The McGraw-Hill Companies, Inc.
1221 Avenue of the Americas
New York, New York 10020-1095
Telephone: (212) 904-2000
Fax: (212) 512-4502
Web site: http://www.mcgraw-hill.com
Incorporated: 1925 as McGraw-Hill Publishing Company, Inc.
Sales: $6 billion (2009)
Stock Exchanges: New York
Ticker Symbol: MHP
NAICS: 511120 Periodical Publishers; 511130 Book Publishers; 511210 Software Publishers; 514191 Online Information Services; 513120 Television Broadcasting
Perhaps best known for its textbooks, The McGraw-Hill Companies, Inc., was formed initially from the merger of McGraw Publishing Co. and Hill Publishing Company. The business has always aimed to provide technicians, scientists, and business people complete, accurate, and up-to-date information of both specialized and general interest. The company carried on that tradition in the late 20th and early 21st centuries with mergers and acquisitions that increased market share, reached new markets, and expanded its global reach. Guided by Harold "Terry" McGraw III, great-grandson of founder James H. McGraw, the company employs the latest media technologies to keep its customers in education, business, industrial, professional, and government markets abreast of their disciplines.
BEGINNINGS: LATE NINETEENTH CENTURY
Born in 1858, John A. Hill, a typesetter, silver prospector, newspaper publisher, and railroad engineer, came to the attention of the publisher of American Machinist with his contribution of letters and articles on practical aspects of railroading. When the publisher began Locomotive Engineering in 1888, Hill was his choice for editor. By 1889, Hill had become part owner of both magazines, and in 1897, divesting his interest in Locomotive Engineering, he took over full ownership of American Machinist and established the American Machinist Press in 1898. In 1902 he incorporated Hill Publishing Company, going on to acquire Power, Engineering and Mining Journal and Engineering News. By 1909 Hill was a leading trade publisher of not just magazines but of books such as Colvin and Stanley's American Machinist's Handbook (1908) and Herbert Hoover's Principles of Mining (1909).
Hill's chief competitor was onetime teacher and subscription salesman James H. McGraw. McGraw was an advertising salesman for the American Railway Publishing Company in 1884, where he rose to the position of vice president by 1886. On resigning from American Railway, McGraw began to acquire magazines that reported on technological progress. Titles included Page 305 | Top of Article the American Journal of Railway Appliances; Electrical Industries (later retitled American Electrician); Electrical World; Electrical Engineer; Electrochemical Industry; and Engineering Record. In 1899 McGraw incorporated McGraw Publishing Company. Its first engineering handbook, the Standard Handbook for Electrical Engineers, was published in 1907.
In the years following the Civil War, the United States evolved from an agrarian to an industrial society. Both McGraw and Hill found a growing market of technicians concerned with the practical applications of science to transportation, lighting, and engineering, among other facets of daily life. In 1909 Edward Caldwell and Martin M. Foss, the respective heads of the book departments of the two firms, agreed that a merger would serve both companies well. After the two men persuaded their bosses, a coin toss decided whose name would come first in naming the new company, the loser becoming president. The McGraw-Hill Book Company, with John A. Hill as president, was thus born, locating itself in McGraw Publishing's building in New York City.
The two companies, however, were still distinct entities: the magazines that formed the chief interests of both and supplied articles for many of the books remained separate concerns. In 1914, as World War I broke out in Europe, Hill moved his company into an air-conditioned building in New York City, one specially constructed to house his publications and their printing facilities. By 1910 the McGraw-Hill Book Company had established itself with its first publication, The Art of Engineering, and its first series, "Electrical Engineering Texts." This series marked the beginning of a company trend toward publishing series of books by multiple authors covering an entire range of knowledge in a specific field.
A NEW ERA: 1916-28
A more complete merger of the McGraw and Hill interests came in 1916 when John A. Hill died at the age of 57. Arthur Baldwin, Hill's attorney, led Hill Publishing for a brief time following Hill's death. McGraw became president of the book company. The two established the McGraw-Hill Publishing Company in 1917, with its offices located in the Hill Building, publishing Electrical World, Electric Railway Journal, Electrical Merchandising, Engineering Record, Metallurgical and Chemical Engineering, The Contractor, American Machinist, Power, Engineering and Mining Journal, Coal Age, and Engineering News. This concentration of interests, along with the enlargement of the book company, now a subsidiary of McGraw-Hill Publishing, made McGraw-Hill the largest technical publisher in the world at that time.
The United States entered World War I in 1917, and this was a particularly good time for technical publishers. The first McGraw-Hill title to benefit from increased wartime demand was the American Machinists' Handbook, originally published before the war. There was also increased demand for engineering books in radio communication, aviation, construction and maintenance, chemical warfare, trench construction, automotive transportation, aerial photography, and antisubmarine tactics. McGraw-Hill responded quickly to this market. An example was its record response to the U.S. Army Educational Commission's order for 150,000 technical books, which were printed, bound, specially packed, and shipped to France in a matter of days.
