After decades of acquisitions, how did one company make a smart bet on divestiture?
S&P Global increased its market value by $23 billion by divesting its education business and realigning its operating model to focus on core capabilities in financial information and analytics to drive margin improvement and growth.
“When I first walked in the door, I did not fully appreciate the level of shareholder discontent. I saw this company that had been around 125-plus years, weathered the financial crisis, built a broad portfolio, and become an everyday name. I thought I had a little time to sort the place out.”
These are the words of Jack Callahan, who joined S&P Global (McGraw-Hill Companies prior to 2013) in late 2010 as CFO of the $6 billion media and information services provider.
“But the pressure was mounting quickly,” Callahan said. “During the earnings release in the first quarter of 2011, which happened within weeks of my joining the company, we had a question from one of the sell-side analysts that was eerie in retrospect: ‘Why don’t you consider selling Education?’ He meant the entire education division. That was my first inkling that we were going to have to make some major changes ... and fast.”
In early 2011, the McGraw-Hill Companies was a conglomerate encompassing a diverse array of businesses and brands in the financial, media, and education arenas. Some, like Standard & Poor’s, Capital IQ, and Platts, were focused on providing information and analytics to the financial industry. Then there was the century-old education division, McGraw-Hill Education, known for its textbooks but moving quickly into software and services. While both were information businesses, they targeted very different audiences with starkly different approaches to innovation and distribution, which begged the question, “Do these assets really belong together?”
It wasn’t just the company’s executives and board asking this question—shareholders were becoming increasingly vocal. Indeed, the value locked within the company’s expansive portfolio had attracted the notice of activist investors who were accumulating the company’s stock. Add to this the aftereffects of the global financial crisis and increased regulation, and McGraw-Hill Companies was at a strategic crossroads. On September 12, 2011, the company announced its intention to separate its education operations from its core financial information businesses, enabling the creation of two distinct and focused companies with more competitive infrastructures and capabilities, and cost structures that would be at least $100 million lower.
Now the hard work began.
John Berisford, another newcomer to McGraw-Hill Companies in 2011 and head of HR at the time, recalls, “We recognized the strain that breaking up the company put on the existing management team. Many of them had been here for decades. The hardest thing in the world to do as a leader is to dismantle the organization that you’ve spent your life building. Very few leaders can do that.”
Working with Strategy&, senior management mapped out a pragmatic and programmatic course of action. The divestiture of McGraw-Hill Education division would unfold along three parallel tracks: 1) cost restructuring, 2) separation and stand-up, and 3) operating model transformation.
“One of the huge challenges in a divestiture—particularly one under pressure from activist investors—is to separate and stand up a new company while taking costs out at the same time,” Callahan said. “Many companies defer dealing with stranded costs until later, but we didn’t take that view. We said, ‘We’re going to take out costs as we separate.’”
“This was particularly important on the education side. If we were going to either sell or spin it off, we had to make it economically attractive. Getting that cost out would get us back value in the price, enhancing shareholder returns.”
Berisford added, “You would expect a conglomerate to have a light cost structure, but we had so much internal infrastructure just trying to connect everything together. Every dollar we spent connecting the rating agency to the education business was a value-destroying dollar.”
Management quickly concluded that trying to disentangle and set up a separate back office for Education would have been time consuming and cost prohibitive. They elected instead to shut down the outdated and sprawling shared service center in southern New Jersey and outsource the administrative Finance, HR, and IT functions housed there for both businesses. Moving to this highly outsourced model actually facilitated the separation of the two businesses and helped variabilize their cost structures while offsetting the scale disadvantages of creating two smaller companies.
Further cost savings came from recalibrating and rightsizing the remaining corporate core. “We had redundant and shadow functions across the noneducation businesses,” Berisford said. “We called it the ‘Russian Doll syndrome.’ Inside corporate costs there were segment costs, then subsegment costs, product costs, and so on.”
Once these unnecessary layers were streamlined, global centers of excellence were established to deliver scalable and standardized expert-based finance and HR services, including financial planning, accounting, talent acquisition, and analytics.
Overall, these initiatives generated annual cost savings of $175 million, nearly double the original objective, and operating margins increased from 28% to 34% in a little over a year.
In November 2012, Apollo Global Management agreed to buy McGraw-Hill Education for $2.5 billion. The company announced a special dividend in December 2012. Satisfied with their returns, the activist investors sold their shares.
McGraw-Hill Companies’ management recognized the once-in-a-lifetime opportunity the spin-off of its education division presented to accomplish in short order what might have taken years to re-engineer. In particular, Berisford and Callahan leveraged their highly collaborative working relationship to integrate finance objectives with those of HR to surface greater insights and the best path forward for the company’s dramatic transformation.
The new operating model for S&P Global (McGraw Hill Financial prior to 2013) transformed its old, underperforming conglomerate structure—requiring massive structural and cultural change—into a lean, highly focused, fit-for-purpose operating company with streamlined functions, greater agility, clearer accountability, and lower costs.
The perfect split
Jack Callahan was the Chief Financial Officer at S&P Global (McGraw-Hill Companies prior to 2013) from 2010 through 1Q 2016. He is now the Senior Vice President for Operations at Yale University.
John Berisford was the Chief Human Resources Officer at S&P Global (McGraw-Hill Companies prior to 2013) from 2011 through 2016. He is now President of S&P Global Ratings, the company’s flagship business.
Strategy& showed up with senior partners that were committed to doing the work—the partners pitching were the ones who would be embedded in our organization. That was pretty compelling to me.
Not every strategy firm did that. They might have showed up with somebody from the relationship team. Strategy& showed up with the people we would be working with, and we got to see and hear what they thought about what we were about to do.
The Strategy& team was more pragmatic in its approach versus dwelling on the theory of the case. Others just declared, “We’re the choice du jour for this sort of thing.” Strategy& got in the trenches with us and started talking about real pragmatic issues and how to knock them down.
Strategy& brought the human capital, social, and operating model issues into the pitch, which was unique. I remember that very clearly. They said that having the right blueprint is not enough, and we moved very quickly into operating model questions, because you’ve got to run what’s left on a lower cost structure.