Boston institution Houghton Mifflin Harcourt faces an uncertain future as textbook sales dry up and its owner reels under heavy debt
The ice is thinning under Houghton Mifflin Harcourt and Barry O'Callaghan, its freewheeling, 38-year-old, Irish owner.
The two big credit rating services, Moody's Investor Services and Standard & Poor's, recently slashed the rating of O'Callaghan's company, Education Media & Publishing Group, and warned that default on its crushing $6.7 billion debt is increasingly likely. Meanwhile, sales of school textbooks, Houghton's bread and butter, are slumping as school districts nationwide cut back orders in the deepening recession.
It's the latest chapter in the convoluted recent history of a grand old Boston name, a publishing institution since 1832. As recently as 2001, Houghton was a strong independent company with thriving K-12 and college textbook businesses and a stable of such best-selling authors as Roger Tory Peterson, JRR Tolkien, Philip Roth, and Rachel Carson. It has had three owners since then, none of them book publishers. Although it's unlikely that Houghton would disappear, default on its debt could mean a fire-sale breakup and a new owner or owners who could move all or parts of it from Boston.
Moody's last month reported that Houghton, with a debt load estimated at more than 10 times gross earnings, is "a likely default" unless its loans are renegotiated. S&P last month placed parent EMPG on its list of weakest links - companies in greatest danger of debt default. "The debt level is our biggest concern," said S&P analyst Hal Diamond, "given the state of the economy and state budget constraints. While they can reduce costs, they can only go so far."
The Globe's request for an interview with Houghton Mifflin Harcourt chief executive Anthony Lucki or other senior executives was declined. Houghton issued a statement disputing Moody's 10-times-earnings figure, and insisted the company is gaining market share and has ample cash to cover its loans. Spokesman Josef Blumenfeld also said that since Houghton's reported decision last fall to suspend acquisition of new titles, it is signing new books again. He declined to comment on rumors that French-based Hachette Book Group, owner of Little, Brown & Co., might be a suitor.
Many veteran editors and publishers, and many longtime authors, are dismayed and worried about Houghton's plight.
"It's a very sad thing," said Steven D. Hill, a former senior executive at Houghton and now publisher of Boston-based Flying Point Press. "It was the birthplace of literary tradition in this country, one of those companies that believed in publishing books that push the wheel of civilization ahead. I'd be sorry to see that tradition go."
Helene Atwan, director of the Beacon Press, is confident Houghton's stellar backlist - previously published books - makes it too valuable to just disappear. But if it were to leave Boston, she said, "it would be a terrible loss to the city. It's a great cultural institution."
Added US poet laureate Donald Hall: "I've had many publishers, and never had such a happy relationship. I would regret anything that diminishes them."
How did Houghton get in this mess? Not, it seems, because of bad publishing.
"The editing and marketing operations were excellent," said former senior vice president Wendy Strothman, now a Boston literary agent. "It wasn't about the books. It was about the owners."
The back story includes a cultural change. Independence once was considered important to publishers, but today they're bought and sold like pork bellies. In 1978, conglomerate Western Pacific Industries acquired a large stake in Houghton Mifflin and was thought to be considering a takeover bid. But it backed off after a group of famous Houghton authors, led by Archibald MacLeish, John Kenneth Galbraith, and Arthur M. Schlesinger Jr. threatened to bolt from the company if the sale went through. "It's hard to imagine any band of authors that would do that today," said Richard Todd, a former senior editor at Houghton Mifflin, "or any company that would listen to them."
In 2001, chief executive Nader F. Darehshori sold Houghton for $2.2 billion to French wheeler-dealer Jean-Marie Messier, head of Vivendi International. With a $19 billion borrowing spree, Messier had built a stodgy water utility into a world media empire that included Houghton Mifflin, Universal Studios, theme parks, TV stations, and telecom companies. Within a year, the empire was crushed by debt, Messier was forced out, and in 2003 Houghton Mifflin was sold - at a $500 million loss - to a Boston-based equity partnership including Thomas H. Lee Partners, Bain Capital, and Blackstone Group.
The equity firms sold in 2006 to Riverdeep Group of Dublin, a $392 million educational software company (since reincorporated in the Cayman Islands) that was controlled by O'Callaghan, for $3.4 billion. Like Messier, O'Callaghan was on a spree, with other people's money. He borrowed most of it from Credit Suisse and Citigroup, along with other investors. A year later, he bought Florida-based Harcourt, which has educational and trade lines much like Houghton Mifflin's, from British-Dutch publishing giant Reed Elsevier. The price: about $4 billion, also mostly borrowed from Credit Suisse and Citigroup, as well as since-collapsed Lehman Brothers.
A law graduate of Trinity College Dublin, O'Callaghan was a young investment banker at Credit Suisse in 1999, when he was hired as CEO of Riverdeep, a four-year-old educational software publisher with $8 million in sales. A few years later, he bought out founder Patrick McDonagh and became the largest stakeholder. It seems he was dazzled by a vision of synergy between books and bytes. "We are excited about the future . . . and the ability to capitalize on the convergence of print and digital education platforms," O'Callaghan said after buying Houghton Mifflin.
"The combined business will leverage Houghton Mifflin's brand names, established relationships, and large sales force to provide customers with an unrivaled product offering." He said much the same after grabbing Harcourt.
However, the print-digital convergence could not happen overnight, and combining two similar publishers is not as simple as the addition of equals. In merging them, a company could lose the separate value of one or the other.
"The problem was that they bought the same kind of list," said Darehshori, who now heads Wellesley-based educational publisher Aptius Education. "By buying Harcourt, they had two reading programs, two math programs. So how does the sales force know what to sell?"
The crushing recession couldn't have come at a worse time. Houghton recently laid off at least 400 employees nationwide, and many survivors are being pressed to work extra hours to take up the slack. Last month, trade executive editor Ann Patty was fired and trade publisher Becky Saletan left the company after less than a year.
There's always a chance a white knight, such as Hachette, will swoop in to buy all of Houghton Mifflin Harcourt. But the sale of smaller parts, such as trade (i.e., noneducational books, only 5 percent of total sales), would barely scratch O'Callaghan's debt. Even a sale of the whole company might not clear the ledger.
"The debt is so overwhelming, there's just no way," Darehshori said. "They borrowed more than the value of the company. They will be lucky if the value is half of what they owe."
Paul B. Carroll, a former Wall Street Journal reporter and coauthor of "Billion-Dollar Lessons," a book about large business failures, last year wrote a skeptical blog post about O'Callaghan's dreams of synergy.
"My feeling from the beginning," Carroll said, "was that O'Callaghan was building a house of cards and would only succeed as long as he succeeded in keeping people believing in the enterprise. With credit markets seizing up, it seems the day of reckoning is here. It looks like a game of musical chairs, and the question is, who is left standing when the music stops?"
David Mehegan can be reached at firstname.lastname@example.org.
Correction: Because of a reporting error, poet Donald Hall's position was misstated in a story about publisher Houghton Mifflin Harcourt in Sunday's Money & Careers section. Hall was poet laureate from 2006 to 2007.