Barry O'Callaghan

Barry O'Callaghan is an Irish investment banker, businessman, and investor. He is the former chairman and CEO of Houghton Mifflin Harcourt (HMH), and the Chairman of Education Media and Publishing Group (EMPG), the Cayman Island holding company for Houghton Mifflin Harcourt.^[1]

He was the largest shareholder in EMPG on its formation in 2007 with a controlling stake of circa 48%. O'Callaghan created Houghton Mifflin Harcourt, one of the largest educational publishers in the United States, by merging existing companies. Despite the rationale of the merger of Riverdeep, Houghton Mifflin and Harcourt to form HMH, the global financial crisis affected the company by first forcing a restructuring that led to a loss of value of Mr. O'Callaghan's shareholding in EMPG in late 2009, with his holding falling to approximately 22%. Then a further restructuring in early 2010, led to his stake and its value being reduced to 'almost zero'.^[2]

Despite the destruction of $3.5 billion of equity value at EMPG, the conversion of approximately 60% of the debt, over $4 billion, into equity, and massive personal debts of O'Callaghan, circa $400 million, he remained for a short time as CEO of Houghton Mifflin Harcourt, after the completion of the restructuring. In 2011, O'Callaghan stepped down as CEO^[3] and was eventually replaced by Linda Zecher.

On 4 April 2010, The Times described the lending practises at Anglo Irish Bank. The article quotes the new CEO, Mike Aynsley: "hubris played a very, very big part." In many deals, Anglo Irish Bank would lend to wealthy individuals to further their equity participation. In many cases, Anglo took personal guarantees as security. The article in the Times notes that Anglo Irish Bank has large exposures to entrepreneurs such as O’Callaghan.The bank’s security was limited and largely to his shares in EMPG.^[4]

Early and personal life

Barry O'Callaghan was born in Mitchelstown, County Cork, Ireland and educated at Clongowes Wood College, a Jesuit secondary boarding school. He was captain of the school's senior cup rugby team and later, he played rugby for Trinity College Dublin where he studied law in the late 1980s. O'Callaghan met his wife, Geraldine McGeough at Trinity College. They have three daughters.^[5]

According to a quote in the Irish Independent O'Callaghan once described himself as

Career in finance

After graduating in Law, O'Callaghan went into investment banking, starting at Morgan Stanley working in the London and Hong Kong offices. This was followed by a stint at Salomon Brothers in New York, now a part of Citigroup.

In his last investment banking job, prior to moving to the education sector, he worked for CS First Boston, the investment banking arm of Credit Suisse. In this job he met Pat McDonagh, a serial entrepreneur, who founded CBT, now known as Skillsoft, Riverdeep, and Thirdforce, where Pat McDonagh is the current chairman.^[7] Pat McDonagh hired O'Callaghan as the CEO of Riverdeep in 1999, ahead of its Initial Public Offering. At the time, O'Callaghan was 31 years old.

Career in educational publishing

CEO of Riverdeep

As CEO of Riverdeep, O'Callaghan prepared the company to raise money from the stock market. When he joined the company it had 20 employees and no revenues, according to an article by The Times.^[8] In March 2000 Riverdeep raised $150m on the Irish Stock Exchange and NASDAQ. At the time the company had $8 million in sales and was losing money.^[9] Riverdeep's stock price declined in the aftermath of the TMT stock market bubble. O'Callaghan took the company private in 2002.^[10] Following a re-financing of the capital structure in 2006, he became the majority shareholder with a 65% stake with an estimated value of $244m for his stake. This valuation is not adjusted for any debts relating to the stake.^[9]

Chairman of HM Riverdeep

In late 2006, Riverdeep announced that it was in discussions with the owner of Houghton Mifflin to merge with the company. The CEO of Houghton Mifflin, Tony Lucki, was a non-executive director of Riverdeep.

The transaction was completed in December 2006,^[11] with Tony Lucki remaining CEO and O'Callaghan assuming the role of chairman. The new company was named Houghton Mifflin Riverdeep. The old Riverdeep became a division of the new company called Houghton Mifflin Learning Technology. At the time the equity of the combined company was valued at $2 billion, with O'Callaghan and other management owning just over 50% of the company. Again, this equity valuation did not reflect any debts related to the stake.

Some commentators raised concerns about the valuation including Luke Johnson who was the chairman of Channel 4 and Signature restaurants at the time. For example, in an article in the Daily Telegraph he wrote:

O'Callaghan did not agree with criticism of the transaction stating that:

Chairman and CEO of Houghton Mifflin Harcourt

In July 2007, Houghton Mifflin Riverdeep agreed to acquire Florida based Harcourt from Reed Elsevier.^[14] The merged company was renamed Houghton Mifflin Harcourt and was owned by a Cayman Island holding company called Education Media and Publishing Group. Tony Lucki remained CEO with O'Callaghan as chairman. EMPG has to raise additional equity to fund the purchase with the equity value of company estimated to be $2.6bn after the transaction. O'Callaghan's stake was 38% following the transaction, implying a value of circa $1bn, though again this does not reflect any related debt. O'Callaghan is known to have borrowed considerable sums from his personal bankers to cover his equity stake.

In March 2008, the Irish Independent newspaper listed O'Callaghan as the 32nd richest person in Ireland, with €360m of wealth in the annual "Richest 100" list.^[15] The difference between the €360m net worth and $1bn value of his stake in EMPG is driven by debt and currency. Based on a US dollar/Euro exchange rate of 1.58 at the end of March 2008, indicates a dollar net value of $575m for O'Callaghan at the time. With an equity value of $1 billion for his stake in EMPG, this implies that he had circa $400m of personal debt and liabilities at the time.

