Q&A: Cengage/McGraw-Hill Merger, One Year and Counting
One year ago today, textbook publishers Cengage and McGraw-Hill Education announced plans to merge. Together, the two giants would create the largest U.S. education publisher, and the second largest in the world next to chief rival and only competitor Pearson Education. The idea of creating a textbook duopoly immediately set off alarm bells across the academic community, raising concerns about the merger’s potential to increase prices for students and drown out competition.
Opposition to the merger mounted quickly. Student governments and consumer and antitrust groups sent letters to the U.S. Department of Justice, and SPARC filed an antitrust analysis laying out a detailed case against the merger. Major organizations including the Association of Public and Land Grant Universities and the National Association of College Stores have since joined the charge, and pressure continues to grow from U.S. lawmakers and international authorities.
After a year of regulatory review, the merger is still pending approval in multiple jurisdictions. An in-depth antitrust investigation ordered by the U.K. has extended the merger timeline at least into the fall, and speculation is growing that the companies have considered calling the deal off.
While it is too soon to tell whether or not the merger will proceed, one thing is true: the merger is in a very different place than when we published our last Q&A, so it’s time for an update.
What is the status of the Cengage/McGraw-Hill Merger?
The Cengage/McGraw-Hill merger was announced on May 1, 2019. The two companies, which are roughly of equal size, proposed a “merger of equals” that would place the combined firm in control of approximately 45% of the U.S. college textbook market, just ahead of Pearson’s estimated 40%—creating an effective duopoly.
Originally, the companies projected that they would be able to clear regulatory hurdles and complete the merger by early 2020, noting positive early discussions with the U.S. Department of Justice (DOJ). However, as the companies began to seek clearance in key international jurisdictions—including Australia, New Zealand, and the U.K.—delays started to stack up, and once January came around, the companies agreed to push back the merger timeline by three months.
In March, the merger hit a major stumbling block when the U.K.’s Competition and Markets Authority (CMA) announced that the companies had failed to satisfy concerns over the “substantial lessening of competition” in relevant markets, and launched an in-depth inquiry that is set to conclude in late September. While both companies are U.S. based, they have substantial enough U.K. operations that CMA’s investigation has the effect of delaying the merger overall. The companies have since notified investors that if the merger is competed, it is not expected before October 2020.
Little information is available publicly about the status of DOJ’s review of the merger, which will ultimately have the greatest impact on its fate. While we have noted all along that the U.S. antitrust environment tends to be more merger-friendly, the fact that the process is still ongoing after a full year suggests—at the very least—that the investigation is at an advanced stage. The launch of the U.K. inquiry may also have helped relieve pressure on DOJ to reach a decision, since even if DOJ were to clear the merger, it would still be delayed by CMA.
Is it possible the merger could end up falling apart?
Rumors have been circulating that the deal may be in some hot water, following the publication of a CMA notice stating the companies requested a three week extension to reconsider the merger before beginning the in-depth U.K. inquiry announced in March. While company spokespeople have noted that the CMA notice was procedural, it is not without significance, and the lack of a public announcement that the companies have extended their merger agreement (which expires today) is also noteworthy.
While it is too soon to tell what may happen, the delay has almost certainly changed the dynamics. Until the merger is approved, the two companies need to operate separately, which means they will continue to incur the costs they hoped to cut through consolidation, and they will need to compete against each other into the next academic year. It is still clear that both companies stand to benefit financially from the merger, but having to wait until October 2o20—with no guarantees of a positive outcome and the uncertainty of COVID-19—may impact the calculus for investors.
Will Congress be able to impact the merger?
Over the past few months, U.S. lawmakers have become increasingly vocal against the merger. In March, Rep. David Cicilline (D-RI), chairman of the House Judiciary Subcommittee on Antitrust, and Rep. Jan Schakowsky (D-IL), chairwoman of the House Energy & Commerce Subcommittee on Consumer Protection sent a letter urging DOJ to scrutinize the merger. This week, six Senators, including long time champion for open educational resources, Sen. Dick Durbin (D-IL), published a similar call.
Members of Congress do not have any direct authority over the merger’s fate, although their opposition adds to the mounting pressure. Most importantly from SPARC’s perspective, both Congressional letters reference not only concerns about increased costs for students, but also concerns over the impact on student data. One of SPARC’s key concerns about the merger is that it could give the combined giant an insurmountable advantage in collecting, processing, and monetizing data, creating a potential platform monopoly (akin to Facebook or Google) in higher education. It is more important than ever to have allies in Congress who are informed and active on these issues.
What would stopping the merger mean for students?
While it will be good news for students if the merger falls through, we want to underscore that it would only prevent worse problems—it does not solve the problems that already exist. The college textbook market is rife with anticompetitive practices that have caused prices to skyrocket over the past two decades and competition to dwindle. As publishers rebrand themselves as technology companies and double down on “inclusive access” programs that force digital textbooks into student hands (and wallets), the threats both to long-term pricing and student data exploitation grow greater by the day.
As SPARC outlines in our Roadmap for Action, there are actions that institutions can take right now to keep their data and content infrastructure open for competition, and that will remain an organizational priority for SPARC whether the merger goes through or not.
SPARC will continue to keep our members up to date, along with posting major updates on our page Opposing Cengage/McGraw-Hill Merger.