Moody's Investors Service took another look at Riverdeep's credit status, hard on the heels of Ernst & Young's sudden departure. When one's auditors slip out the back door, those who would loan substantial sums of money would like to know why said auditors left so abruptly, and what are those so-called "incorrect representations" all about exactly?
As it turned out, Moody's was comfortable leaving the rating at B3. Not quite the sort of lofty rating one might hope for, but there was no downgrade and Barry O'Callaghan can take comfort in that. Unfortunately for the same gentleman, Moody's stated that the outlook for Riverdeep was not getting any better and would remain negative for now.
Investors want to know about a firm's future prospects, not unlike a potential bride examining her suitor in a Jane Austen epic. So what does our Mr. Darcy of an educational materials company have going for it? Perhaps he is not the one for you, my dear.
The little minnow that swallowed the Houghton Mifflin whale has caused concern amongst the thinkers at Moody's, who continue to be troubled by the company's reported earnings for 2006 (before interest, tax, depreciation and amortization for those of you who follow the markets). Any time a firm comes up short in the expected earnings department, investors tend to flinch and big bankers grumble, loudly.
Moody's is also looking at the future, and they have their doubts that HMRiverdeep is going to deliver on the "synergies" that were projected for 2007. That means that the big, overstuffed minnow might not cut costs and blend the two companies together in a way that results in profits. Big losses are not popular with investors, and the threat of such losses has kept Riverdeep's credit rating in the negative range. On top of all that, Moody's has the notion that Mr. O'Callaghan might be thinking of buying up something else, adding to the debt load, which in turns puts pressure on the bottom line. Interest payments have to be met on time, and if there's no money in the till, the banks go begging. With a threat of loan default looming, B3 is the best that Riverdeep is going to get.
Off to a rocky start, plagued by doubters, but the little minnow hasn't gone under just yet. The question remains, can Barry O'Callaghan pull off what he said he would when he ate up Houghton Mifflin?
4 comments:
There have been some cost cuts in the form of layoffs across all divisions, in the past few weeks. How those cuts will lead to any synergies--or profits, for that matter--remains to be seen.
Synergy is corporate-speak for lay-offs. Reduce the work force and decrease payroll costs, but there's a limit to how many can be sacked.
You'd think the CEO's would have learned something during the last merger frenzy, but then again, the top of the heap usually comes out relatively unscathed.
I live in the Corning (NY) area, home to Corning, Inc. When the telecom bubble burst in '02, Corning -- company and community -- got gobsmacked. The company cut at least a third of its work force worldwide, and its stock bottomed out at about $1/share.
You're right when you say that "the top of the heap usually comes out relatively unscathed." Like most companies, Corning Inc cuts from the ground up, but this was different. On the day the company began cutting the PhDs, a pall settled over the town.
Corning Shattered: "This is worse than the Great Depression. Even then, sales didn't fall 50%," says Houghton, 66. In an unsentimental speech to shareholders in April [2002] at the Corning Museum of Glass, he said, "The coming months are going to be painful. People are going to lose jobs. Communities are going to lose plants and facilities, and this company will be tested."
The company has bounced back -- kinda -- but it will never be the same.
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Depends on which of the "last merger frenzies" you're talking about. Given the age of O'Callaghan and his buddies, they may consider those mergers to be ancient history, unworthy of teaching any lessons.
But as you point out, the top o' the heap usually comes out top o' the mornin'. So their actions may make sense, depending on their desired outcome. The publically-stated goal was to merge print and tech into one solid 21st century corporate entity. Swallowing another huge whale (as rumor says the minnow wants to do) would not contribute to that goal. Though perhaps it would lead to more "synergies"...
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