A textbook case: Publisher sues Houghton Mifflin Harcourt after deal

A rule of thumb for companies preparing to strike a deal: if you're going to do business together, it's probably not such a great idea to undermine your new colleagues before they've handed you a pot of cash from them. But a $20 million breach-of-contract suit filed yesterday by Cengage, the textbook company formerly known as Thomson Learning, complains of some dirty pool by publisher Houghton Mifflin Harcourt, which unloaded its college textbook division to Cengage last year for $750 million in cash.

Cengage's 14-page complaint charges that, prior to the closing on May 30, 2008, HMH "dramatically increased sales of its college textbooks in an unprecedented manner (particularly in India, South Korea and Taiwan)," with full knowledge that the "unprecedented" sales spike that inevitably followed suit would flood the American market through "unauthorized distribution channels." Meaning that HMH would make a killing on export sales -- and deprive Cengage of post-deal revenues.The suit is the latest blow against Houghton Mifflin Harcourt, a 167-year-old Boston-based publishing company that's spent the last two years in a flurry of mergers and acquisitions that it couldn't afford. In 2007 -- back when it was still Houghton Mifflin -- the company was bought by Dublin-based conglomerate Rivergroup for almost $1.8 billion. By July 2007, the new parent company, now Education Media & Publishing Group, spent $4 billion in cash and stock to buy competitor Harcourt, merging it with Houghton Mifflin -- with painful, money-bleeding results.

The debt load ballooned, several rounds of massive layoffs occurred, and, in a particularly low point last December, the company put a halt on acquiring books: an unprecedented move even for an industry rocked by bad news. Houghton Mifflin Harcourt even tried to sell its trade division -- publisher of Philip Roth, Umberto Eco, and Nobel Prize-winner Jose Saramago -- to alleviate the almost $7 billion in total debt. There were no takers, and the offer was abandoned in May.

But 2008's Cengage-Houghton alliance heralded a rosy future, where the merged college-textbook divisions could expand "the distribution of Cengage's titles into the high school Advanced Placement market in the United States."

Things turned sour, though, as Cengage now accuses HMH of operating "in blatant breach" of their asset-purchase agreement, which had HMH promising not to behave "outside the ordinary and normal course" of its college-textbook business and to indemnify Cengage for any losses that could arise from international sales.

A Houghton Mifflin Harcourt representative says, "The claims are baseless, and we will defend ourselves vigorously."
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