Barry O'Callaghan and Ripplewood Holdings were involved with three of the biggest acquisitions in publishing circles since 2006, but the combination of recession and heavy debt loads has forced the two to dramatically alter their financial positions in the publishers they bought. O'Callaghan, through his ownership of Riverdeep, led the 2006 purchase of Houghton Mifflin and a year later the acquisition of Harcourt from Reed Elsevier. Riverdeep paid $1.75 billion for HM (plus taking on $1.61 billion in debt) and $3.7 billion (plus $300 million in stock) for Harcourt, most of it with borrowed money that contributed to a $7.6 billion debt. Ripplewood's purchase of Reader's Digest for $1.6 billion, also mostly with borrowed money, left it $2.1 billion in debt. Both companies had hoped to be able to repay loans by slashing expenses, but despite cutting hundreds of jobs, selling off or closing noncore assets and widespread restructuring, both were unable to service the debt.

In a memo August 14, O'Callaghan notified employees that the company had reduced its debt by $1 billion as a result of an agreement with HMH's lenders to convert their debt to a minority equity position in the company. The deal diluted the existing shareholders' stake by about 45%, including O'Callaghan's, whose stake in HMH declined from about 40% to the low 20% range (keeping him the largest shareholder). The agreement also reduced HMH's annual interest payment by $100 million. O'Callaghan said the refinancing gives HMH “a more appropriate capital structure with the underlying liquidity to support our company's long-term strategic plan and business objectives.”

HMH can use all the financial wiggle room it can get since sales for the total elhi market are projected to decline by about 15% in 2009, according to the Book Sales Index compiled by the Institute for Publishing Research and PW. An HMH spokesperson said that the company's trade division was performing better than the elhi operation this year, although he said the elhi group is increasing market share in a down year. In an interview with the Financial Times, O'Callaghan said once again that the trade and reference group is not for sale, a fact repeated by the HMH spokesperson last week. In his memo, O'Callaghan wrote that the HMH trade and reference group “continues to shine,” citing in particular the current success of The Time Traveler's Wife. O'Callaghan also said that HMH's international business has grown “dramatically,” with gains in China, India and with the Department of Defense schools; international sales are expected to grow at a 20% annual rate. Domestically, O'Callaghan was optimistic that the focus HMH has put on combining technology with content will pay off in a major way in 2010 as federal stimulus money—which demands more technology and innovation in educational materials—begins to hit; HMH has more than 500 educational titles in digital format. And while the integration of Houghton Mifflin and Harcourt resulted in deep job cuts (a document used by HM to drum up support for the Harcourt acquisition said it expected that 70% of cost savings would come from headcount reductions by eliminating overlapping positions), the HMH spokesperson said no more widespread layoffs are anticipated in the foreseeable future.

While O'Callaghan still remains in charge of HMH, Ripplewood is giving up any role in RD as part of its refinancing deal. The form of RD's restructuring is similar to HMH's in that lenders are trading debt for equity, but the RD deal, which will cut its debt from $2.2 billion to $550 million, will wipe out Ripplewood's investment. J.P. Morgan Chase will take control of the company, and Mary Berner will remain as CEO (earning $125,000 per month). In several published interviews, Berner said the core operations of RD were performing well and blamed the company's financial problems mainly on two divisions it has sold—Books Are Fun and QSP (Books Are Fun was one of the worst deals in book publishing history, with RD paying $380 million for it and selling it back to the original owner for $17.5 million). Sales for the fiscal year ended June 30 are expected to be down in the low single digits; for the first nine months of the year, revenue was off 8%.

As part of the refinancing, RD will soon file for prepackaged bankruptcy, a move that does not affect its international operations. In January, RD laid off about 8% of its workforce, but no more layoffs are expected.