the information provided, either the FTC or the DOJ may make a second request for additional information useful in determining whether the proposed transaction is likely to have an anti-competitive effect. In practice, one agency or the other will take the lead in this investigation, the process will take from several months to a year to complete, and may well end with the parties consenting to a final order that requires divestiture of certain products or lines of business as a condition to approval of the transaction.

In the course of its review, the investigating agency will look at the market on a course-by-course basis, evaluating the relative market concentration in each course where the parties have competing works (the “Overlap Courses”). The agency will use a commonly accepted measure of market concentration in these Overlap Courses called the Herfindahl-Hirschman Index (“HHI”). The HHI is calculated as the sum of the squares of each party’s market share. HHIs can theoretically range from zero (a market with infinitely many competitors, each having infinitesimal shares) to 10,000 (a market with a single monopolist with a 100% share). The difference between the pre-merger HHI and the post-merger HHI is the Delta. Mergers that result in highly concentrated markets (HHI over 2,500) with a Delta of more than 200 are presumed to be anticompetitive.

“McCengage” has a projected value of $5B and is, accordingly subject to review. If the FTC/DOJ finds that the merger would have an anticompetitive effect, the parties can be required to divest certain properties before the transaction will be approved. The Cengage-HMH transaction in 2007-2008 was also subject to such review. A number of Overlap Courses were identified, with post-merger HHIs in excess of 3,000 and Deltas in excess of 500. As a consequence, Cengage was required to divest titles in the introduction to business category, French, German and Italian language categories, history category, and college orientation/success category. Some of these went to Wiley, some to Bedford St. Martin, others just disappeared. In Cengage-HMH, this process took about eight months to complete and as a consequence, some authors found themselves transferred to yet other publishers.

Cengage-McGraw-Hill are projecting their antitrust review to take nine to twelve months to complete. If you are the author of one or a series of works of interest to the agency investigators, you may be invited to participate in an interview. You may also volunteer, but the final decision as to whom to interview will be made by the investigating agency.

After the Deal

Once a sale that involves your title is announced or completed, it’s time to do some homework. You need to learn as much as you can about the acquirer:

  • Does the acquirer already publish in your field?
  • How will your title fit into the acquirer’s list?
  • Do the acquirer’s titles complement your title or compete with it?
  • Are they on the same publication/revision cycle?
  • Who handles that list for the acquirer? And to whom does he/she report?
  • Is your title likely to be one divested as a consequence of antitrust review? If so, where is it likely to go?
  • Do you have a termination right under 17 USC §§ 203 or 304 that you might exercise in order to obtain some leverage?

Check the acquirer’s catalog for answers to some of these questions. Check its web site. Ask your editor what he/she knows about the acquirer . . . and its list . . . and its people. Ask your editor what he/she knows about post-acquisition plans for your title and for the list of which it is a part. Ask the same questions of your editor’s boss. Find out who your editor’s counterpart is at the new owner and ask him/her the same questions (see if you get the same answers – reliable information is a scarce commodity in consolidations and often times the respective staffs at acquirer and target are getting very different stories about the post-acquisition plans). Ask the same questions of the counterpart’s boss (again, see if you get the same answers). And finally, always ask the sales reps – ironically, sometimes the best information about what is going on at the home office comes from the sales staff in the field.

What you learn from all of this sleuthing will help you begin to understand how your title is perceived by the acquirer . . . which will tell you whether to work on building your relationship with them, or whether to begin exploring your other options.

Don’t Let the New Owner Take Advantage of You

Understand that, after an acquisition, you may have a new owner, but you don’t have a new contract. When the acquirer buys your title and your publishing contract, it steps into the shoes of your former publisher and takes on not only that publisher’s rights under the contract but also its obligations.

Also understand that some of your expectations of your former publisher are based not on what is in the contract but instead on what has been said and what has been left unsaid between you and your editor. If you lose your editor, you lose this history. So be certain to take some time to reflect on your expectations and take the opportunity to memorialize any unwritten course of conduct, waivers, promises, or representations made by your editor in a status letter to your publisher.

It is entirely likely that the acquirer will have some standard practices that are different from those employed by your former publisher. The acquirer may be somewhat cavalier about unilaterally moving your title into its system, but you don’t have to accept this:

  • Don’t let the acquirer substitute, for its convenience, its contract form for the one you signed with the target
  • Get an explanation of any differences between the two forms, and get independent advice
  • Don’t let them change the royalty reporting or payment schedule
  • Don’t let them change the rates or arrangements on secondary channel/market sales
  • Pay careful attention to how the acquirer handles the allocation of proceeds in connection with custom publications and sales via a digital platform

If you are inclined to request or demand an audit of your past royalty accounting, so it sooner rather than later so that access to the necessary records is not frustrated or delayed by migration of the data to a new platform

If you do elect to accommodate their requests, be sure to negotiate for some concession in return
If your book has been around since the 1980s, you may have a statutory termination right that you can exercise against the acquirer to improve your leverage in these discussions

What About the Upside?

A consolidation is not necessarily all bad news. If your book survives the competition for attention, it is entirely possible that the exposure to a new sales force and new distribution channels will result in a spike in sales, at least in the short term if not for the long term. Sometimes, however, you have to look a little harder to find the silver lining.

