Planned Merger of Cengage and McGraw-Hill Could Remake College-Textbook Market

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McGraw-Hill and Cengage, two of the country’s three biggest textbook publishers, announced on Wednesday that they would merge.

The deal, which some in the publishing industry called not surprising given the financial pressures facing the sector, would create a company with the potential for growing influence over the textbook market. Combined, the two companies would have revenues of more than $3.1 billion and 44,000 titles in a range of fields.

But the all-stock transaction is also expected to draw scrutiny from federal antitrust regulators — “justifiably,” in the words of one publishing insider — and might result in one or both companies’ divesting assets as a condition of merger approval. Company executives said it was premature to comment on how that might play out.

The textbook market is in a period of rapid change. In recent years, publishers have been squeezed by the used-book and textbook-rental markets, as well as the growth of freely available course materials being developed by organizations in the open-educational-resources movement. Unlike textbook publishers such as Pearson (the biggest) and Wiley, which have diversified into services like managing online programs, both Cengage, which is now No. 2, and McGraw-Hill, No. 3, have stayed focused on the textbook market and moved increasingly toward digital products and adaptive-learning tools, such as the Aleks individualized-tutoring system.

The merger is slated to be completed in early 2020. The new company will take the McGraw-Hill name.

Here are a few ways the deal could have an impact on students and colleges.

More variety under bundled pricing. Both Cengage and McGraw-Hill offer subscription models. Cengage Unlimited, aimed at college students in the United States, gives individuals online access to all Cengage texts and related course materials for a single price. McGraw-Hill’s Inclusive Access program, which is sold at the institutional level, ensures that all students in a class have the course materials on Day 1. Universities often incorporate the cost of such materials into their tuition price.

Both companies said they planned to continue and expand those programs to include more content from their combined list of titles. That could make the Cengage Unlimited option more valuable to students because they could have more resources available to them at the same price. It also means the company could offer more titles across more disciplines under Inclusive Access.

But the loss of competition in the market could also give the new McGraw-Hill fewer incentives to control prices on both of those services. In an interview with The Chronicle on Wednesday, Cengage’s chief executive, Michael E. Hansen, said that both companies had used their programs to lower prices and that the new company was “committed to affordability — no ifs, ands, or buts.”

The company wants to build revenue, he said, but believes it can do that by expanding the use of digital textbooks and other products to the 80 percent of students who don’t use digital materials. “We’ll get the growth through volume, not price increases,” said Hansen, who will head the new company.

Digital products account for a growing share of both companies’ sales. Eight years ago, they made up a negligible share of revenue, said Nana Banerjee, president and chief executive of McGraw-Hill. Today they account for 65 percent to 70 percent of revenue in their higher-education market.

More pressure on college leaders to cut smart deals. The merger is likely to accelerate the movement for more publisher-college partnerships that provide students with inclusive access. Publishers negotiate more such deals than colleges do, said Gates Bryant, a former publishing-company executive who now follows the industry as a partner at the consulting firm Tyton Partners. That means colleges could be at a disadvantage when they negotiate.

“Institutions need to be smarter about creating consortia,” said Bryant, to give themselves more clout when they come to the table.

More power for McGraw-Hill in its dealings with its distributors. With a larger share of the textbook market under its control, the company could have a stronger hand when it comes to its relationships with companies like Ingram, Vital Source, and Amazon. It could then pass on those savings to students and colleges. It could also keep more of those savings for itself, but Hansen said the realities of what is still a very competitive landscape would continue to be a force that keeps prices in check.

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.