Reinvigorated Houghton Mifflin presses forward

Eighteen months ago, when it was purchased by a private equity group, Boston educational publisher Houghton Mifflin Co. was starting to resemble a distinguished New England family that had fallen on hard times. It had been sold twice in a two-year period -- once to a French conglomerate better known for wastewater treatment -- and was about to undergo its third top management change in less than two years.

More than a few employees feared the next step would be packing up the china and silverware for an estate sale.

Instead, its new owners -- a consortium led by Boston's Bain Capital and Thomas H. Lee Partners, which acquired the publishing firm for $1.66 billion at the end of 2002 -- raided a competitor to snare a new chief executive with a Houghton Mifflin pedigree and three decades of experience in educational publishing. They have since poured about $155 million into expanding the company's product line and sales force. And they have acquired a California company that will beef up their educational testing and standards evaluation offerings -- a key growth market.

''We're investing across the board," said Anthony Lucki, 55, the new president and chief executive, who arrived last October. ''Our goal is to be leaders in everything we publish."

Houghton Mifflin still has a long way to go. The venerable firm traces its roots to 1832 and has published such American literary icons as Nathaniel Hawthorne (his desk remains on display in the company's Back Bay headquarters), Ralph Waldo Emerson, and Harriet Beecher Stowe. But in recent years, Houghton Mifflin has slipped to fourth place -- behind giants Pearson PLC, McGraw-Hill Cos., and Reed Elsevier PLC -- in its largest current business: the $4 billion-a-year ''K-12" market for instructional and supplemental materials sold to schools for kindergarten through high school students.

And while the company posted a $49.7 million operating profit last year, compared to a $703.5 million operating loss in 2002, its payments to extinguish debt and other acquisition-related expenses resulted in a net loss of $71.6 million for 2003. The loss, however, was narrower than its $790 million net loss the year before (also due to acquisition charges).

Houghton Mifflin's buyers have now taken the bulk of charges related to the purchase, so that should be less of a drag on the balance sheet going forward. Moreover, a new buying cycle should get underway in 2005 by large ''adoption states" that approve textbooks for all their municipal school districts. . ''I would look for the economic environment of their business to improve significantly in the coming year," said Peter Appert, a media analyst for Goldman Sachs & Co. in San Francisco.

To capitalize, Lucki must position Houghton Mifflin to gain ground against rivals with deep pockets. After a decade of mergers, educational publishing survivors are mostly units of media conglomerates that can afford up-front outlays in new books and related products that are increasingly customized for different states. It was that consolidation trend that prompted Houghton Mifflin's management to arrange its sale to France's Vivendi Univeral in 2001. ''Frankly, I was finding it difficult to compete with the big boys," conceded Nader F. Darehshori, a long-time Houghton Mifflin executive who was its president throughout the 1990s. ''If you don't invest, you don't have products in three to four years."

Vivendi had promised to make Houghton Mifflin a technology leader and expand its reach internationally. But it was unable to complete its planned investments because the optimistic cross-media synergies promised by its ambitious chief executive Jean-Marie Messier, never materialized. Saddled with debt, Vivendi ultimately spun off Houghton Mifflin to the Bain Capital-Thomas H. Lee consortium, which also includes New York's Blackstone Group.

Lucki had kept a close eye on the company's travails from Orlando, Fla., where he was president and chief executive of Reed Elsevier's Harcourt Education division. ''I could see, as a competitor, that Houghton Mifflin was underinvesting," he recalled. ''It appeared to me, and it appeared to others, that Houghton was being prepared for sale."

As it turned out, Lucki, who grew up in Holyoke and South Hadley, had met several principals of Houghton Mifflin's purchasing consortium when the same group had attempted unsuccessfully to buy Harcourt Education four years earlier. And he was very familiar with Houghton Mifflin, not only because they competed for business, but also because he began his career there in the mid-1970s. After a period of soul-searching, he accepted the job last summer.

Lucki described his return as ''exhilarating." But he said his decision was driven in large part by the new owners' commitment to ''a strategy of growth through investment." Houghton Mifflin plans to hire aggressively for the balance of this year to beef up its workforce of about 4,400, including about 1,550 in the Boston area, in anticipation of competing for orders from big states such as California, Florida, and Georgia. Among his early hires were some former Harcourt colleagues, including his wife Donna Lucki, who is senior vice president and publisher for Houghton Mifflin's school division, and Stephen Richards, the new executive vice president, chief financial officer, and chief operating officer.

Houghton Mifflin has long been strong in reading programs. In California, for instance, the company won about 85 percent of the sales of reading textbooks and ancillary products from 2002 to 2004. But it has lagged in other subjects. Through its new $155 million investment, the publisher will be introducing textbooks and other offerings, in math, science, and social studies, that will give the company ''a full book bag" for elementary and middle schools. At the same time, it will deemphasize secondary businesses, such as noneducational testing and publishing. ''The issues a company has when you're trying to grow all these businesses is making choices about where you want to play to win," said Mark Nunnelly, the managing director of Bain Capital.

Separate from the textbook investments, Houghton Mifflin purchased Edusoft Inc. of San Francisco last December for an undisclosed sum. That company makes Web-based assessment software that helps teachers track student performance on the state-mandated standardized tests that enable states to draw federal funding under the No Child Left Behind program. The move will help Houghton Mifflin tap into a growing market, and is part of a push to integrate technology into the publisher's product line. ''If you just have a textbook, if you don't have the online materials and the supplemental materials that allow you to drill down, you won't be able to sell into as many school districts," said Pat Meehan, Houghton Mifflin's chief information officer.

Competitors are also seeking to give themselves an edge through technology. Pearson, for example, has picked up market share in the higher-education business segment by publishing hundreds of its college textbooks in an Internet format. ''We've been able to outpace our competitors because of our innovations," said Sandi Kirshner, president of Addison Wesley Higher Education, a Pearson division that employs 1,100 people in Boston and Needham.

For Houghton Mifflin, the toughest challenge may be differentiating itself from its rivals. ''Houghton Mifflin is an old venerated brand," said Kosmo Kalliarekos, senior partner at the Parthenon Group, a strategy consulting firm in Boston. ''But I don't think there is a substantial differentiation among the four brands in the minds of consumers." Kalliarekos applauded Houghton Mifflin's moves, however, suggesting a complete book bag will make its sales force more effective.

And the other players certainly aren't taking Houghton Mifflin for granted. ''We compete vigorously," said Bill Barke, the Addison Wesley chairman and chief executive who formerly worked at Houghton Mifflin. ''In the K-12 space, they're a pretty strong competitor."

Robert Weisman can be reached at weisman@globe.com.