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McGraw-Hill Cos., challenged by activist investor Jana Partners LLC, said it will split into two companies focused on global markets and education.

The transaction should be completed by the end of 2012 through a tax-free spinoff of the education unit, the New York- based company said today in a statement. McGraw-Hill Markets will include Standard & Poor’s and J.D. Power and Associates and be led by Chief Executive Officer Terry McGraw.

McGraw-Hill, under pressure following S&P ratings missteps that played a central role in the 2008 global financial crisis, as well as last month’s downgrade of U.S. sovereign debt, began a strategic review this year of the company’s businesses. Education revenue fell the past three quarters. Jana Partners, a New York-based hedge fund, said Aug. 1 that it met with company management to discuss corporate structure and future plans.

“Virtually any company with the profile of McGraw-Hill has value that isn’t being reflected in the market today,” Michael Holland, chairman of Holland & Co. in New York, said before the announcement. His company owns McGraw-Hill shares. “When companies have, over the last few years, split themselves up, value has been unlocked.”

As part of the split, McGraw-Hill will seek to cut more than $1 billion of corporate expenses and administrative and technology costs. The company is also searching for a CEO for McGraw-Hill Education, which expects to have revenue of about $2.4 billion this year.

$4 Billion Revenue
McGraw-Hill Markets will include Platts, a provider of information and indexes in energy, petrochemicals and metals. The new company anticipates 2011 revenue of about $4 billion. McGraw-Hill said earlier this year that it would sell its broadcasting group because of the unit’s limited growth prospects.

McGraw-Hill also said it will accelerate the pace of a share buyback plan to $1 billion for the year, with $540.6 million repurchased year-to-date.

On Aug. 5, S&P sent shockwaves through the markets with its decision to downgrade U.S. credit to AA+ from the top AAA rating. Rather than cause a selloff in Treasuries, the move boosted demand for the debt, driving 10-year note yields to a then record low. Treasury Secretary Timothy Geithner slammed the move, as did Berkshire Hathaway Inc. CEO Warren Buffett, who said the U.S. should be rated “quadruple-A.”

McGraw-Hill said Aug. 22 that S&P President Deven Sharma will step down at yearend and be replaced by Citibank NA Chief Operating Officer Douglas Peterson.

123 Years Old
McGraw-Hill, founded in 1888 by McGraw’s great-grandfather, James H. McGraw, earned about 87 percent of its $358.8 million in operating income in the second quarter from S&P and its financial-information unit. The company has been publishing college textbooks since 1927, and it formed the TV unit in 1972.

In 2009, McGraw-Hill agreed to sell BusinessWeek magazine to Bloomberg LP, the parent of Bloomberg News.

Jana Partners, which manages about $3 billion, holds a 5.2 percent stake in McGraw-Hill, together with the Ontario Teachers’ Pension Plan, according to a regulatory filing.

Goldman Sachs Group Inc. and Evercore Partners Inc. advised McGraw-Hill.

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