After World War I, McGraw-Hill expanded rapidly. With Foss in charge of editorial and sales activities and Caldwell heading up finances and production, the book company had grown by establishing close contacts with the faculties of various universities and engineering schools, not only to make sales but also to find new authors. With the addition of a series designed for educational use, McGraw-Hill formed a college department in 1927, thus establishing a lasting emphasis on textbooks. Foss was equally innovative in finding new ways to market the technical books that seldom found space in general bookstores. By both advertising at cost in the parent firm's magazines and sending letters and circulars to subscribers, Foss offered interested parties a chance to examine a book for ten days without payment, an approach that quickly resulted in increased book sales.
The publisher also grew through acquisition during the 1920s, purchasing the Newton Falls Paper Co. in 1920. McGraw-Hill opened offices in Great Britain and California as well. With the purchase of the A. W. Shaw Company of Chicago in 1928, McGraw-Hill extended its reach into the field of business books and magazines. The editorial staff turned one of Shaw's monthlies, the Magazine of Business, into a weekly, covering and interpreting news of specific interest to business people. Now named Business Week (and later known as Business-Week), it would become the best known of all McGraw-Hill publications.
During the 1920s James McGraw began to shift some of his authority in the company to other people. The first shift came when he named himself, his son James McGraw, Jr., and Malcolm Muir to a governing board of trustees. Then, in 1925, McGraw turned over the presidency of the book company to Edward Caldwell, who was succeeded by Martin M. Foss the next year. In 1928 Malcolm Muir became president of the publishing company, and James McGraw remained chairman of the board.
NEW VENTURES: 1929-45
McGraw-Hill stock was first traded publicly in 1929. Just after the stock market crash that same year, The Business Week (as it was then known) predicted, in its November 2, 1929, issue, that "business will gradually and steadily recover as businessmen regain their perspective and go back to work." Following this optimistic line of thought, McGraw-Hill established four new magazines in 1930, opened a West Coast office and book depository in San Francisco, and, under the imprint of Whittlesey House (named after James McGraw's father-in-law), entered the trade book field for the first time. The first title under the new imprint, selected to distinguish this division from trade publications, was Ernest Minor Patterson's The World's Economic Dilemma.
McGraw-Hill commissioned a new office building designed by Raymond Hood and located on West 42nd Street in New York City. Nicknamed "Big Green" because of the blue-green cast of its Art Deco exterior, the new McGraw-Hill building aroused controversy because of the horizontal banding of its windows, now a standard feature of many modern office buildings. When first occupied in 1931, Big Green included a complete production plant taking up four floors. The increasing severity of the economic depression during the early 1930s, however, forced McGraw-Hill not only to make deep cuts in personnel and salaries but to sell its press machinery and equipment in 1933. In 1932 the parent company's deficit ran to $239,137.
That same year, Whittlesey House had its first bestseller, Life Begins at Forty, by Walter B. Pitkin. The company's other publications made themselves useful sources of information for business people by providing hard facts and analysis of the economic situation. The vocational-education department of the book company helped those seeking new skills. Established in 1930, it concentrated on mechanical arts, agriculture, and home economics. The 1930s also saw major shifts at the executive level of McGraw-Hill. In 1935 James H. McGraw handed the chairmanship over to James McGraw, Jr. During the next two years Malcolm Muir failed to get along with the McGraw family. In 1937 he left to run Newsweek magazine, and James H. McGraw, Jr., became both president and chairman of the board. By 1937 the company had an annual profit of more than $1 million.
With the coming of World War II in the 1940s, McGraw-Hill was in an advantageous position. Because Page 307 | Top of Article its technical publications were especially important to the war effort, its paper requirements received special priority. The company's magazines began to cover a range of relevant wartime topics from accelerated training in the use of metalworking power tools to dehydrated foods. The company also added titles in the fields of aviation, health, and atomic energy. In addition, the company began to publish special wartime titles, such as En Guardia, a Spanish-language paper promoting Latin American relations, and Overseas Digest, excerpting articles from other McGraw-Hill titles for distribution to military personnel posted abroad.
It was in the area of special training manuals, however, that McGraw-Hill was to make a special effort. As untrained men and women poured into industry and the armed services, accelerated technical training became increasingly important to the war effort. By 1943 the book company had published 231 titles for the Engineering and Science Management War Training Program. Of the 304 books published by 1944 to further the war effort, many dealt with radio and electronics, a newly important part of warfare. One title, Mathematics for Electricians and Radiomen by Nelson M. Cooke, first published in 1942, continued to be successful after the war and by 1964, under the new title of Basic Mathematics for Electronics, had total sales in excess of 485,000 copies.