It is not uncommon, after the excitement of the deal has subsided, for the new owner to have second thoughts about whether it might have overpaid for the target. If your title is an important part of the revenue line, it will be critically important for the new owner to keep you happy and productive (and they know it). You can sometimes use this incentive as leverage to obtain concessions . . .  provided you know what to ask for and when and how to ask for it.

If, on the other hand, your title is not important to the list, then it’s a drag on their resources and a distraction. If they let it languish, it will waste away. But it’s not in their best interests to allow this to happen. Help them understand this and take the initiative to ask about re-acquiring the rights . . . or about getting consent to shop it around. If you’re able to place your book elsewhere, this will give you a new home, a new champion – someone with a personal stake in the success of your title . . . which just might provide new life and a fresh start for you and for your work.

May 2019 Cengage McGraw-Hill merger announced; the combination will have 44,000 titles and $3.1B in sales and is subject to antitrust review

John Wiley to acquire Knewton, a provider of courseware and adaptive learning technology

March 2019 Rowman & Littlefield acquires McBooks Press, adding to R&Ls list of nautical titles
December 2018 Rowman & Littlefield acquires Hal Leonard trade titles, giving it more than 3,000 books in the performing arts field
September 2018 Kaplan buys educational assets, and name, from Barron’s, including the test prep, study aid, and foreign language assets. Barron’s is retaining its large trade list which will be published under a new name
April 2018 Independent Publishers Group (IPG) has acquired the academic book distributor International Specialized Book Services (ISBS)

In two separate niche deals, LSC Communications bought the university press distributor TriLiteral, while Turner Publishing acquired a publisher that specializes in books on eating disorders

March 2018 HarperCollins has acquired the imprint AMACOM, a division of the American Management Association International, which has a backlist of approximately 600 business and professional titles
October 2017 Baker & Taylor Publishers Services forms distribution group to offer distribution and other functions to children’s, trade, K‐12, higher education and academic publishers
August 2017 Barnes & Noble Education has acquired Student Brands, a direct-to-student subscription-based writing skills service, for $58.5 million
June 2017 Rutgers and Bucknell University Presses have reached a partnership agreement through which Rutgers will do all of the production, marketing, and sales for Bucknell titles
February 2017 B&N Education Buys MBS Textbook Exchange for $174 Millionin another move that consolidates the college retail and wholesale market
January 2017 Pearson, faced with worse-than-expected results in its North American higher education publishing business, puts its 47% stake in Penguin Random House up for sale (yet another in a series of troubling financial signals from the largest publisher in the US college market)
September 2016 Cengage acquires WebAssign
August 2016 John Wiley & Sons acquires Atypon, a publishing-software company, for $120 million in cash. Atypon enables scholarly societies and publishers to deliver, host, enhance, market and manage their content on the web
May 2016 Macmillan acquires Pronoun, Inc., a New York City–based technology company that provides digital book publishing tools, analytics, and services for authors and media companies

Elsevier has acquired the largest repository and community for social science and humanities researchers in the world, SSRN, to accelerate its social strategy and scale the network up for the benefit of “the entire scientific ecosystem”

April 2016 Pearson puts GlobalEnglish Corp, which uses cloud software to teach English to employees of multinational companies, up for sale (a division it bought only 4 years earlier)
November 2015 Bertelsmann acquires a minority interest in HotChalk, which helps non-profit universities and colleges create online graduate degrees and currently supports 33 online degree programs, and RediLearning, a provider of online courses with 400 courses.
October 2015 Macmillan Higher Education and Macmillan New Ventures consolidate as a singular education unit under the new brand, Macmillan Learning
September 2015 Cengage Learning acquires Learning Objects, an ed tech company that provides adaptive online learning programs and courses to higher education institutions
May 2015 Houghton Mifflin Harcourt acquires the Ed Tech business of Scholastic for $575MM

Springer Science+Business Media and Macmillan Science and Education combine to form Springer Nature

March 2014 CourseSmart, originally founded by a consortium of higher ed publishers in 2007, was acquired by Ingram

 


[1]With credit for the mashup to Alistair Adam, Co-CEO at Flatworld, who was quick with it in a LinkedIn article on May 2, 2019.


Stephen E. GillenSteve Gillen counsels clients in publishing and entertainment transactions and disputes, internet issues, advertising law, computer law, copyrights, and related matters. His clients have included publishers, authors, artists, photographers, videographers, independent producers, Internet service providers, multimedia developers, and software programmers from Maine to California. He has written and spoken nationally on various publishing and copyright topics and teaches courses in Media Law at the University of Cincinnati. He currently serves as Publication Officer and Chair of the Books Editorial Board of the Intellectual Property Section of the American Bar Association. Earlier in his career, Steve served as in-house counsel for a middle market educational publishing company.

Steve is the author or co-author of three books published by TAA, Writing and Developing Your College Textbook: A Comprehensive Guide, Guide to Textbook Publishing Contracts, and Guide to Rights Clearance & Permissions in Scholarly, Educational, and Trade Publishing. Learn more or order