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Boston-based publisher freezes acquisitions

Houghton Mifflin Harcourt move fuels talk about its future

By David Mehegan
Globe Staff / November 27, 2008
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Reports this week that Houghton Mifflin Harcourt Publishing Co. has stopped acquiring new titles has the publishing world speculating that the venerable Boston-based company is for sale. But the debt-laden Irish company that owns Houghton would not confirm or deny whether the publisher might be sold.

"I have no information I can share," said Josef Blumenfeld, spokesman for Education Media and Publishing Group. "I can't say absolutely yes or no." He added, though, that nothing is imminent.

Houghton startled the book industry this week by freezing acquisitions of new trade and reference books for an indefinite period, a virtually unheard-of act by a major publisher. The move was first reported on the Publishers Weekly website and was confirmed yesterday by the company. While Blumenfeld said the freeze was part of a general reassessment of costs, he did not say when or if acquisitions would resume. The freeze covers only trade books - general books sold at retail - and not educational titles.

Some in the book world took the move as a "for sale" sign, since excluding new contracts would make a publisher's value easier to assess, based on current books and the all-important backlist - successful books published in the past. Trade and reference books - the latter consists mainly of the American Heritage Dictionary - represent only about 10 percent of Houghton's income. The rest comes from school textbooks.

Still, some publishing executives found the move puzzling, even for a contemplated sale. "If you put a company up for sale, you do want to be acquiring new books," said Drake McFeely, chairman and president of W.W. Norton & Co. "You don't want to offer only the backlist, but also a forward list. It's my observation that you would expect a higher price, not a lower price, with new acquisitions."

The backlist can represent a huge part of a publisher's income. In recent years, Houghton's backlist has brought in as much as 80 percent of its trade profits. "Any one of us would love to have Houghton Mifflin's and Harcourt's backlists," McFeely said. "Houghton has J.R.R. Tolkien, the Peterson field guides, Philip Roth. Harcourt has T.S. Eliot, Robert Penn Warren. Both lists are gems. But I'd guess they'd have a hard time finding a buyer who would pay what they paid."

Houghton Mifflin was acquired for $3.4 billion in 2006 by Ireland-based Riverdeep Holdings, an educational software company. Last year, Riverdeep bought Harcourt for $4 billion and combined it with Houghton. The merger resulted in layoffs, including several high-ranking editors. Riverdeep, controlled by Barry O'Callaghan, a 39-year-old former investment banker, has since changed its name to Education Media and Publishing Group and reincorporated in the Cayman Islands.

The acquisitions were financed with borrowed money; president Jeremy Dickens told The New York Times that EMPG is paying $500 million per year on its $7 billion debt.

Callaghan is the second free-spending European entrepreneur to own Houghton in this decade. In 2001, French media conglomerate Vivendi Universal, controlled by Jean-Marie Messier, bought the publisher for $2.2 billion. When excessive debt forced the breakup of Vivendi, Houghton was sold in 2003 for $1.7 billion to Thomas Lee Partners LP and Bain Capital Partners LLC, two Massachusetts private equity firms, who two years later sold it to Riverdeep.

For those with affection and respect for both Houghton Mifflin and Harcourt, two classic brands, the fiscal turmoil and repeated sales are cause for anger and sadness.

"I think it's heartbreaking that decisions made by a series of corporate owners are decimating two venerable publishers," said Wendy Strothman, a former Houghton executive who is now a Boston literary agent. "It was their hubris in taking on so much debt when anyone could see that the economy was weakening. The editing and marketing operations pursued quality, and were creative. It's not about the books; it's about the gross mismanagement of the owners."

David Mehegan can be reached at mehegan@globe.com.

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