Although McGraw-Hill had been present in the United Kingdom and Germany as well as other countries since before World War I, the company made use of the opportunities World War II offered to increase its foreign activities. In 1943 the book company opened a book-export department, which by 1944 had a foreign-language translation office. The same year, McGraw-Hill acquired the Embassy Book Company Ltd. of Toronto, which was renamed the McGraw-Hill Company of Canada, Ltd., and later designated McGraw Ryerson. In 1945, to provide its magazines with international coverage, the company started the World News Service.
AFTER WORLD WAR II: 1946-59
After the war the book company prospered under the presidency of Curtis G. Benjamin, who succeeded James S. Thompson, president for only two years. Benjamin developed a text-film department, a venture inspired by the use of educational films during World War II to supplement textbook materials. As teachers discovered the value of motion pictures and filmstrips in the classroom, the market expanded, and by 1965 McGraw-Hill was the leader in the field. Another wartime dividend for the company was the 13-volume "U.S. Navy Flight Preparation Training" series printed for the Bureau of Aeronautics during the war.
With the growth of commercial aviation in the postwar period, McGraw-Hill found a large market for civilian editions of the series. Building on the close contacts with governmental agencies in research and development made during World War II, the company contracted to publish the "Radiation Laboratory" series, 27 volumes concentrating on the results of wartime research into radar. According to Charles A. Madison's 1966 Book Publishing in America, this series, published in 1949 and costing more than $1.2 million to produce, "set a precedent for the commercial publication of government-financed projects." Although McGraw-Hill lost money on another project, the "National Nuclear" series, the company made an arrangement with the U.S. Atomic Energy Commission to produce an eight-volume compilation of scientific reference materials that was presented at the first International Conference on the Peaceful Uses of Atomic Energy at Geneva in August 1955.
Another project started in the late 1940s was the publication of James Boswell's manuscripts. Consisting of the voluminous collection of original manuscripts of the 18th-century Scottish author collected by Colonel Ralph H. Isham, the project was guided through negotiations with its purchaser, Yale University, by Edward Aswell, Whittlesey House's editor-in-chief since 1947. Publication of a projected 40 volumes began in 1950. It was not to be under the Whittlesey imprint, however, as Yale preferred to have the McGraw-Hill name on the books. This began the relegation of Whittlesey House to juvenile titles. Another milestone, this one commercial, proved to be the publication in 1950 of Betty Crocker's Picture Cook Book, which achieved sales of more than 235,000 copies in its first two years.
By the time its cofounder, James H. McGraw, died in 1948 at age 87, McGraw-Hill Publishing was well on its way to developing a departmentalized organizational structure. An independent technical-education department had been established in 1941, then a text-film department in 1945. The acquisition of the Gregg Publishing Company, publisher of vocational textbooks, in 1949 transformed the company's business-education department into the Gregg division. In response to the need for training literature during the Korean War, beginning in 1950, the book company established a technical-writing division to produce specialized materials for both government and industry. The next year, following a reorganization of the handbook, technical, and professional publishing department, the industrial-and business-book department was born, and the medical publishing department was formed in 1945. It was Page 308 | Top of Article not until 1954, when it acquired Blakiston Company from Doubleday, which specialized in medical titles, that McGraw-Hill began to have a major share of the medical market under the newly named Blakiston division.
What proved by far to be the most important division for company progress in the postwar period was the international division, established in 1946. In less than 15 years, book exports trebled, with a profitable business in text-films, filmstrips, and the sale of foreign-language rights. A major force in the international growth of the company was Curtis Benjamin, who proceeded along lines mapped out by James Thompson. Benjamin succeeded, along with B. G. Dandison, head of the international division, in making the company successful in foreign countries: In 1962 McGraw-Hill was presented by President John F. Kennedy with a presidential E-for-Export award, making McGraw-Hill the first commercial publishing firm to be so honored.
James McGraw, Jr., who had headed up the company since 1935, retired in 1950 and was replaced by another son of the first McGraw, Curtis. Curtis led the company for three short years before his sudden death in 1953. He was succeeded by his brother, Donald C. McGraw.
Just before the death of Curtis, the company purchased the National Petroleum Publishing Company, the W. C. Piatt Company, and Piatt's Price Service, Inc., all from Warren C. Piatt. The book company then began three major encyclopedia projects in the late 1950s, each continuing on into the 1960s: The McGraw-Hill Encyclopedia of Science and Technology, The Encyclopedia of World Art, and The New Catholic Encyclopedia. When in 1959 the publishing company commemorated its 50th year, revenues exceeded $100 million.
GROWTH AND DIVERSIFICATION: 1960-79
While Curtis Benjamin remained chairman of the board and CEO of the book company, Edward Booher, who had joined the company in 1936, became president in 1960. They doubled overall sales within five years, contributing 39 percent of the total income of the parent company in 1965. The F. W. Dodge Corporation, information provider to the construction industry, was purchased in 1961. The following year, the general book division was formed by merging the industrial-and-business-book department with the trade department. The purchase of Webster Publishing Company in 1963 marked the company's entry into the elementary school and high school textbook markets.
