The Minnow Eats The Whale

Big companies take over small companies. It's logical, given the scale of financial strength in a large firm. That's also how big companies get even bigger, growing into the size of a monopoly...and then the law kicks in and the behemoth can grow no more.

Leave it to an Irishman to reverse the natural order of things. Barry O'Callaghan, the man in control of the publishing firm Riverdeep, is about to swallow Houghton Mifflin. It's all a very friendly sort of take-over, given that the chief executive of Houghton Mifflin, Tony Lucki, is claimed as a friend of O'Callaghan. He was a director of Riverdeep, in fact, so he surely knows what he's getting himself in for. Two of Riverdeep's managers worked with Houghton Mifflin, making the whole deal sound more like a marriage after a decent period of dating. Rather unusual, however, for a smaller firm to buy up another that is worth somewhere in the vicinity of five billion dollars. Riverdeep is valued at around one and one-half billion. Hardly small beer, but unquestionably it's the baby in the family.

Riverdeep is famous for their educational materials, especially software and on-line education items. Houghton Mifflin is big on education as well, but they fear they are being left behind in the age of technology because they only produce books. Bit by bit, the folks at Houghton Mifflin feared they would be last in the race as the Internet took over, with Riverdeep leading the way. And so, the wise folks at Thomas H. Lee, Bain Capital and Blackstone decided that the time was right to unload their investment, which cost them $1.6 billion to buy back in 2002.

Sure and it's a marriage made in heaven. Look for a rise in the cost of schoolbooks next September. Someone's got to pay the interest on Riverdeep's borrowings to pay for the purchase, and it won't be Mr. O'Callaghan or Mr. Lucki.

Technorati tag: Riverdeep, Houghton Mifflin