One year ago today, Cengage and McGraw-Hill called off their plans to merge. Originally announced in May 2019, the proposed merger would have remade the college textbook market as an effective duopoly controlled by two giant publishers—further reducing competition in a market already known for decades of skyrocketing prices.
SPARC joined a broad coalition including students, consumer groups, universities, bookstores, and members of Congress in voicing concerns about the merger’s harmful impact on textbook costs, competition, and control of student data. After a year of mounting scrutiny by the U.S. Department of Justice (DOJ) and other antitrust enforcers, the companies announced the termination of their merger plans on May 4, 2020.
On the anniversary of this important milestone, SPARC takes a look back at the merger, why it failed, and where things stand one year later. Following the style of our original Q&A and one year follow-up, we’ll ask a set of key questions and offer answers with input from SPARC’s team of experts.
What was the Cengage/McGraw-Hill merger and how did it fail?
The Cengage/McGraw-Hill merger was announced on May 1, 2019. The proposed merger would have combined the second and third largest education publishers into a single firm, which would control approximately 45% of the U.S. college textbook sales. Alongside Pearson’s estimated 40% share, the merger would concentrate the vast majority of the market in the hands of two giants.
At first, the companies projected confidence that they would clear regulatory hurdles in order to merge by early 2020, noting positive early discussions with DOJ and a favorable regulatory environment. However, opposition quickly began to mount. SPARC filed an extensive antitrust brief with DOJ in August 2019, and many stakeholders, including students, consumer groups, libraries, higher education associations, bookstores, and antitrust leaders in both chambers of Congress, voiced concerns.
Throughout the fall of 2019, it became clear that DOJ’s investigation was heating up. The companies also came under scrutiny in international jurisdictions, including Australia, New Zealand, and the U.K. In January 2020, the companies agreed to push back the merger timeline by three months to provide additional time for these processes to complete. In March 2020, the merger hit a major stumbling block when U.K authorities launched an in-depth inquiry, which would delay the merger by at least six months—right as the COVID-19 pandemic was intensifying.
According to the companies, it was ultimately demands from DOJ that resulted in their mutual decision to terminate the merger. While Cengage and McGraw-Hill had expected to divest or sell off some of their competing products as a condition of the merger, the amount requested by DOJ—rumored to be $175 million—was more than the companies could accept. In their official statements, McGraw-Hill said that the divestitures “would have made the merger uneconomical” and Cengage references the “inability to agree to a divestitures package” with DOJ.
How did the merger’s failure impact the textbook industry?
The merger failed at the same time that the industry (and world) was beginning to reckon with the magnitude of COVID-19. Cengage and McGraw-Hill remained separate companies during the merger process, so cancelling the merger did not visibly change their operations. Any other impacts are likely to be overshadowed by the effects of the pandemic.
The companies had already engaged in some layoffs and other cost cutting measures in anticipation of the merger, and by summer 2020, all major publishers were cutting operations costs and devising contingency plans for drops in higher education enrollment, and therefore revenue. Ultimately, the decline in fall 2020 enrollment did not end up being as sharp as some anticipated (-2.5% according to NSCRC). The decline was steepest for 2-year institutions (-10.1%), which potentially gave McGraw-Hill a reprieve over Pearson and Cengage, who cater more to that audience.
Based on recent financial reports, it appears that both McGraw-Hill and Cengage may have taken market share away from Pearson over the course of 2020, despite the failed merger. McGraw-Hill’s U.S. Higher Ed revenues rose by 2.5% in the three quarters of 2020 affected by the pandemic, and Cengage’s U.S. Higher Ed revenues rose by 1% during the same period. On the other hand, Pearson reported a decline of -12% in its U.S. Higher Ed courseware business during the whole of 2020.
Has the threat of a Cengage/McGraw-Hill merger passed?
While it is possible that Cengage and McGraw-Hill could try to merge again, it is not likely. After a year of significant cost cutting by both companies, the scope of potential savings that could be achieved through a merger is smaller, and therefore less appealing to investors. Moreover, none of the factors likely to reduce divestitures have meaningfully changed—if anything, a larger combined market share would make it an even more uphill battle. Short of a catastrophic business failure (which would allow them to invoke the rarely-successful failing firm defense), it is unclear how a second try would yield a different result.
What seems more possible is that Cengage or McGraw-Hill might pursue a merger with a different company. While mergers between direct competitors face more scrutiny, mergers between complimentary business are more often approved—a classic example being Amazon and Whole Foods. The growing amount of student data amassed through digital courseware could make publishers like Cengage or McGraw-Hill attractive targets for, say, consumer credit or recruiting companies, who would find access to information about students highly valuable.
What is SPARC watching closely in the college textbook market?
As we said last year, the failure of the merger didn’t solve any problems with the publishing industry; it only avoided new ones. The college textbook market is rife with anticompetitive practices that have caused prices to skyrocket over the past three decades, and higher education faces the looming threat of the industry’s increasing control over data infrastructure.
The future of academic publishing is not just about digital content—it also is about the data that can be collected on users and how it can be exploited. As textbooks and other course materials transition to digital, the amount of data publishers can collect about the students who use them will grow exponentially. This is especially true as publishers double down on so-called “inclusive access” automatic billing programs as a way to accelerate the shift to digital—whether students consent to it or not. While data and data analytics can be used for good in education, without the proper policies, contracting terms, and governance structures, there is a risk of massive unintended consequences.
SPARC will continue our work to advocate for robust competition in academic publishing and community-owned infrastructure. Our Roadmap for Action outlines steps that institutions can take to keep their data and content infrastructure open for competition.