In 1964 the book company and the F. W. Dodge Corporation merged with McGraw-Hill Publishing Company to form McGraw-Hill, Inc. The reorganization created a single corporation, the parent company, with three operating divisions: book publishing, the Dodge complex, and magazines and news services. The company established an Australian publishing unit the same year. With the acquisition of the California Test Bureau in 1965, McGraw-Hill strengthened its K-12 educational services just in time to benefit from the postwar baby boom. The company moved into two new fields in 1966: One was legal publishing with the purchase of Shepard's Citations, Inc., and the other was financial information services through the acquisition of Standard & Poor's Corporation. Other acquisitions were Schaum Publishing Company, Capitol Radio Engineering Institute, and Postgraduate Medicine magazine, all in 1967. The company also expanded into Mexico in 1967 and into Japan in 1969.
A key figure in this expansion was Shelton Fisher. Beginning as promotion manager for Business Week in 1940, by 1968 Fisher had succeeded Donald McGraw as president and CEO of McGraw-Hill. His goal was to change the perception of McGraw-Hill as an old-fashioned publisher of trade magazines into that of a dynamic media giant. Fisher further extended the company's reach into Canada, Brazil, and India, bought four television stations from Time Inc., and moved the company out of Big Green and into a new, 50-story international headquarters in 1972. While increasing the company's prestige, the large capital outlay came at a time when a recession caused a loss in revenues for the McGraw-Hill magazines. After a period of uncertainty during which the McGraw family worked out a succession, Harold McGraw, Jr., became president of the parent company and Fisher assumed the chairmanship. This changed within a year when Fisher retired and Harold McGraw, Jr., became chairman in addition to his other positions.
The picture of McGraw-Hill, Inc., at the end of the 1970s, according to John Tebbel's History of Book Publishing in America, was of "an extremely healthy, well-managed conglomerate, composed of several operating divisions." Along with the book and publications companies, there was the information system company, composed of the F. W. Dodge division, Sweet's division, and Datapro Research Corporation. Two other divisions were Standard & Poor's Corporation and the McGraw-Hill Broadcasting Company. Total operating revenues amounted to more than $761 million, crossing the $1 billion threshold in 1980.
Its very success made McGraw-Hill the target of a takeover attempt by the American Express Company in 1979. The chairman of American Express, James D. Robinson III, and its president, Roger H. Morley, were Page 309 | Top of Article shocked by the ferocity with which Harold McGraw fought the attempted stock buyout. Concerted action by the McGraw family, along with various legal actions, defeated the bid for ownership. Although American Express had failed, McGraw-Hill remained a prime target for a takeover. Harold McGraw was planning to retire in four years and, while another generation of McGraws waited in the wings, none were as yet ready to run the corporation. By appointing Joseph L. Dionne, who had been in charge of planning, to the newly created position of vice president of operations, McGraw sought to improve management organization and put someone in charge who could generate the fast growth needed to discourage further takeover attempts.
DAWN OF THE ELECTRONIC AGE: 1980-90
Dionne became president and CEO in 1983, while McGraw remained chairman. A former history teacher, Dionne proved a visionary intent on transforming McGraw-Hill from "a simple publishing company" into an "information turbine" for the digital age. Under this model, McGraw-Hill's content would flow seamlessly throughout the company's vast information-gathering and disseminating "machine." As Suzanne Oliver described it in a 1990 Forbes article, "Housing statistics, say, could go into the turbine and come out as a feature story in a magazine and then as a new bond rating on a home builder. Like a packing house of old, McGraw-Hill would turn the same basic raw material into dozens of different products." Under Dionne's guidance, the company was reorganized into "market focus groups" as opposed to groupings by media. In 1985 Dionne created 20 market-focused business units.
Although still committed to print publishing, Dionne planned to reduce the 80 percent of the business that was print-oriented in 1983 to 65 percent or 70 percent over several years. The company had made a halting step toward this goal with the acquisition of Data Resources, Inc. (DRI), in 1979. Dionne was convinced that DRI held not only a vast share of the world's business and economic data but also the expertise required to translate McGraw-Hill's hard copy into malleable electronic information. Although the DRI acquisition would prove to be a misstep (the company actually made most of its money from renting computer space), Dionne pressed on with his plan. During this same period, McGraw-Hill entered the computer publishing field by acquiring BYTE, Unixworld, and LAN Times magazines, as well as Osborne Books, all of which provided support information to computer users. As the company moved into the electronic information marketplace, much of the data supplied by the news service, magazines, Standard & Poor's, Dodge, Piatt, and Shepard's was made available in computerized form and in various configurations.
