Laughing Water Capital, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. Laughing Water Capital “LWC” returned approximately -12.5% in the first quarter of 2022 after all fees and expenses. As always, results will vary based on the timing of your investment, which fund you are in, and which class you are in, so please check your individual statements for a more accurate reading on recent performance. The SP500TR and R2000 returned -4.6% and -7.5% during this time period. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, Laughing Water Capital mentioned Houghton Mifflin Harcourt Company (NASDAQ:HMHC) and explained its insights for the company. Founded in 1880, Houghton Mifflin Harcourt Company (NASDAQ:HMHC) is a Boston, Massachusetts-based education technology company with a $2.6 billion market capitalization. The stock closed at $21.03 per share on April 19, 2022.
Here is what Laughing Water Capital has to say about Houghton Mifflin Harcourt Company (NASDAQ:HMHC) in its Q1 2022 investor letter:
“Houghton Mifflin (NASDAQ:HMHC) The most notable events for our portfolio over the past quarter were related to our investment in Houghton Mifflin, our K-12 curriculum business, which I detailed in a slide deck last September. In mid January Bloomberg reported that HMHC was exploring a sale. Believing that HMHC could be worth as much as $30 per share to a strategic buyer and with shares trading around ~$18, I brought HMHC to max position size for us. In late February it was announced that private equity firm Veritas Capital planned to buy HMHC through a tender offer for $21.00 per share. In my view this price was woefully inadequate, and I issued a letter to the Board explaining my reasoning. Three other shareholders also publicly objected to the transaction, and when the Tender Documents were made public, it became clear to me that the process to sell HMHC was flawed. Specifically, in the early rounds of the sale process, HMHC presented potential buyers with a set of financial projections that were in my view non-sensical, only to later present a revised set of financial projections that were significantly improved. However, all but 2 potential buyers had dropped out of the process before the updated projections were made available, and these other potential buyers were not presented with the updated projections.
My early diligence on HMHC suggested that the board of directors, which is made up primarily of education types rather than business types, was weak, and that the management team had outsizedinfluence with the board. I cannot know for certain, and I am certainly not making any accusations, but it seems possible that HMHC’s management team deliberately ran a sale process with flawed projections so that they could remove themselves from the public markets, regardless of price. When one considers that it is not uncommon for management teams to earn 5-10% of the value of a private equity transaction, it seems possible that HMHC’s management team chose to earn ~$100M for themselves rather than maximize the value of the business for the benefit of all shareholders. I am quite confident that the private equity buyer will ultimately make billions of dollars by combining HMHC with another of their portfolio companies, Cambium Learning, and eventually taking the combined business public once again. Making this even more painful for us, all of our considerable gains in HMHC will now receive short term treatment from the IRS.”
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Our calculations show that Houghton Mifflin Harcourt Company (NASDAQ:HMHC) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Houghton Mifflin Harcourt Company (NASDAQ:HMHC) was in 32 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 27 funds in the previous quarter.
In February 2022, we also shared another hedge fund’s views on Houghton Mifflin Harcourt Company (NASDAQ:HMHC) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.
