Fresh from its reverse merger with Riverdeep, Houghton Mifflin will acquire Reed Elsevier's Harcourt Education and Trade units for $3.7 billion in cash and $300 million in common stock. (Reed sold the Harcourt Assessment and International Units to Pearson earlier in the year.) The combination is one big K-12 provider.

Three Observations

Antitrust implications. Writing in Education Week online on July 17 Kathleen Kennedy Manzo and Andrew Trotter quote Association of American Publishers Executive Director Jay Diskey to the effect that the deal will leave three publishers – Houghton, Pearson and McGraw-Hill - with something on the order of 80-85 percent of the k-12 textbook market. Textbooks are the bulk of sales to k-12 and these firms also have a significant presence in the other products and services aimed at the classroom that substitute for textbooks and challenge the growth of that segment.

So it is not unreasonable to ask whether and when the industry is going to come to the attention of antitrust regulators at the Federal Trade Commission (The Bureau of Competition is committed to preventing mergers and acquisitions that are likely to reduce competition and lead to higher prices, lower quality goods or services, or less innovation). The topic is certainly worthy of attention from a whole lot of assistant professors at law schools looking for interesting opportunities for research leading to publication - and from there it's often a short leap to litigation. Your editor doubts that too many other sectors of the American economy involving billions of dollars of sales have been permitted such concentration.

To those who think this far-fetched, it may be worth pointing out that in June Thomson Financial reported that the United Kingdoms Office of Fair Trading had "invited comments on the completed acquisition by Pearson PLC of Harcourt Education Ltd from Reed Elsevier PLC. The OFT said it may consider whether the acquisition will result in substantial lessening of competition that would require an investigation by the Competition Commission."

See also, Reuters' Jeffrey Goldfarb on July 16:

One antitrust lawyer knowledgeable about the industry who wished to remain anonymous said the deal will "raise eyebrows" with U.S. regulators because Houghton and Harcourt are among a handful of large publishers who supply school textbooks....Jeremy Dickens, president of Houghton Mifflin Riverdeep, said the companies had studied the antitrust issues. "Our view is that the pro-competitive aspects of this transaction so clearly outweigh any potential negative effects of the combination that we don't envision a substantial problem, if any, with the regulators...."

Value-Add to Investors. How does the new enterprise plan to recoup the multi-billion dollar investment made by Credit Suisse, Lehman Brothers, and Citigroup on behalf of former Riverdeep CEO Barry O’Callaghan, first to acquire Houghton and now Harcourt?

There is nothing magical about the range of strategic choice: Sell high-value parts not central to the strategy of the new enterprise, cut costs, take market share from direct competitors, and expand into new markets,

Since the general point of acquisitions by the major publishers has been to purchase businesses with complementary geography and product lines in order to build a full service offering for schools – and Houghton's July 16 press release suggests this acquisition is consistent with that strategy - the first avenue has limited potential.

Cost cutting also seems limited. Redundancies at headquarters will be eliminated, but the new enterprise is unlikely to end or consolidate the array of valuable brands and well-known imprints it now controls. There may be some consolidation of marketing and distribution, but here again the press release at least implies that the two firms' reach is complementary more than competitive. It may be that O’Callahan believes Harcourt and Houghton are overweight and ready for a trim, but again, this doesn’t seem the opportunity for great savings.

In a mature k-12 textbook market driven more by demographics than anything else, the huge publishers have been trading market share back and forth on the margins for decades. There is really no reason to believe this acquisition puts the market shares of Pearson or McGaw-Hill in great jeopardy.

That leaves emerging markets.

Threat to School Improvement Providers. Maybe there is an international play – see a pretty concise article on the deal in the July 18 issue of  The Australian. In the United States, opportunities for significant growth in k-12 sales focused on the classroom amount to everything but textbooks. In short, the strategic objective must be the emerging the school improvement industry. The three huge publishers have the same strategy; to stem the modest erosion of control over every dollar spent on teaching and learning by moving vigorously into these new market segments – from information, to formative evaluation, to teacher training, to  content other than paper text, to high stakes testing, and everything in between.

Absent a renewal of the federal committment to AYP and SBR as written into NCLB 1.0 in version 2.0, with their incredible brand equity, marketing machines and distribution channels, Houghton, Mc-Graw-Hill and Pearson each have the capacity to leverage their control of textbooks into control of the emerging school improvement segments. Unchecked, the net result will be the market we have today, except with the three giants controlling 85% of the school improvement industry. As a matter of public policy, that's not a desirable future.

The idea that concentration "could create some significant opportunities for some of what might be considered not-tier-one publishers," expressed to Ed Week by Adam Newman of Eduventures, suggesting that the moves of his larger clients (Houghton, Harcourt, McGraw-Hill and Pearson) and work to the advantage of his smaller clients (like Agile Mind Inc.), strikes your editor as wishful thinking at best and more properly, pure spin. The big publisher's merger and aquisition moves over the last 24 months are not on balance a good thing for these tiny school improvement firms.

And this brings us back to the matter of antitrust. The world before NCLB, as well as the more recent Reading First mess, offer reasons to argue that concentration in the k-12 publishing market has led to reduced competition, higher prices, lower quality goods and services, and less innovation - and that mergers and aquisitions that extend the publishers' control to the rest of the k-12 market will do the same.