Can John Paulson Save Houghton Mifflin Harcourt from Doom?
Out of Control
O'Callaghan was quick to assert his lack of fault and his own substiantial losses. "Nobody has lost more on paper than I have," he told the Financial Times. "Obviously I'm disappointed for my fellow shareholders, but I can't be blamed for things I can't control, and unfortunately state budgets are things I can't control. I looked very smart through September of 2008." But his desire to acquire and to overleverage while the economy was spiraling downwards made overall debts balloon that much more, leaving him vulnerable to a massive company collapse.
That's where Paulson comes in. The FT reports that Paulson has bought up the bulk of EMPG's debt and will emerge as its main shareholder. The plan appears to be risky but elegant: With existing stockholders and the balance sheet tidied up, EMPG can then start selling new stock to new investors, who will contribute the $600 million necessary to get things working smoothly. Paulson told HMH employees, "With the dramatic reduction in debt and injection of new capital, I believe Houghton Mifflin Harcourt is well positioned."
Indeed, HMH may emerge from this debt-ridden mess with its heart still beating, ready to conduct business as usual. (In keeping with this motif, O'Callaghan will stay on as the head of the restructured company.) But O'Callaghan and CFO Michael Muldowney's plea to company employees not to "allow yourselves to become distracted by speculation or rumors in the marketplace" doesn't look to be heeded anytime soon -- especially if the restructuring plan fails to stem the bleeding debt after all.