JANA Partners' Presentation on McGraw-Hill (MHP): Reasons to Split Up the Company ~ market folly

Wednesday, August 24, 2011

JANA Partners' Presentation on McGraw-Hill (MHP): Reasons to Split Up the Company

Earlier today we posted up about hedge fund JANA Partners' activist push against McGraw-Hill (MHP). Barry Rosenstein's hedge fund (along with the Ontario Teachers' Pension Plan) owns 5.6% of the company and is pushing for MHP to split up into four separate entities.

JANA just met with the company on Monday (August 22nd) to present their case. Here's the hedge fund's rationale for splitting up MHP:

- MHP's conglomerate structure acts as a significant constraint on each of its businesses, hampering operational performance, strategic flexibility in allocating capital and share price valuation

- MHP has much more meaningful and beneficial opportunities to improve operating performance and clarify the underlying value of its assets than the actions taken to date (such as seeking to sell broadcasting, which accounts for only ~2% of total EBIT)

- A wide ranging, transformative and comprehensive resolution of the corporate structure and cost structure is essential for MHP to improve operating performance and shareholder return

- Separating MH Education, Information & Media and the S&P Index business would position these businesses to improve performance and participate in consolidation, thus unlocking value

- Collapsing MHP's corporate cost structure and eliminating duplicative overhead costs would enhance this value creation

- Accelerated share buybacks would multiply the value creation impact of these changes

- Bolstering S&P Ratings with an independent oversight figure would help the business navigate an increasingly complex global regulatory environment and heightened public focus

- The real question is why would MHP not promptly take these steps to improve operating performance and unlock shareholder value?

JANA's recent slideshow presentation to the company is embedded below (email readers need to come to the site to view it):

In response to JANA's presentation, McGraw-Hill issued a statement that their review of the company's options for splitting up is "well advanced and expected to result in significant actions in the next few months to accelerate global growth, align appropriate cost structures and build shareholder value."

The question is whether McGraw-Hill opts for the more aggressive four-pronged break-up or if they are eyeing the smaller split up as they are said to be considering.

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