Houghton Mifflin Harcourt is facing pushback from a group of shareholders after the recent announcement that it will be acquired by private equity firm Veritas Capital.

Multiple investment funds and an individual investor have taken a public stance against the $2.8 billion sale, claiming the price tag undervalues the company and fails to give them the payout they deserve.

Engine Capital Management, one of the company’s top 10 stockholders, joined Breach Inlet Capital, Prasad Phatak, and Laughing Water Capital in announcing they will not tender their shares.

And a law firm that represents individual investors announced that it’s investigating HMH for possible breaches of fiduciary duty, alleging in part that the company unreasonably limited competing bids.

“We are extremely disappointed in the [b]oard’s decision to sign a definitive merger agreement allowing Veritas Capital to acquire HMHC for a paltry $21/share,” wrote Chris Colvin, founder and portfolio manager of Breach Inlet Capital in a public letter to the HMH board of directors.

“We do not believe Veritas’ offer fully reflects the fair value of the [c]ompany.”

However, it remains to be seen if the opposition will be enough to force the HMH board to reconsider the merger, which is expected to close in the second quarter.

In response to the pushback, HMH said in an email to EdWeek Market Brief that it “seeks to maintain an open and constructive dialogue with our shareholders and values their perspectives.”

“We are confident that the transaction represents a fair offer, a certain return for our investors, and the highest price reasonably obtainable. We look forward to discussing the rationale for this transaction with our shareholders.”

The HMH board voted unanimously to approve the acquisition, saying in a letter to customers that Veritas will provide “enhanced flexibility and opportunities to increase our impact.”

According to the company’s initial announcement, the $21 payout per HMH share represents a 36 percent premium to the company’s unaffected stock price as of Jan 13.

This sort of dispute over an acquisition is rare in the education sector, in large part because most K-12 companies remain smaller and are not publicly traded. But more broadly, it’s not unusual to have shareholders object during the process of a deal, especially when a company is becoming private, said Adam Newman, a founding partner of Boston-based consulting firm Tyton Partners.

“The idea that there’s a set of investors who believe a company is valued and worth more than what an investor may be willing to pay to take it private, it is not uncommon,” Newman said.

Shift to Digital

Engine Capital, which has a 2.6 percent stake in HMH, along with the other stockholders say the agreement with Veritas undervalues the company because HMH is expected to continue to grow, with a corresponding increase in the value of its stock.

The firm argues that HMH should remain public for those who want to continue owning stock.

“I believe shareholders would be better served by HMHC continuing to stay public and giving management additional time to drive shareholder value,” said Prasad Phatak, who identified himself as a significant shareholder, in a letter to board members.

HMH, which went public in 2013, is one of the biggest and best-known K-12 providers, reporting to serve 90 percent of schools, teachers, and students in the U.S.

The Boston-based company — which specializes in core curriculum, supplemental tools, and intervention solutions — announced a 300-percent growth in digital platform usage in 2020. Over the past few years, the company focused on making the difficult transition from being a publisher of print-based materials to a company capable of delivering myriad forms of digital content.

The company has the ability to double its earnings per share over the next three to five years, raising its stock to more than $55 per share, said Laughing Water Capital, which identifies itself as a significant stockholder, in a public letter.

Some of the shareholders disputing the deal also questioned the timing of the announcement, which came before a fourth quarter conference call during which the company’s management provided information about HMH’s expected growth.

“We would be remiss if we did not consider the possibility that management purposely accelerated this potential transaction in order to prevent stockholders and employees from having access to all of the information,” said Matthew Sweeney, managing partner at Laughing Water, in the firm’s public letter.

A Question of Value

For the most part, investors such as Veritas who are seeking to acquire a public company understand that stockholder pushback is a risk, said Newman from Tyton Partners. The value of a company is subjective, he said, and stockholders invest because they see potential for a company to rise in value.

“The reason why dissenters make noise is because they’re trying to see if they can get a better deal,” Newman said.

However, it’s often the case that by the time an acquisition is announced it can be difficult to unwind, he said. And the interested investor likely knows there are enough supportive votes to approve an acquisition. 

In HMH’s case, the company has many stockholders with smaller percentages of investment, which Newman said could make it difficult to collect enough opposition to meet the threshold for upending the deal.

“If you’re a firm that’s gone through this process — and it’s an arduous process, a lot of time and resources go into it — you’re usually working to manage your risks, inclusive of dissenting shareholders.”

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See also:

• Houghton Mifflin Harcourt Sold to Private Equity Firm for $2.8 Billion
• K-12 Dealmaking: Discovery Education Is Acquired; Savvas Learning Buys Online Math Program
• After a Two-Year Wait, In-Person Education Conferences Are Roaring Back to Life
• Digital Illiteracy Is a Rising Threat. A New Department of Education Program Seeks Solutions