Despite his reservations, Harold McGraw approved of the direction in which Dionne was taking the company. In 1988 Harold McGraw became chairman emeritus and Dionne added the title of chairman to those of president and CEO. In its attempt to weather the communications revolution, McGraw-Hill had undergone three major reorganizations in four years, resulting in an organization centered around 14 market-focus groups. These reorganizations, the automation of F. W. Dodge, and the shutdown of the general-book division, ending the company's involvement in the trade book market, resulted in a layoff of more then 1,000 workers.
The company expanded globally and had success with the Standard & Poor's Marketscope and with other online, real-time services. Early in 1990, however, two online services, McGraw-Hill News and Standard & Poor's News, were discontinued. Some acquisitions resulted in costly write-offs, notably Nu-merax Inc., an electronic data and services operation. McGraw-Hill continued, however, to invest in strong growth markets and divest itself of publications and units connecting it with its past. American Machinist & Automated Manufacturing, Coal Age, and Engineering & Mining Journal were sold in 1987. Although it took years of acquisitions and divestments, more than a few stumbles, and intensive development from within, Dionne's model proved not only successful but prescient.
In 1988 McGraw-Hill celebrated its centennial, acquired Random House's college division for over $200 million, and created the Harold W. McGraw Jr. Prize in Education to honor the chairman emeritus's efforts on behalf of education and literacy. Operating revenues for the year were just shy of $1.7 billion. The next year, 1989, McGraw-Hill entered into a 50/50 joint venture with Macmillan, combining the elementary, secondary, and vocational education businesses of both companies. In 1990 a new electronic textbook publishing system known as Primis was implemented, allowing teachers to custom design textbooks with the results printed, bound, and shipped within 48 hours. Primis quickly became America's leading custom publisher.
KEEPING THE WORLD UP TO SPEED: THE NINETIES
The early 1990s found McGraw-Hill growing steadily in its quest to provide information in a wide range of formats for persons of all ages. In 1993 the company bought out Macmillan's half of the Macmillan/ Page 310 | Top of Article McGraw-Hill School Publishing Company for $160.8 million, and by the following year McGraw-Hill's three business segments (Educational and Professional Publishing, Financial Services, and Information and Media Services) helped the company rake in almost $2.8 billion in revenue, a sizeable leap from the previous year's $2.2 billion. The Educational/Professional unit accounted for the most revenue (42 percent), while Financial Services dominated income with over 48 percent, despite the worst bond market since 1927 and rising interest rates.
For McGraw-Hill, Inc., 1995 proved a pivotal year in which the company ceased to exist, at least in its previous form. To reflect its ongoing diversity, the company changed its name from McGraw-Hill, Inc., to The McGraw-Hill Companies, Inc., followed by a broadcast media campaign showcasing how the company was "keeping the world up to speed." Other milestones for 1995 were an all-time high stock price and a two-for-one stock split, as well as additional ratings services and new alliances for Standard & Poor's. Along with a myriad of new CD-ROM products, including Harrison's Principals of Internal Medicine (the world's best-selling medical textbook), there was a joint venture between the company's secondary school publisher Glencoe/McGraw-Hill, National Geographic, and Capital Cities/ABC. In addition, the company acquired UCB Canada and Hospital Practice and opened new offices in Asia, Europe, and the Middle East.
McGraw-Hill's most famous periodical, BusinessWeek, experienced a phenomenal year in 1995 with exceptional circulation (over one million with a readership of nearly seven million) and pumped up advertising volume and revenue. Additionally, BusinessWeek Online gained in popularity and BusinessWeek Enterprise, a magazine for small-business executives, published international editions in Asia, Europe, Latin America, and the Middle East. With so many new opportunities swirling about, McGraw-Hill, inevitably, let others go: Shepard's publishing operations and SRA Technology were sold, while Open Computing ceased publication. Despite a disastrous showing in Mexico after the peso's collapse, McGraw-Hill still managed to increase overall earnings by nearly 12 percent to $227.1 million while revenue topped $2.9 billion, a 6.3 percent increase over 1994's stellar performance.
In 1996 McGraw-Hill continued to expand its operations globally, with several high profile acquisitions, including Open Court Publishing Company for its K-8 elementary education division, Healthcare Informatics and InfoCare magazines from Wiesner Publishing for its Healthcare Information unit, and the Times Mirror Higher Education Group, which prompted the formation of the Higher Education and Consumer Group to house it and McGraw-Hill's well established college division. The Times-Mirror acquisition made McGraw-Hill America's top college publisher, with leading positions in 12 disciplines and a particular strength in business. The college division's emphasis on business and finance meshed well with the corporation's financial services operations. Around that same time, the Financial Information Services unit was renamed to reflect its most important asset, Standard & Poor's, to Standard & Poor's Financial Information Services.
