Riverdeep buys Houghton Mifflin for $1.8B

Houghton Mifflin Co. on Nov. 29 agreed to a nearly $1.8 billion buyout that will pair a venerable name in educational textbook publishing with Riverdeep Inc., a smaller firm whose complementary strength is in educational software.

By joining Houghton Mifflin’s paper-and-ink business with Riverdeep’s core strength in educational software, the newly formed venture hopes to better position itself against larger rivals Pearson PLC, McGraw-Hill Cos., and Harcourt Education.

The deal is the second significant merger in just over a month that is sure to affect the educational software market. In late October, Adobe Systems purchased Serious Magic, a maker of video editing tools, for an undisclosed amount (see related story).

Barry O’Callaghan, Riverdeep’s chairman and CEO, said the transaction seeks to “capitalize on the convergence of print and digital education platforms” and help Riverdeep draw strength from Houghton Mifflin’s larger sales force.

The buyers, a newly formed holding company called HM Rivergroup PLC, are led by O’Callaghan, a former investment banker from Ireland and a controlling shareholder of Riverdeep.

HM Rivergroup is paying $1.75 billion in cash for Boston-based Houghton Mifflin. In addition, some Houghton managers and employees are rolling over $40 million in stock into shares of the new company.

The buyers also are assuming about $1.61 billion in debt in the deal, expected to create a company with more than $1.4 billion in revenue–most of it from Houghton Mifflin, which has about 3,500 employees, including 1,200 in Boston, to Riverdeep’s total 300 workers.

As part of the deal, the new holding group also acquired Riverdeep in a share-for-share exchange valuing Riverdeep at approximately $1.2 billion, including assumption of debt, bringing the total purchase to more than $5 billion.

After the deal’s expected completion by year’s end, the new holding company will be based in Ireland and be renamed Houghton Mifflin Riverdeep Group PLC.

Houghton Mifflin, the fourth-largest textbook publisher in the United States, traces its origins to 1832. It was home to early American authors such as Ralph Waldo Emerson and Henry David Thoreau, as well as British author J.R.R. Tolkien.

The Nov. 29 transaction was the latest in a string of ownership changes for Houghton Mifflin, which was acquired by French media and telecommunications company Vivendi Universal in 2001 for $2.2 billion, including $500 million in assumed debt. The next year, Vivendi sold Houghton Mifflin for $1.28 billion to Thomas H. Lee and Bain Capital, two Boston firms that also agreed to assume $380 million of debt.

Riverdeep was founded in 1995 and underwent a management buyout led by O’Callaghan in 2002. The company’s web-based and CD-ROM course materials include its flagship product, called Destination Success. The firm has recently added education products from such names as The Learning Company, Broderbund, and Edmark.

“By putting these two companies together, we’ve created the competitive advantage beyond all standard competitors who are trying to grow these things organically, as was Houghton Mifflin before,” said Collin Earnst, a Houghton Mifflin spokesman.

“Where the market’s heading is actually moving toward an electronic format, so that loop between instruction, assessment, and remediation is closing tightly around technology,” Earnst said. Today’s students increasingly are studying from both textbooks and online curricula. Having acquired the textbook assets of Houghton Mifflin, Riverdeep will be able to offer more integrated learning materials to schools, company officials say.

The deal also will expand Riverdeep’s reach by enabling Houghton Mifflin’s sales force to promote Riverdeep’s products. Mifflin’s sales force is four times larger than Riverdeep’s.

“This isn’t really about collaborating to create new products,” said Tony Mulderry, an executive vice president at Riverdeep. “It’s about increasing the footprint of Riverdeep’s sales force.” As a result, Riverdeep hopes to be able to compete head to head with Pearson and its popular SuccessMaker software, among other titles.

The new owners claim to have no plans to cut staff, because the newly merged businesses “will continue to operate in the fashion they’re already operating in,” Mulderry said.

He added, “Globally, eLearning is going to more significantly impact the classroom, and we aim to be at the forefront–both in the U.S. and worldwide.”

Tony Lucki, chairman, president and CEO of Houghton Mifflin, will become vice chairman of the newly formed holding company and will remain in his leadership role at Houghton Mifflin.

After the transaction’s completion, O’Callaghan and the management group will own approximately 50 percent of the new company, while former shareholders of Riverdeep other than O’Callaghan will own about 15 percent. The remaining 35 percent will be owned by new investors.


Houghton Mifflin Co.

Riverdeep Inc.

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