At a time when publishers are jostling to grow their footprint in the education technology market, two big players appear to be heading in opposite strategic directions: Scholastic wants to focus on its core businesses; Houghton Mifflin Harcourt desires to branch out.
Scholastic has reached an agreement to sell its Education Technology and Services business to Houghton Mifflin Harcourt for $575 million in cash. The deal has been underway for four to five months and is expected to close by the summer.
Included in the transaction are Scholastic’s most popular edtech products—READ 180, System 44 and MATH 180—which offer intervention and assessment tools for students who are behind in math and reading, along with professional development services that help teachers implement the programs. Two other products—Big Day for PreK and iREAD—that target early childhood education are also changing hands.
Since its launch in 1999, READ 180 has generated over $1 billion in sales for Scholastic. Sales from the company’s edtech business rose 9% from fiscal 2013 to 2014, but The Wall Street Journal says revenues from the company’s overall edtech business have flattened recently, to $175 million for the first nine months of this fiscal year.
In a prepared statement, Scholastic CEO Richard Robinson offered a couple reasons behind the deal: “The EdTech business has a substantially different model for product development, marketing and sales from Scholastic’s core school-based and consumer print and digital publishing businesses,” he said. “EdTech also requires longer lead times for selling and larger investments in product development.”
After expenses, Scholastic expects to net $360-$370 million, which it will invest in its core businesses that include Children’s Book Publishing and Distribution (which includes book fairs, the “Harry Potter” series and those book order flyers that evoke fond memories), Classroom and Supplemental Materials Publishing, and an international division that sells to more than 150 countries. These three businesses generated $490 million, $214 million and $414 million in revenue, respectively, over the previous four quarters.
Scholastic is not selling all of its education technology services, as some headlines suggest. The company will keep Storia, a digital library of 2,000 fiction and non-fiction titles for preK to sixth grade students, and Flix, a collection of video storybooks that cover literary classics as well as science and social studies subjects.
Both services are sold to schools, but “they are more classroom-focused rather than large-scale implementations...which is what occurs with READ 180 and other EdTech programs,” explains Kyle Good, Scholastic’s Senior Vice President of Corporate Communications. Digital offerings like Storia and Flix “don’t have the longer product development and sales cycles” required of READ 180 and others involved in the transaction.
Scholastic will continue making digital investments in products that serve schools, customers and students, says Gregory Worrell, President of Scholastic’s Classroom & Community Group. “We will be accelerating our investment in technology that works in concert with printed books and magazines to offer comprehensive programs for blended learning.”
For Houghton Mifflin Harcourt, the deal will mark its seventh—and by far the biggest—acquisition since coming out of bankruptcy in 2012. (It previously snapped up Tribal Nova, Choice Solutions, Channel One News, Curiosityville, SchoolChapters and some cooking and reference assets from John Wiley & Sons.)
“We’re excited about the complementary possibilities between Scholastic’s products and our products,” says Bianca Olson, Senior Vice President of Corporate Affairs at Houghton Mifflin Harcourt. “HMH’s strength has been in the core K-12 market. [Scholastic’s] tools are market leaders in the digital intervention space.” This deal “is going to fill a gap in our product portfolio and help us grow in complementary markets like intervention and early learning.”
Olson shares that sales from digital content made up over half of Houghton Mifflin Harcourt’s overall sales in 2014, a percentage that the company expects to grow if this blockbuster transaction goes through.
Approximately 800 employees in Scholastic’s Education Technology and Services business, including its president, Margery Mayer, are expected to join Houghton Mifflin Harcourt.