A MCGRAW AT THE HELM: LATE NINETIES
When CEO Joe Dionne retired in 1998, he could look back on a 15-year record of innovation and growth. He was succeeded in April 1998 by Harold "Terry" McGraw, a great-grandson of the founder who had logged 13 years at McGraw-Hill before ascending to president in 1993. Although McGraw's climb to the top spot was viewed by some with skepticism, he quickly proved to be a "big picture" leader for a new era. He focused on enlivening the company's identity through a $4.5 million promotion targeting industry analysts and investors. In-house, he concentrated on cutting costs and investing in growth businesses. He consolidated McGraw-Hill's divisions from 15 down to 3 and sacked two-thirds of the company's senior managers. A 1998 article in Crain's New York Business called Terry McGraw's global expansion of Standard & Poor's "his most meaningful accomplishment." His efforts paid off in higher returns: While revenues increased only slightly from 1997 to 1998, earnings increased by 15.6 percent.
In 2000 McGraw-Hill moved to challenge Pearson Education for the top spot in educational publishing with the acquisition of Tribune Education. The nation's top publisher of K-12 supplements, Tribune was one of McGraw-Hill's largest purchases in years, at $635 million. The horserace for leadership of the textbook industry continued, however, when rival Thomson Corp. acquired Harcourt's higher-education and professional/corporate divisions from Reed-Elsevier in 2001.
With sales of $4.6 billion in 2001, McGraw-Hill stood as America's top K-12 education publisher and led the world in financial analyses and risk assessments though its Standard & Poor's financial services. With a 20 percent decline in net income from 2000 to 2001, however, the company announced a year-end restructuring that cut 5 percent of the global workforce, or 925 employees. McGraw-Hill continued to cut costs and refocus over the next two years, when it sold its MMS Page 311 | Top of Article International unit, which provided real-time fixed-income and foreign-exchange commentary and analysis, and then sold its 45 percent stake in its Manhattan headquarters building.
In early 2004 it sold its retail educational book division, and then it reorganized its entire professional book group from three divisions into two. McGraw-Hill also sold another peripheral operation, the municipal bond broker J. J. Kenny Drake. The company, however, was also adding to its data and research offerings, acquiring Capital IQ, a financial data provider, for Standard & Poor's. It also purchased J. D. Power and Associates, supplier of well-known automobile and truck surveys, in 2005 and bought Automotive Research Asia, an auto industry consultancy, for J. D. Power the following year.
BELT-TIGHTENING AND THE RATINGS BOOM: 2000-05
Fallout from the economic and other crises of the early years of the new millennium was affecting McGraw-Hill. In 2002 the Commodity Futures Trading Commission, which was conducting an investigation of energy-trading practices, subpoenaed documents, employee information, customer lists, and other materials from Platt's, the company's energy research and information unit. McGraw-Hill refused to turn over some of the information sought, arguing the request violated the First Amendment. A federal judge ruled in 2005 that the company had to turn over the data. Controversy also touched another McGraw-Hill data-and-research provider, Standard & Poor's. In 2004 a former Standard & Poor's analyst pleaded guilty in an insider-trading case that involved improper use of information he had gathered on the job.
Data and research, especially for the financial sector, were becoming an ever more important component of McGraw-Hill's profits. In January 2004 the company reported a 19 percent boost in fourth-quarter net income, to $159.9 million. Revenue for financial services, including Standard & Poor's, led the way with a 21 percent jump. Education and testing services still dominated the revenue mix, with revenue from this area having quadrupled since 1990 to account for 49 percent of the company total. Revenue from sales of research on stocks and bonds had tripled to compose 34 percent of total sales, while only 17 percent came from McGraw-Hill's advertising-based information and media unit.
The formula was proving successful: The company had delivered a 10.4 percent total annual return to shareholders over the past five years, compared with 1 percent per year for the benchmark Standard & Poor's (S&P) 500 index. Within the McGraw-Hill fold, Standard & Poor's itself was expanding geographically as well as into new corners of the financial information business. It formed a joint venture with Citic Securities Co. in 2006 to develop and promote benchmark indexes for the Chinese securities market.
Meanwhile, Standard & Poor's, along with competitors Moody's and Fitch, was expanding its ratings service from corporate and government bonds to encompass "structured finance" deals: securities created from all or parts of mortgages, credit card debt, and other streams of income, such as mortgage-backed securities and collateralized debt obligations. By 2005 most of Standard & Poor's revenue came from supplying ratings on this fast-growing category of investments. "Structured finance showed strength across all asset classes and in all of our international regions," Terry McGraw told Richard Beales and Gillian Tett in the Financial Times.
Standard & Poor's now accounted for some 70 percent of McGraw-Hill's total corporate profits. Noting that the company's stock price was not rising as fast as that of rival Moody's, a stand-alone concern that had no other businesses but its rating service, some observers like Andrew Bary in Barron's suggested that McGraw-Hill's shareholders would benefit if Standard & Poor's was spun off. Terry McGraw opposed the idea, arguing that diversification had advantages and citing the stock's strong performance.