The Sunday Times rich list for Ireland, published in April 2009 reported similar figures for O'Callaghan to the Irish Independent's 2008 survey, estimating a €348m value for his investment in EMPG. His other investments were estimated to be worth £8m.^[16]

In April 2009 on the retirement of Tony Lucki, O'Callaghan became chairman and CEO of Houghton Mifflin Harcourt.

Chairman of EMPG

In August 2009, the Irish Independent reported that EMPG was in negotiations with its lenders to restructure the company.^[17] As a result of the transaction $1 bn of debt would convert into a 45% stake in EMPG with an implied equity value of $2.66 bn for both the old equity and the new shares combined. As a result of the dilution O'Callaghan's stake was diluted to 20.8% with an estimated value of $555 million, not accounting for related debts.

On 13 January 2010, EMPG announced that it was in advanced negotiations with its lenders about a comprehensive restructuring, that could see a 70% reduction in its debt levels. Interviewed on Irish State broadcaster RTE, O'Callaghan confirmed that he and Irish investors faced huge losses.^[2] He stated that "no-one has lost more than me".

In an interview with the Irish Times published on 15 January 2010, O'Callaghan blamed the troubles at EMPG on the global economic crisis that led to massive deficits at US states who chose to protect jobs rather than education materials.^[18] Revenues for 2009 were 25% below budget with the company's earnings collapsing to $500 m, less than half budget. Discussing the financial structure of Houghton Mifflin Harcourt, O'Callaghan admitted that "the sums didn't work out". Looking back at his deal making that created EMPG, O'Callaghan said, he didn't regret forming Houghton Mifflin Harcourt, but that,

According to the Irish Independent, O'Callaghan and other shareholders are likely to see their investment in EMPG wiped out.^[19] The decline in value of O'Callaghan's EMPG stake to a near zero value does not take into account any related debt. The Irish Independent article notes that he is a large personal customer of Anglo Irish Bank. O'Callaghan admits to having multimillion loans from Anglo Irish Bank and other international banks.^[20] Refusing to confirm the level of his indebtedness, O'Callaghan claimed to still be solvent and stated that he expects to honour all his obligations.

In addition to facing personal losses, numerous Irish-based investors have been affected. Clients of Davy Stockbrokers had invested $475 m in EMPG according to the Irish Times.^[21] Within this group are included the former Chairman of Anglo Irish Bank, Sean FitzPatrick, the head of Claret Capital Domhnall Slattery and Senator Feargal Quinn.^[22]

The Irish Independent article states that O'Callaghan may be forced to resign once the restructuring package is agreed. This is in contrast with his interview with the Financial Times where he insists that he will continue to run the business.^[23]

Though O'Callaghan and EMPG investors are expected to receive nothing for their equity stake, O'Callaghan admitted to the Irish Times that he hoped to gain in the future from a share option scheme at Houghton Mifflin Harcourt.^[18]

On 22 February 2010, Houghton Mifflin Harcourt announced that EMPG and HMH had reached an agreement to restructure the finances of the company.^[24] According to the Irish Times^[25] the investments by the current equity holders of EMPG, including the EMPG and HMH CEO, Barry O'Callaghan, will see their investment of over $3.5 billion written down to zero. The Financial Times reported^[26] no management changes are expects as part of the deal with both the CEO, Barry O'Callaghan and the CFO, Michael Muldowney expected to remain in their roles. A new nine-member board is to be created with the CEO the only executive representative, one independent, two representative of Paulson & Co., and one director from each of Apollo Management, BlackRock, Guggenheim Partners, Fidelity Investments, and Avenue Capital.

On 10 March 2010, Houghton Mifflin Harcourt announced that it had completed its re-capitalization. In addition to a new investment of $650 million of equity, the debt levels of the company were reduced by approximately 60% and the annual interest payments by over 75%. According to the Irish State Broadcaster RTÉ, the old equity investors based in Ireland have lost all their investment.^[27] The Irish Independent reported that the old shareholders were denied a shareholders' meeting to vote on or discuss the restructuring.^[28] The former shareholders have been left with warrants over 5% of the company, in the case its value recovers to previous levels.

Other interests

In addition to his positions at Houghton Mifflin Harcourt and EMPG, O'Callaghan has other investments, in particular in his native Cork with a stake in the Cliff House hotel, a 39 bedroom luxury hotel, in Ardmore, Co. Waterford, an investment in Cliff Town House^[29] a hotel/restaurant in St. Stephens Green in Dublin.

On 15 January 2010, the Irish Independent reported that Valshan, the company that operates the Cliff House Hotel owed O'Callaghan €3.5m at the end of 2008, based on information reported to the Irish tax authorities.^[30] The report showed a drop in accumulated profits in 2008, which may indicate that Valshan lost money in 2008. The hotel is estimated to have cost €20m of investment. O'Callaghan is the sole shareholder in Valshan, whose registered office is at EMPG's office in Dublin.

Political links

In September 2008, Enterprise Ireland, a government agency agreed to pay a €30m subsidy to Houghton Mifflin Harcourt to guarantee that its research and development centre, the old Riverdeep unit, would not just remain in Ireland but increase the size of its workforce. Fianna Fáil's TD, Mary Coughlan, Tanaiste and Minister for Enterprise, praised the deal.^[31] At the time, Enterprise Ireland has a €650,000 investment limit to the amount it was allowed to devote to any project but this limit was ignored.

In late 2009, O'Callaghan was among a number of Irish business leaders invited by Taoiseach, Brian Cowen to the government guest house, Farmleigh, to discuss ways to address the Irish financial crisis.

References