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McGraw-Hill surprises analysts with purchase of J.D. Power

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Viewed as a cautious company in business media circles, the McGraw-Hill Cos. made an uncharacteristically bold move last month in agreeing to acquire J.D. Power & Associates for an estimated price of $350 million to $400 million. Some observers compared the move to McGraw-Hill's successful purchase of Standard & Poor's in 1966, which provided momentum for the corporation's transformation from a publishing operation to an information-based company.

"I think it's the kind of thing that McGraw-Hill can run very well," Robert Crosland, managing director of media investment bank AdMedia Partners, said of J.D. Power. "They have a lot of ways they can leverage the J.D. Power name in vertical markets. Essentially what they are is a ratings business, which McGraw-Hill is very familiar with through Standard & Poor's."

"I'd love to draw that analogy," said Scott Marden, president of McGraw-Hill's information and media services unit, with which J.D. Power & Associates will be integrated. "This is the first significant brand we've acquired since we acquired Standard & Poor's."

Initially, McGraw-Hill's announcement seemed to puzzle some observers. "The two main acquisitions last year were clear strategic fits [Capital IQ and Grow Network], while the J.D. Power acquisition is not as obvious a strategic fit, in our view," said a report written by Lauren Rich Fine, first VP at Merrill Lynch, and others.

Currently, J.D. Power generates about $150 million in annual revenue, selling its ratings data to consumers and businesses. It made its name collecting ratings information in the automotive industry, and about 65% of its revenue still originates from that sector.

J.D. Power has expanded to serve the finance and insurance, health care, construction, telecommunications and energy industries. It has also announced it will begin conducting customer satisfaction surveys of the after-sales service and support of technology products. Additionally, J.D. Power generates 22% of its business from overseas, with about two-thirds of that coming from Asia.

"In the McGraw-Hill Cos., we have found an ideal partner that will provide our firm with the best opportunity to extend J.D. Power & Associates' reach globally and into new vertical markets," J.D. Power III, founder of the firm, said in a statement.

Marden sees opportunities to sell marketing information to businesses served by BusinessWeek as well as McGraw-Hill's construction, aviation, energy and health care publishing and information units. For example, he said, McGraw-Hill could sell J.D. Power-branded marketing information on consumer satisfaction with home builders in its construction group or with airlines in its Aviation Week unit.

Although some observers considered the price McGraw-Hill has agreed to pay for J.D. Power to be high, they acknowledged that McGraw-Hill's perspective in making the deal was long term. In the short term, McGraw-Hill estimated that its acquisition of J.D. Power, Capital IQ and Grow Network will dilute its earnings this year by about 6 cents to 7 cents per share, and 3 cents per share in 2006.

McGraw-Hill's share price has declined since the announcement of the J.D. Power deal. On March 7, the day the deal was announced, the share price closed at $95.40. The share price was around $88 late in the month.

Despite her initial reservations, Merrill Lynch's Fine said the deal ultimately makes sense, especially considering McGraw-Hill's track record with acquisitions. "We do not view this acquisition as a natural extension of [McGraw-Hill's] existing assets in the information and media segment; rather, it seems to signal an intention to expand in the marketing information area," she wrote. "If so, this would answer the often-asked question of what [McGraw-Hill] would do to build up its information and media segment, the smallest of its three segments."

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