STANDARD & POOR'S AND THE MORTGAGE COLLAPSE: 2006-08
In March 2006 Standard & Poor's launched 10 indexes to track housing prices in different regions of the United States, along with a nationwide composite index, all of which it expected to serve as the basis for futures and options contracts. Unfortunately, the housing bubble of inflated home values, and much of the business derived from it, was starting to deflate. In June Standard & Poor's revised its criteria for evaluating pools of mortgages that allowed home buyers to use other loans to finance their down payments.
By the following year Standard & Poor's and its rivals were becoming embarrassed by revelations that they had assigned investment-grade ratings to securitized products made up of shaky subprime mortgages. McGraw-Hill's stock price dropped 6 percent in February and March 2007 on these concerns. Some observers were calling into question the rating agencies' revenue model, by which they were paid to issue judgments by the same institutions that packaged and underwrote the securities and often worked with those institutions to make sure the final product received a respectable rating.
In July Standard & Poor's downgraded hundreds of debt issues backed by risky home loans. The U.S. Securities and Exchange Commission (SEC) and the state attorneys general of New York and Ohio announced in September that they were investigating the mortgage market and the rating agencies. Standard & Poor's was subpoenaed to turn over documents by New York State Attorney General Andrew Cuomo. Standard & Poor's, Moody's, and Fitch all agreed to cooperate in the probe. The Senate Banking Committee and the House Financial Services Committee were also planning hearings into the ratings firms' role in the subprime mortgage business.
To partially end the New York inquiry a year later, the agencies agreed to change their compensation structure. Instead of being paid by the banks only if they were selected to rate bonds backed by individual home loans, they would be paid for all work they performed, including initial reviews and discussions. McGraw-Hill itself was taking measures to tighten control of Standard & Poor's, having seen its stock drop from a peak of $72.50 in June 2007 to $41.67 in August 2008. That month, four key executives of the unit departed as part of a broad management shakeup.
Even as the company worked to contain and correct problems at Standard & Poor's, it was again cutting costs to address a difficult economic environment and eroding profits. McGraw-Hill Education group underwent 2 major restructurings in 18 months. The first, in 2006, resulted in 405 jobs eliminated. The group saw gains in sales and earnings the following year. Nevertheless, in January 2008 McGraw-Hill announced that the education group would be cutting another 611 jobs, about 3 percent of its global workforce, and taking a $43.7 million charge. Net income for the entire company declined 30 percent during the first six months of 2008, and for the rest of the year McGraw-Hill continued to tighten its belt, cutting a total of 1,045 jobs.
NEW BUSINESS PROSPECTS: 2008-09
Some positive signals were peeping through. While states' spending on schools, reduced due to the recession and collapse in property tax revenues, was dampening K-12 sales, the company in January 2009 forecast an offsetting boost from the higher education market, building on 3 to 4 percent growth chalked up the previous year. McGraw-Hill was looking for ways to take advantage. One avenue was the fast-growing textbook rental market. The company entered into a deal with Chegg, an online textbook-rental business, to supply 25 of its books to Chegg in return for a portion of the rental income.
Another route was Connect, a new service the company launched in 2009 that delivers college course-work to students over the Web, including notes and video lectures, and enables them to answer practice exam questions. The product aimed to help McGraw-Hill keep pace with the transition in college study from textbooks to greater use of interactive, multimedia tools. Connect "is where we see this all going," Ed Stanford, president of McGraw-Hill Higher Education, told Kelly Nolan in the Wall Street Journal.
The company was continuing to penetrate Web-based businesses in other ways, while also managing its exposure to these businesses. In 2005 McGraw-Hill joined with a group of large publishers in a copyright lawsuit against Google aimed at the company's Google Print Library project, set up to scan millions of books and make their content searchable online. A year later McGraw-Hill teamed with Hearst Corp. to invest in Gather Inc., a start-up social-networking site aimed at adults.
BusinessWeek was looking to integrate its traditional, print magazine with the Web but was hampered by declining ad revenues in the print edition. In 2005 it closed its European and Asian editions and announced layoffs. For all of 2008, the entire BusinessWeek operation lost $43 million. Ad pages declined by a third in the first quarter of 2009. In July McGraw-Hill hired an adviser to explore selling BusinessWeek. A purchaser emerged in October: Bloomberg L.P., which McGraw-Hill had been rumored three years earlier to be considering buying. The final deal called for Bloomberg to take over the 80-year-old magazine in exchange for $5 million and the assumption of some $31.9 million in liabilities.
McGraw-Hill remained dependent on Standard & Poor's for as much as three-quarters of its earnings. The rating agencies as a group were still the focus of lawsuits and congressional and regulatory action. Consequently, much of McGraw-Hill's attention was still focused on Standard & Poor's. The company announced a series of organization and procedural changes in early 2008 aimed at bolstering confidence in the agency's practices. These included rotation of lead analysts every five years so that relationships with companies, governments, and packagers of structured finance vehicles did not become entrenched. The company also hired a chief credit officer to better monitor the quality of Standard & Poor's ratings.
