Wednesday, July 18, 2007

From The Minnow's Accounting Department

Add the three, carry the two, plus one, and the answer is $7.5. Billion.

If HM Riverdeep is allowed to acquire Reed Elsevier's Harcourt division, the newly created entity begins its life with $7.5 billion in money owed to investors. Those who have invested their retirement funds with Davy stockbrokers will of course be keen to recoup their moneys at some point down the road, and Citigroup would not care to go to its Board of Directors with a portfolio of bad loans to be written off. How will the minnow that swallowed two whales manage to keep up the payments?

HM Riverdeep expects to see savings of $70 million out of Houghton Mifflin's management. The bean counters anticipate reduced operating expenses because the merged entity can operate more efficiently as a unit than as separate companies. Just eliminating two or three executives from corner offices ought to accomplish that feat, and Riverdeep has enough high-powered leaders to take over and run things to Mr. O'Callaghan's satisfaction. No need to lay off the lower echelon of employees....

It is also believed that $100 million worth of savings can be squeezed out of Harcourt, and here again one can see how easily that much could be cut from a budget by giving the sack to the suits whose performance proved to be a disappointment to Reed Elsevier. In no time at all, operating expenses are reduced and the composite structure is leaner and faster. Think of the minnow becoming more like a shark.

After cutting out the fat, it's time to generate some profits, because that is what really pays the bills -- and the mortgage. Add the savings projected, factor in some more "revenue synergies", and you're looking at $1 billion (EBITDA). Now that's some real revenue.

HM Riverdeep is counting on Houghton Mifflin to do what they need it to do while various government entities explore the anti-trust potential of the Harcourt acquisition. The minnow has to prove to its investors that it can live up to the promises of reduced operating expenses and increased sales and revenue, and it has to accomplish this goal before the end of the year when the Harcourt sale could be finalized. The investors will be watching, nervous fingers on wallets that can be closed up tight in a flash.

2 comments:

Anonymous said...

As for cutting at the top...many of the top-level "old guard" at the major divisions of Houghton (those who date to Nadir D.'s tenure) have left or been asked to leave in recent months. Those who've had a previous history with Harcourt do not seem as likely to leave.

O hAnnrachainn said...

The employees of Riverdeep are a known commodity, and I believe are less likely to be given the sack. Top level managers could conceivably be promoted to posts at the merged company, at the expense of the old guard who held those same positions.

I can't help but fear that cuts will take place down the chain of command, in a quest to reduce operating expenses. Same old story as any other merger.

At the same time, they can't very well eliminate everyone or there's no one left who knows how to run Harcourt. The difficulty comes in deciding who is critical to operations.