By Jeffrey A. Trachtenberg
Two years after emerging from bankruptcy, publisher Houghton
Mifflin Harcourt Co. has a growing appetite for acquisitions.
The company this year has snapped up Channel One News, which
provides daily news programs to students; Curiosityville, an
early-education website aimed at children 3 to 7, and
SchoolChapters Inc., an education-technology company. More deals
are likely as Houghton builds its digital portfolio and looks to
expand its direct-to-consumer business.
Houghton went public last year at $12 per share. Today the stock
is trading above $19, and the company has a market capitalization
of $2.8 billion. The publisher is primarily focused on pre K-12
education but also boasts a consumer books business whose authors
include J.R.R. Tolkien and Philip Roth. These days it is counting
on Common Core standards to drive demand for such products as Go
Math!, an in-school curriculum that offers both print and digital
components. And it is pitching parents a companion digital product
called Go Math! Academy for home use via a $9.99 monthly
subscription.
Overseeing the new strategy is Linda Zecher, a former Microsoft
Corp. executive who is Houghton's first female chief executive
since the company was founded in 1832. In a recent interview, Ms.
Zecher, 61 years old, discussed Houghton's transformation. Edited
excerpts:
WSJ: People still think of Houghton as a major textbook
publisher. What percentage of your revenue still comes from
textbooks?
Ms. Zecher: About 85% of our revenue comes from the education
business and about 15% come from our trade business. On the
education side, digital is over 50% of revenue; last year it was
probably 40% and the year before that it was in the teens. That
means that less than 50% of our overall education revenue comes
from print materials. On the trade publishing side (consumer
books), digital revenue is in the teens.
WSJ: What's driving your digital push?
Ms. Zecher: Common Core is coming into play. There is more
pressure on standards and there's more pressure on testing. Every
school district in the nation is trying to figure out how to get
ahead and make sure their kids are getting the very best. You have
a lot of parents putting pressure on school districts to get more
digital content.
WSJ: Who is paying for this?
Ms. Zecher: The schools. Two things have been driving that.
School spending tends to follow the real-estate market by about 12
to 18 months, and real estate tax revenues have been increasing.
The states have been somewhat flush with cash, and it really comes
from that. The second thing driving it is Common Core, and the need
to make sure they have new materials that meet the Common Core
standards.
WSJ: But there has been some pushback to Common Core
standards.
Ms. Zecher: There is a lack of understanding about what Common
Core is. It's a way to make sure that all kids in all schools are
getting a base level of learning and making sure we're raising the
standard. Kids are being taught not to respond by rote to something
but to have critical thinking skills. No one is saying we want
lower standards. They're concerned that with the new more rigorous
standards their child may test lower. Parents have a hard time with
that.
WSJ: Your company recently authorized a $100 million stock
buyback over a two-year period. Is that really your best use of
cash at a time when you are trying to expand your digital
reach?
Ms. Zecher: Our No. 1 priority is to grow organically and the
second is to make acquisitions, either small or larger strategic,
and then to provide some money back. We'll have somewhere between
$675 million to $725 million in cash on our balance sheet at the
end of the year. Part of what this stock buyback says is that
management and the board have confidence in our ability to generate
free cash flow moving forward.
WSJ: You made several deals in recent months. What is your
M&A strategy?
Ms. Zecher: Those were small tuck-ins, but all part of our
strategy to go directly to consumers and provide educational games
and content in a variety of ways. We want to expand our portfolio
and our footprint.
WSJ: Will you sell your consumer book business and focus
strictly on education?
Ms. Zecher: The history of our company [Houghton has published
such major American literary writers as Ralph Waldo Emerson, Henry
David Thoreau and Henry Wadsworth Longfellow] is all about our
trade business, and I'm very proud of that. I'm also proud of our
children's division and all of the great content we have there. I
have no intention of selling off our trade business.
WSJ: For a while, some schools embraced the iPad as the
education tablet. Where is the K-12 market headed when it comes to
tablet use?
Ms. Zecher: The top-selling piece of hardware right now in K-12
is the Chromebook. Google is putting a lot of push into education.
I was just at a conference and I was asked a question about how
fast do we think Google, Amazon, Microsoft and Apple are going to
pick up their pace in education. Everyone sees that if you can get
the child early they can become a lifelong customer. Apple is very
successful at that. Google is on that same road with the
Chromebook.
WSJ: Earlier this year, Satya Nadella suggested women should
have faith in the system rather than asking for a raise. He later
backtracked. What are your thoughts?
Ms. Zecher: I know Satya, and he's a great guy. It was an
out-of-context comment. Women have made great strides. But women
need to help more women. We still aren't as good at the networking
component as men are. People tend to hire and promote people they
know and are comfortable with. I don't think women have built as
much of that network as men have.
Write to Jeffrey A. Trachtenberg at
jeffrey.trachtenberg@wsj.com
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