OTPP and Jana Demand Division of McGraw-Hill

(August 23, 2011) — The Ontario Teachers’ Pension Plan (OTPP) and hedge fund Jana Partners have called for McGraw-Hill, owner of ratings agency Standard & Poor’s (S&P), to be divided into multiple units.

“Public scrutiny of the S&P Ratings business serves as an overhang on McGraw Hill’s valuation…Analysts and investors have accounted for public focus and regulatory scrutiny by applying a discount to the valuation of all McGraw-Hill’s businesses, not just to the S&P Rating’s business,” a Securities and Exchange Commission (SEC) report filed by shareholders said. The filing noted that regulatory and public scrutiny over the ratings unit harms the valuation of the rest of McGraw-Hill, which is under increasing shareholder pressure as it moves to speed up growth.

Earlier this month, with a roughly 2.3% stake in New York-based McGraw-Hill, the OTPP began pressuring the information services company to implement changes that would increase its share price as the Canadian pension searches for higher yield. However, yesterday, OTPP and Jana Partners presented a more extreme plan than that being considered by McGraw-Hill. OTPP has worked with Jana Partners to urge McGraw-Hill to possibly sell its education business — as the company’s units are worth about a third more when separated than they are under McGraw-Hill, according to the Canadian scheme. The two firms said they want to separate the various businesses into a total of four groups: an education business, a media and information arm, a ratings and financial business and an operation for its Standard & Poor’s indexes.

McGraw-Hill “has consistently underperformed its potential and traded at a sizable discount,” Jana asserted in the latest SEC filing.

OTPP’s demonstration of shareholder activism jibes with a report published in November of last year that predicted that pension fund shareholder activism will be on the rise in 2011. A survey by the law firm of Schulte Roth & Zabel and research firm mergermarket.com showed that hedge funds, and, to a slightly lesser extent, pension plans were expected to drive an increase in shareholder activism. The findings in the Shareholder Activism Insight survey reflected a rising level of confidence in shareholder activism since 2008, when the interviews were last conducted.

“Activists should have a good sense of the various investor groups likely to increase their activist activity, and if they’re right then corporate executives are in for a surprise as to the source of increased investor activism — investor groups that formerly were reluctant to utilize activists tools are losing that reluctance,” Marc Weingarten, partner at Schulte Roth & Zabel, said in the report. Citing the Dodd-Frank Act, corporate respondents said the new regulation will not cause them to change their approach to executive pay structures, board composition, or public relations.

The sectors expected to experience the greatest increase in shareholder activism during 2011 in financial services and energy. Additionally, the study showed that among the causes most likely to result in an increase in activism, 54% of corporate executives cited financial performance and 68% of shareholder activists cited excessive cash on balance sheets.