On Sunday, December 23, the 40-day quiet period on underwriter research on Houghton Mifflin Harcourt (HMHC) following the firm's November 13 IPO will come to an end, allowing underwriters to release positive research information on HMHC into the market and likely providing a temporary boost to the price of HMHC shares. The IPO priced below the expected range of $14-$16 at $12 per share, but saw a quick first day return of 32.2%, and has since fluctuated between $13.74 per share and $18.73 per share; the stock closed at $16.44 on December 16th. See our prior article here.
HMHC's underwriters, including Morgan Stanley & Co LLC, Goldman Sachs & Co, Castle Oak Securities LP, Blackstone Advisory Partners LP, Stifel Nicolaus & Company, BMO Capital Markets Corp, Citigroup Global Markets, Credit Suisse Securities, Piper Jaffray & Co, Samuel A. Ramirez & Company, and Wells Fargo Securities LLC, will attempt to take advantage of the stock's post-IPO success with a release of positive information about HMHC at the conclusion of the quiet period.
Recent academic studies and the results of our past two years of research have empirically provided indications of a positive correlation between the visibility and quantity of underwriters and an increase in the price of a firm's shares at the end of its quiet period.
HMHC's impressive list of underwriters, along with its exceptional name recognition (the firm's S-1 IPO filing noted that the firm believes that it currently reaches every student in the United States at some point during the student's academic career), may yield dividends between now and December 23rd. The rise in price will typically begin several days in advance of the underwriters' research release, as veteran investors begin to buy up shares in anticipation of the price bump. These initial buys generate a perception of demand before the quiet period expires, leading to an early increase in the price of shares.
HMHC is a well-known producer and distributor of educational materials, and claims to currently reach more than 50 million students across more than 150 countries. HMHC is the leading provider of education materials in the American primary and secondary school markets in terms of market share. The firm has a lengthy history of trade and reference publishing, including titles like Curious George, The Lord of the Rings, Carmen Sandiego, Webster's New World Dictionary, The Oregon Trail, The Little Prince, Life of Pi, and Cliffs Notes.
It should be remembered that, despite the serious losses that HMHC has suffered in recent years-the firm lost a shocking $2.1 billion in calendar 2011 and $819.5 million in calendar 2010-its recent IPO did nothing to alleviate its financial problems, as 100% of the proceeds went to firm insiders and the company itself received nothing. However, matters did look much brighter for the firm as it emerged from bankruptcy in 2012, as the firm appeared to be on an upward trend and lost "only" $87.1 million; HMHC lost $46.5 million through the first nine months of 2013. The firm also has awarded its Chief Executive Officer an outsized compensation package, as discussed below under "Management."
HMHC competes with other firms offering educational materials, including McGraw Hill Education, Cengage Learning, Inc., Pearson Education (PSO), K12 (LRN), and Scholastic Corporation (SCHL). The firm faces a new set of competitors in online educational providers as well, such as Chegg (CHGG).
Linda K. Zecher joined HMHC as President and CEO in 2011 after serving in roles with Microsoft (MSFT) including Corporate Vice President of the computer giant's Worldwide Public Sector organization and as its Vice President, U.S. Public Sector and Vice President Public Sector, Americas and Asia Pacific. Ms. Zecher has also served in leadership positions with diverse firms including PeopleSoft, Oracle (ORCL), Texas Instruments (TXN), Bank of America (BAC), and Evolve Corp.
Ms. Zecher's resume is certainly impressive, but we don't believe that it merits her outsized compensation package, especially given HMHC's gratuitous recent losses; in 2012, she received a total compensation of nearly $12 million.
HMHC has performed well on the market thus far, and the company seems to be on a path towards stability. The conclusion of the quiet period should provide a benefit to the stock price as underwriters flood the market with impressive research reports.
However, we worry that the firm's leadership is more closely aligned with its private equity masters and insiders than its shareholders, as evidenced by the IPO's 100% insider proceeds. Nonetheless, it's hard to argue with the type of name recognition that HMHC holds, and its exceptional lineup of underwriters make the upcoming quiet period expiration as good a time as any to buy into the firm.