Houghton Mifflin's purchase of Harcourt Education from Reed Elsevier will catapult the combined companies to the top of the US K-12 market.

Important Details: Five months after Reed Elsevier declared its interest in selling off its educational division, the deed is done. First, Pearson announced the acquisition of Harcourt Assessment and Harcourt International. Now, Houghton Mifflin has claimed the remaining Harcourt businesses - the core Harcourt Education company, as well as the Harcourt Trade and Greenwood-Heinemann divisions. Sales were $1.1 billion in 2006. In a transaction valued at $4 billion, Houghton Mifflin will pay $3.7 billion in cash and $300 million in common stock of Houghton Mifflin's parent company, Houghton Mifflin Riverdeep Group PLC ["HMR Group"]. Once the transaction closes, Reed Elsevier will have an almost 12% interest in the HMR Group.

The combined business will be led by Tony Lucki, Chairman, President and CEO of Houghton Mifflin, and former CEO of Harcourt Education and Harcourt, Inc.

Implications: Seven months ago, Barry O'Callaghan, chief executive of the HMR Group and principal shareholder, engineered the reverse take-over of Houghton Mifflin by the Riverdeep e-learning group, thereby obtaining a foothold in US educational markets. Houghton Mifflin may have held a distant 4th position in overall market share, but was well-respected for both text and testing components. At this time, O'Callaghan also confidently predicted the new company would grow by 50% in the next 18 months. With this latest acquisition, the foothold has now become a stronghold, the annual sales base has doubled, and the possibilities for future development and growth are significant.

Previously, four players held an estimated two-thirds of the $8 billion US K-12 market for basal (textbook), supplemental, and testing/assessment services: Pearson, McGraw-Hill, Harcourt, and Houghton Mifflin. If the deal does go through with no significant changes to portfolio and market participation, two players - Pearson and the Houghton Mifflin/Harcourt entity - would account for 50% of the market. Coupled with Riverdeep's consumer/school educational software products, the HMR Group is now the leading K-12 educational publisher in the US. Given the high stakes involved, regulatory consideration in the US will be heavy, and is expected to keep closure at bay until well into 2008. While Pearson's recent acquisition of the Harcourt Assessment properties takes some of the weight away, the focus on the competitive position in the basal and supplemental publishing markets will be significant.

With the transaction, the HMR Group mission - combining technology and educational programs to provide a comprehensive and flexible suite of options to school and school-to-home customers - is now fully powered. In form, this differs little from the strategic principles driving Pearson and McGraw-Hill efforts. In substance, Houghton Mifflin approaches the market from the reverse order of traditional print publishers which evolved over time to include electronic media and digital solutions. Rather, Houghton Mifflin's school business is built on the foundation of Riverdeep's electronic courseware and learning software, strengthened by the acquisition of instructional content, teacher development services, and assessment tools.

As Outsell noted earlier in the year, school market demands are moving toward comprehensive products bringing textbook content, assessment tools and supplemental materials together to guide class and individual learning needs. Digital options enable a level of flexibility, allowing publishers to pull in modular options at will. Whether its technology-based foundation gives the new Houghton Mifflin a competitive or operational advantage remains to be seen. The company began integrating the Riverdeep technology and Houghton Mifflin content components early on, with the creation of the new Houghton Mifflin Learning Technology division just months after the acquisition. Now, the expected regulatory approval process precludes the possibility of similar fast-track action with Harcourt assets. In the end, the ability to pull together the appropriate components to meet the varying needs of state-specific curricula promises high rewards to those willing to enter the fray, a path the rejuvenated and greater Houghton Mifflin has certainly chosen.

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