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NEW YORK — The president of Standard&Poor's is stepping down just weeks after the rating agency stripped the United States of its AAA credit rating. At the same time, an activist hedge fund is calling for S&P's parent to break into four separate companies to unlock more value for shareholders.
McGraw-Hill Cos., S&P's parent, said that the resignation of Deven Sharma was not related to Jana Partners' break-up proposal or to S&P's polarizing decision to downgrade its rating on U.S. debt. McGraw-Hill named Citibank's chief operating officer, Douglas Peterson, to the S&P job late Monday.
Jana Partners, which had also called for new leadership at S&P, issued a terse response Tuesday to Peterson's appointment. "Recognizing the need for help at S&P will be useful," the firm said in a statement, "but to address years of chronic underperformance for its shareholders McGraw-Hill will need to take much bolder steps."
Representatives from Jana Partners and the Ontario Teachers' Pension Plan, which together own more than 5 percent of McGraw-Hill's shares, presented a 26-slide presentation to McGraw-Hill leaders on Monday.
In the presentation, they said McGraw-Hill should separate into four public companies: the education division, which provides testing and other materials for schools and colleges; the information and media division, which includes the Platts energy analysis unit and the J.D. Power rankings; the financial division, which includes research firm Capital IQ and credit and equity research; and the S&P ratings division.
Jana Partners said that grouping the four businesses together is inefficient and results in heavy overhead costs. For example, the education division, where revenue is falling as school districts suffer from squeezed budgets, takes away from other units where revenue is growing, the firm said.
"Each business has unique strengths and challenges. The question is: What is McGraw-Hill's logic for keeping any of these businesses together?" the firm said in its presentation.
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On Aug. 5, S&P decided to downgrade its rating on U.S. debt, a move that has been both praised and criticized. Jana Partners on Monday said "the recent regulatory and political scrutiny" surrounding S&P "highlights the drawbacks of housing wholly unrelated businesses together and the risks of further delay on addressing this issue."
McGraw-Hill pointed out that it has already made changes meant to bolster the company's value, including plans to sell the broadcast division and buying two businesses to complement Platts. On Tuesday it said it had engaged outside advisers, including Goldman Sachs Group Inc. and Evercore Partners, to help it further review its portfolio.
The company said it expects to announce "significant actions in the next few months to accelerate global growth, align appropriate cost structures and build shareholder value."
McGraw-Hill shares show a small increase for the year. But investors dumped shares after S&P issued the U.S. downgrade, and they're down about 8.5 percent in August, which has been a volatile month in the stock market. On Tuesday, shares rose 2.8 percent to $38.08 in midday trading.
The company declined to comment on Monday's meeting, which occurred hours before Sharma's resignation was announced.
Monday McGraw-Hill CEO Harold McGraw, chief financial officer Jack Callahan, and board member Edward Rust, who is also the CEO of State Farm Insurance, were among the audience at McGraw-Hill's headquarters in midtown New York.
The company said Tuesday that Sharma, 55, had decided to leave months ago, after the company split the S&P ratings agency from its other financial divisions. McGraw-Hill said it had been looking for a replacement since the beginning of the year. It said it announced Sharma's resignation late at night because the Financial Times already had the story.
Peterson, 53, will take over starting Sept. 12. Sharma, who joined S&P about five years ago, will stay on as an adviser at the parent company until the end of the year.
The spotlight has been on S&P for most of August. , which earlier this month sent shockwaves through the stock market when it
The Obama administration has heavily criticized S&P's decision to downgrade its rating on U.S. debt from the highest level, AAA, to the second highest, AA-plus, for the first time. S&P has stood by its decision, and supporters say the agency is merely bringing needed attention to the government's growing debt burden and overspending.
S&P also faces accusations over its ratings of subprime mortgages. The Justice Department is reportedly investigating whether S&P improperly rated dozens of mortgage securities that later turned out to be toxic in the years leading up to the financial crisis in 2008.
The other two major ratings agencies, Fitch Ratings and Moody's Investors Service, still give U.S. debt the highest rating. However, Moody's says its outlook is negative, meaning it could also decide to downgrade the debt.