Companies buy other companies at the intersection of strategy and opportunity. For there to be opportunity, the first requirement is a willing seller (hostile takeovers are truly rare and not likely to occur in scholarly publishing). The second requirement is the ability to finance a transaction, which tilts the playing field to the for-profit entities, which have greater flexibility in approaching capital markets. As for strategy, it’s important to recognize that companies don’t acquire other companies willy-nilly: there has to be a rationale or investment thesis to explain why two entities are worth more together than they are on their own. Both strategy and opportunity have now moved into position for large scholarly and research publishers to consider acquiring college textbook publishers, which would reduce the number of publishers overall and result in much greater industry consolidation. The investment thesis centers on the “inclusive access” business model for textbooks and the place libraries are likely to play in facilitating the advance of that model.
Let’s examine the players as they walk onto the field. On the acquiring side we have the large entities that are the focus of so much attention here on the Scholarly Kitchen: Elsevier, Springer Nature, and their ilk. The targets are the Big Five of the textbook world: Pearson, McGraw-Hill Education, et al.
|Scholarly/research Publishers||College Textbook Publishers|
|Springer Nature||McGraw-Hill Education|
|Informa/Taylor & Francis||Cengage|
You can pad out the list of research publishers a bit — add Wolters Kluwer, for example, which is no stranger to mergers and acquisitions — but it would be a stretch because the strategic rationale is not in place, and you could even consider putting Oxford University Press and the American Chemical Society on the list, giving us some not-for-profit participants. But OUP, which is a billion-dollar company, is not structured to do mega-deals, and ACS would have to think hard about leveraging its balance sheet to swallow even the smallest of the college players (Macmillan). There is little room to add names on the textbook side, as the five listed here overwhelmingly dominate the U.S. market, with perhaps 85% of new book sales among them. It is noteworthy that only Wiley appears in both columns, which will invite bankers to pitch the company with a Hollywood-worthy PowerPoint deck, arguing in the morning that it should be a buyer, and in the evening that it should be a seller.
The investment thesis arises from the emergence of inclusive access (which I wrote about here) and the horizontal strategy, as my colleague Michael Clarke terms it, of the large research publishers. In inclusive access institutions take on some of the responsibility for provisioning textbooks for students, and the management of these arrangements increasingly lies with the library. This makes textbooks a new product category — in addition to journals, books, and databases — for publishers that mostly service libraries. In the horizontal strategy, which can only be played by the very largest publishers, the aim is to increase market share with libraries, to the detriment of the many smaller publishers who fight, with diminishing effect, for libraries’ attention. For Elsevier to acquire Cengage or McGraw-Hill, the rationale would simply be that this would further increase Elsevier’s leverage with libraries. And this in turn would lead small college publishers, just like small journal publishers before them, to seek the embrace of a major publisher, in order to maintain access to the marketplace.
If the name of the game is to have a dominant market share in academic libraries, why don’t the major STM publishers simply acquire more commercial journal publishers? They would if they could. The fact is that there are not many publishers left to buy; they have all pretty much been gobbled up already. The major publishers would also like to acquire the programs of society publishers, but for a number of reasons (which may be the subject of another post), societies resist the outright sale of their publications, choosing to license rights to a major partner for a limited period of time (typically 5-7 years) instead.
This is part of the reason that over the last few years mergers and acquisitions activity has moved from making deals for publishers to making deals for workflow and tools providers — because of the availability of commercial properties in this area (e.g., BEPress, Mendeley, colwiz, SSRN). Another rationale for these deals is that these workflow acquisitions typically open up a new revenue stream that does not derive from a library’s materials budget, thereby enabling growth in the academic sector without further straining library budgets. With inclusive access of college textbooks, research publishers add revenue that does not come out of the library’s budget (typically students pay for the texts when they sign up for a course), but is managed by the library: a perfect set of conditions for consolidation, market dominance, and eventual creeping price increases.
If one deal of this kind were to be consummated, we may see a domino effect. If Wiley moves first, Elsevier and Springer Nature may feel pressure (from Wall Street, if not from their own strategic outlook) to move in this direction, too. Whether a transaction of this kind will pay off is unknown, but the pressure to grow in a mature market makes management teams court big risks. There is, of course, nothing to stop the large college publishers from playing the role of the acquirer — some of these companies are very large — though the strategic reason for such a deal may not yet have arisen for them.
Of course, as big as a deal between, say, Taylor & Francis and Cengage may seem to those of us who toil in the tiny market for scholarly publishing, the upper bound of a deal, or a series of deals, could change drastically if a new category of buyer gets interested in this market. What if Microsoft decides to build out its Microsoft Academic experiment by acquiring T&F on Monday, Wiley on Tuesday, and Springer Nature on Wednesday? That’s lunch money for Microsoft. Or if IBM’s Watson develops an appetite for primary research? Down the hatch goes Elsevier’s unparalleled collection of full-text scientific articles. Heck, Watson is so smart that it could do the deal itself, without the help of bankers or even the approval of the IBM management. We should not assume that the scholarly publishing market as constituted today will be with us forever.