Monday, February 02, 2009

A death rattle from a once proud publisher?

For those of you outside of Boston, you may have missed this article in the Boston Globe about the, let's be honest, inevitable end of Houghton Mifflin. The picture that media reporter David Mehegan paints is grim. Really grim. In paragraph three of the article, Mehegan writes:

Moody's last month reported that Houghton, with a debt load estimated at more than 10 times gross earnings, is "a likely default" unless its loans are renegotiated.

Um, I'm not too good with numbers but I think that is bad. How did they get here? There are a few things which have contributed to their dire situation:
  • Sales of school textbooks, Houghton's bread and butter, are slumping as school districts nationwide cut back orders in the deepening recession.
  • Since 2001, it has had three owners since then, none of them book publishers.
  • Combining two similar publishers-Houghton Mifflin and Harcourt-is not as simple as the addition of equals. In merging them, a company could lose the separate value of one or the other.

    "The problem was that they bought the same kind of list," said Darehshori, who now heads Wellesley-based educational publisher Aptius Education. "By buying Harcourt, they had two reading programs, two math programs. So how does the sales force know what to sell?"

  • The crushing recession couldn't have come at a worse time. Houghton recently laid off at least 400 employees nationwide, and many survivors are being pressed to work extra hours to take up the slack.
Perhaps this is a good time to look again at the topsy-turvy finances in book publishing? One would think that some of the properties they have as a backlist-Carson McCullers, Philip Roth, J.R.R. Tolkien, Rachel Carson-would help sustain them in tough times. Those authors still sell and they have acheived what all publishers and authors hope will happen to every book they publish, namely become stable, year-after-year sellers that provide an income stream both parties can count on. Unfortunately, good publishing doesn't seem to be the problem here. They edit, publish, and market great books at "the dolphin," but it seemingly isn't enough. While in this case returns and outrageous advances don't seem to be the problem either, aglomeration of publishing is the culprit.

In recent years the industry has shrunk...it continues to shrink. Mehegan tells the backstory:
Independence once was considered important to publishers, but today they're bought and sold like pork bellies. In 1978, conglomerate Western Pacific Industries acquired a large stake in Houghton Mifflin and was thought to be considering a takeover bid. But it backed off after a group of famous Houghton authors, led by Archibald MacLeish, John Kenneth Galbraith, and Arthur M. Schlesinger Jr. threatened to bolt from the company if the sale went through. "It's hard to imagine any band of authors that would do that today," said Richard Todd, a former senior editor at Houghton Mifflin, "or any company that would listen to them."
However, independence was not part of Houghton's future:

In 2001, chief executive Nader F. Darehshori sold Houghton for $2.2 billion to French wheeler-dealer Jean-Marie Messier, head of Vivendi International. With a $19 billion borrowing spree, Messier had built a stodgy water utility into a world media empire that included Houghton Mifflin, Universal Studios, theme parks, TV stations, and telecom companies. Within a year, the empire was crushed by debt, Messier was forced out, and in 2003 Houghton Mifflin was sold - at a $500 million loss - to a Boston-based equity partnership including Thomas H. Lee Partners, Bain Capital, and Blackstone Group.

The equity firms sold in 2006 to Riverdeep Group of Dublin, a $392 million educational software company (since reincorporated in the Cayman Islands) that was controlled by O'Callaghan, for $3.4 billion. Like Messier, O'Callaghan was on a spree, with other people's money. He borrowed most of it from Credit Suisse and Citigroup, along with other investors. A year later, he bought Florida-based Harcourt, which has educational and trade lines much like Houghton Mifflin's, from British-Dutch publishing giant Reed Elsevier. The price: about $4 billion, also mostly borrowed from Credit Suisse and Citigroup, as well as since-collapsed Lehman Brothers.

Not a publishing professional in sight anywhere. I mean, Credit Suisse? Ugh. Houghton is the perfect storm of what happens when a publishing company gets mixed up in a world where the only thing that matters is the bottom line. It has happened to the best of them: Hyperion, Random House, HarperCollins are all small parts (comparartively) of gigantic media conglomerations which, if they actually were honest, really couldn't care less what happens to a book publisher in a country which doesn't, isn't willing, or can't make reading a center of the culture. So, book sales look stupid when they are compared dollar for dollar with WALL*e, Gruner + Jahr magazine sales in Europe, or Horton Hears a Who which each represent just one small media success in the companies Disney, Bertelsmann., and News Corp which own the publishers mentioned above respectively.

Helene Atwan, Director of Beacon Press, thinks that:

Houghton's stellar backlist - previously published books - makes it too valuable to just disappear. But if it were to leave Boston, she said, "it would be a terrible loss to the city. It's a great cultural institution."

I disagree. The parents don't care about who Houghton has published in the past nor do they care about what they Houghton means to the culture life of Boston. Actually, there is an obvious case to be made that their backlist is the only valuable property they have left. Textbooks are in flux and tend to induce queasiness in its industry professionals because of its volatility and no one in the US buys hardcovers, right Pat Holt? It is easy to envision another publisher-say Random House-purchasing the backlist to beef up their own backlist. I mean, it seems like an easy transition in the physical object to imagine the publisher name on the spine of Ms. McCuller's transcendent books to change from Mariner (the Houghton paperback imprint) to Vintage (Random's industry-leading paperback imprint). I can see it. Can you?

Not so fast. Even selling the popular trade division won't necessarily help.
The sale of smaller parts, such as trade (i.e., noneducational books, only 5 percent of total sales), would barely scratch O'Callaghan's debt. Even a sale of the whole company might not clear the ledger.

"The debt is so overwhelming, there's just no way," Darehshori said. "They borrowed more than the value of the company. They will be lucky if the value is half of what they owe."

When you owe ten times what you have, you really can't be picky about what you sell to pay your debts, right? At least, that is how it works in the real world.

Although, who ever claimed that book publishing is the real world?

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