Terry McGraw's Bad Year

Harold W. McGraw III, more commonly known as “Terry”, is Chairman, President and CEO of McGraw-Hill Companies, publisher and broadcaster.  He is the founder’s great-grandson.

M-H is known widely for the tens of thousands of textbook titles it has published.  With annual revenue of $6+ billion, M-H has some well-known brands under its mantle: The Ryerson Press, Random House, J.D. Power & Associates and, yes ... Standard & Poors.

McGraw-Hill has had a tough go of things for a few years.  It sold BusinessWeek, which has been racking up losses for years, to Bloomberg in 2009.  It has also brought in an an outside company, Evercore Partners, to sell its large Education business.

Now, on the heels of the debt ceiling stand-off and Standard & Poor’s decision to lower the U.S. debt rating to AA+, we learn that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are investigating S&P’s rating practices.  Specifically, federal bodies are examining S&P’s ratings practices as applied to mortgage-backed securities during the financial crisis.

What’s even more interesting is to learn that S&P is conducting its own internal investigation to determine if insiders leaked its intentions to drop the U.S. of its AAA rating.

Just how big a problem does this pose to Terry McGraw?

• For starters, S&P is the rose among the thorns in the M-H fold.  In the second quarter, it represented 30% of McGraw-Hill’s revenue, and contributed over half of its net income (53%).  The performance of S&P is a big factor in M-H’s valuation.
• Speaking of which, immediately following S&P’s shaving of the U.S. debt rating, shares of McGraw-Hill tumbled 8%.  (Film maker Michael Moore even called for Obama to arrest S&P President Deven Sharma.)  Add to this the market volatility surrounding fears of a double-dip recession and the spread of the Euro crisis - it does not make for a good investment climate.
• Finally, there is the matter of the Obama Administration and Congress.  The debt ceiling debate left both sides bloodied (Tea Party-ers perhaps excluded).  No one needed this salt added to their wounds.  So, don’t be surprised if the DOJ and SEC operate in payback mode on this investigation.

Terry McGraw will have his work cut out for him during the remainder of 2011, and well into 2012.