RECOVERY: 2009-10 AND BEYOND
In the first few months of 2010, McGraw-Hill had reason to both mourn and celebrate. In March the company observed the passing of former chairman and CEO Harold W. McGraw Jr., at age 92. He did live to see McGraw-Hill experience a financial recovery as its own cost-cutting measures paid off. For fourth-quarter 2009 the company reported its first increase in quarterly diluted earnings in two years, a 43.2 percent boost from the same period in 2008. "Continued recovery in the corporate new issue market here and overseas at Standard & Poor's Credit Market Services and an upswing in higher education, professional and international markets enabled us to finish 2009 positively and set the stage for more growth in 2010," Terry McGraw said in a press statement. "Increased revenue and tight cost controls contributed to substantial improvement in our operating margin."
In January McGraw-Hill announced it was working on applications for the iPad, Apple Inc.'s new tablet computer. As quoted by Jeffrey A. Trachtenberg in the Wall Street Journal, Terry McGraw predicted, "In the near future you'll undoubtedly see a McGraw-Hill e-book for the college market running on the Apple tablet." With its long history of innovation and diversification, McGraw-Hill seemed ready to face the future challenges posed by the publishing industry.
Wilson B. Lindauer
Updated, Taryn Benbow-Pfalzgraf;
April Gasbarre; Eric Laursen
Capital IQ, Inc.; ClariFI, Inc.; CTB/McGraw-Hill LLC; Editora McGraw-Hill de Portugal, Ltda.; Editorial Interamericana, S.A. (Colombia); Funds Research SRL (Argentina); Funds Research USA, LLC; Grow.net, Inc.; International Advertising/McGraw-Hill, Inc.; J. D. Power and Associates; Lands End Publishing; McGraw-Hill Australia Pty Limited; McGraw-Hill Broadcasting Company, Inc.; McGraw-Hill Cayman Finance Ltd.; McGraw-Hill Holdings Europe Limited; McGraw-Hill Information Systems Company of Canada Limited; McGraw-Hill/Interamericana de Chile Limitada; McGraw-Hill/Interamericana de Venezuela S.A.; McGraw-Hill Interamericana Editores, S.A. de C.V. (Mexico); McGraw-Hill Interamericana, Inc.; McGraw-Hill/Interamericana, S.A. (Panama); McGraw-Hill International Enterprises, Inc.; McGraw-Hill News Bureaus, Inc.; McGraw-Hill New York, Inc.; McGraw-Hill Publications Overseas Corporation; McGraw-Hill Real Estate, Inc.; McGraw-Hill Ryerson Limited; McGraw-Hill Ventures, Inc.; Money Market Directories, Inc.; S & P India LLC; Standard & Poor's (Dubai) Limited; Standard & Poor's Europe, Inc.; Standard & Poor's Financial Services LLC; Standard & Poor's Hong Kong LLC; Standard & Poor's International, LLC; Standard & Poor's International Services, Inc.; Standard & Poor's Investment Advisory Services (HK) Limited; Standard & Poor's Investment Advisory Services LLC; Standard & Poor's, LLC; Standard & Poor's Securities Evaluations, Inc.; Standard & Poor's Maalot Ltd. (Israel); Standard & Poor's, S.A. de C.V. (Mexico); Standard & Poor's South Asia Services (Private) Limited (India); Sunshine International, Inc.; Tata McGraw Hill Education Private Limited (India); WaterRock Insurance, LLC.
PRINCIPAL OPERATING UNITS
Education: CTB/McGraw-Hill; Glencoe/McGraw-Hill; The Grow Network/McGraw-Hill; Macmillan/McGraw-Hill; McGraw-Hill Contemporary; McGraw-Hill Custom Publishing; McGraw-Hill Digital Learning; McGraw-Hill Education (Asia); McGraw-Hill Education (Australia); McGraw-Hill Education (Europe); McGraw-Hill Education (Spain); McGraw-Hill Higher Education; McGraw-Hill Interamericana (Latin America); McGraw-Hill Professional; McGraw-Hill Professional Development; McGraw-Hill/Ryerson (Canada); Open University Press (UK); SRA/McGraw-Hill; Wright Group/McGraw-Hill; Tata/McGraw-Hill (India). Financial services: Standard & Poor's. Information and media: Aviation Week Group; Broadcasting Group; J.D. Power and Associates; McGraw-Hill Construction; Platts.
Pearson PLC; Thomson Reuters Corp.; Moody's Corp.; Morningstar, Inc.; Bloomberg L.P.; Reed Elsevier Group PLC; Wolters Kluwer N.V.
Burlingame, Roger, Endless Frontiers: The Story of McGraw-Hill. New York: McGraw-Hill, 1959.
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