Eyeing the opportunity to unlock inherent value in a potential breakup of The McGraw-Hill Companies (NYSE: MHP), an shareholder activist hedge fund and major pension plan are gaining traction.
New York based shareholder activist hedge fund Jana Partners ($2.3 billion in assets under management) joined forces with the Ontario Teacher’s Pension Plan or more commonly known as Teachers’ (Canada’s largest single-profession pension plan with $107 billion in assets according to the Canadian government) to announce a combined 5.2% stake, or 15,724,793 shares in The McGraw-Hill Companies. The move was revealed in a U.S. Securities & Exchange Commission filing on August 1, 2011.
These unfolding events are particularly noteworthy, especially amongst the shareholder activism community. According to data provided by FactSet Research McGraw-Hill boasts an estimated market valuation of $12.5 billion, before the recent 10% correction in U.S. markets. That would rank McGraw-Hill among the largest targets of shareholder activists thus far in 2011.
This move may likely be intended to build pressure for a potential breakup of the 102 year-old- family owned conglomerate. According to the SEC filing, Jana Partners engaged in discussions with McGraw-Hill’s management and board of directors concerning current business strategies, with emphasis what steps may be taken to increase shareholder value.
This type of hedge fund shareholder activism is quite common, where activist investors buy up a substantial block of shares in a company with the intention to unlock greater potential value by pressuring management to sell or spin off pieces of that company.
Alternatively, accumulating a higher percentage of ownership affords the activist hedge fund the opportunity to join the board of directors to affect real change from the inside.
In both scenarios, the manner in which these shareholder campaigns are conducted ranges widely from boisterous and highly public to more discreet, behind-the-scenes interaction with management. Thus far the Jana and MHP talks have been civil.
Why is shareholder activism necessary in this instance? Well, according to Lazard analyst William Bird, the breakup value is worth $55 a share, but the value could climb to $70 a share if McGraw-Hill buys back stock and sells businesses at a premium [www.theknowledgepile.com].
As of the morning of August 12, 2011, shares of MHP were trading at $36.92. However, before the recent drop in the markets MHP over the last several months has been trading in a range between $40-44 per share.
In a statement, McGraw-Hill communicated that it was “conducting a comprehensive portfolio review, which includes reevaluating its strategic core to ensure it is appropriately allocating capital to generate shareholder value. This process began in the second half of last year with the creation of McGraw-Hill Financial and is expected to continue with additional significant actions in 2011. This process is designed to unlock superior shareholder value and accelerate global growth.”
Even for the investor with a smaller stake, it is critical to understand MHP’s response to these claims of undervaluation and the obstacles to optimal share price performance.
Where might MHP be without such shareholder activism? Regardless of the eventual outcome, the pressure exerted by the activists, in concert with the independent criticism issued by the analysts, is prompting real action—hopefully the kind that does “unlock superior shareholder value.”
To contact Jonathan Bayer directly, please email Jonathan.Bayer@TheShareholderActivist.com.