The Landscape Shifts: HMHC Goes Private

Even as mask mandates fall away, we continue to see the lingering effects of the pandemic in all areas of the education market. New priorities for institutions and a new sense of agency on the part of parents and learners are reshaping old markets and creating new ones and we continue to see these themes play out in both our consulting and transaction work.

Nowhere is this truer than in the market for K-12 instructional materials. Demand for digital content and tools capable of assessing and remediating gaps in student learning resulting from the pandemic is high and we’ve seen this play out through several deals which Tyton has either led or supported through diligence. These include the acquisition of Mentoring Minds by Curriculum Associates, the investment in 95% Group Inc. by Leeds Equity Partners, and New Harbor Capital’s acquisition of MindPlay Education, among others.

However, the real exclamation point to this trend came last month in the decision by Veritas Capital to add Houghton Mifflin Harcourt to a portfolio already heavily weighted to K-12 education solutions. Below we discuss the continuing implications for the sector as well as how the HMH assets might be managed inside Veritas’s growing EdTech empire.

We have written many times about the changing dynamic in the K-12 curriculum materials market. Growing institutional comfort with digital solutions and a greater openness to varied curricular approaches has eroded the oligopoly of the large textbook publishers and contributed to the rise of new content providers built around a diverse portfolio of supplemental solutions that marry engaging digital instruction with formative assessment. Last month, another major domino in this progression fell with the announced go-private purchase of publicly traded Houghton Mifflin Harcourt by Veritas Capital for $21 per share or $2.8 billion. This is a price the stock has not reached since December 2015 and represents 18.6 times its all-time low of $1.13 set as recently as April 2020.

Though most people know of HMH as a core basal publisher of reading, math, science and social studies textbooks, much of the value in the business exists outside of these highly cyclical core markets in supplemental and intervention solutions, teacher professional development, and its crown jewel, Heinemann, which publishes instructional material built around the philosophies of world-renowned teaching experts, including Irene Fountas and Gay Su Pinnell in literacy, Lucy Calkins in math, and several other authors well-known and consistently popular with teachers.

These so-called supplemental materials enrich learning and support student achievement beyond the core curriculum through workbooks, test-prep materials, software, games, and apps. They are also used to support students that have fallen below-grade level proficiency in particular subject areas. Once considered a discretionary add-on, they are increasingly being used by classroom teachers as the focal point of their instruction, often in lieu of core textbooks altogether.

Enter Cambium Learning Group, Veritas’s existing investment in the newly emergent K-12 oligopoly of aggregated supplemental product providers. While the Cambium name is not well known, many of its portfolio businesses – and their products – are trusted brands among educators and include well-regarded offerings that overlap many of HMH’s products in the areas of intervention, assessment, and professional learning. Similarly, it will need to judge whether the HMH brand halo is something to be leveraged across the entire portfolio or kept apart from Cambium’s existing “house of brands” strategy. Veritas will face a choice between streamlining distribution and even potentially combining offerings versus preserving the equity of its existing brands. 

Another interesting strategic question relates to Cambium Assessment’s capabilities. Cambium Assessment is a summative testing offering which is a segment that HMH exited with the sale of Riverside Publishing in 2016. However, one of the trends that has catalyzed the success of other K-12 supplemental providers, such as Curriculum Associates and Renaissance Learning, has been the centrality of their interim and formative assessment tools, which are enormously popular with schools and teachers and have historically not been central to basal curricula. Recently HMH has partnered with Renaissance to package assessments and content in core adoptions. Moving forward with Veritas, the potential may exist for HMH and Cambium to combine forces to create its own proprietary assessment capabilities.

Panning back, this deal further highlights the robust state of the education sector for private investors. With the addition of HMH, Veritas has the largest direct position in K-12 education of any investor or company, and now boasts an education portfolio – including Anthology – in excess of $3 billion in annual revenues. Others are certainly working to keep pace – see Francisco Partners and Vista Equity Partner’s current portfolios to see where others that are bullish across education are playing.

Finally, the exit from the capital markets by HMH raises the question of whether it could, someday, in some form, return. Public equity investors, like private equity investors, value predictability. One of the factors driving enthusiasm for the EdTech model in K-12, apart from the obvious savings in printing and distribution costs, is a subscription-based business model. The shift to digital has introduced some of this dynamic even in core sales and HMH has transitioned much of its revenue to a subscription model. But most large states continue to budget for curriculum purchases in cycles and the feast-or-famine nature of these adoption cycles made HMH a challenging stock. Among the many reasons that publicly traded Pearson exited K-12 education, this was certainly an important one. The migration of the market toward supplemental materials has already begun to impact the political constructs around textbook adoption, softening the winner-take-all dynamic of the past and giving individual districts more autonomy to buy what they like. If and as this trend continues, even the cyclical core sales are likely to resemble supplemental revenue streams and HMH could be welcomed back by public investors.