The decision, which has been expected, follows a yearlong review of the company's business. Investors have pushed the New York company to boost the company's stock price, which has dropped by more than 40 per cent since 2006.
The company's S&P ratings agency has been under fire for its recent downgrade of U.S. debt, as well as several bad calls it made leading up to the financial crisis and economic meltdown that began in 2008. The unit's president stepped down last month.
McGraw-Hill said Monday it will also accelerate share buybacks to a total of $1 billion for 2011. It has bought back about half that amount to date.
McGraw-Hill Education will be the new company focused on education services and digital learning, while McGraw-Hill Markets will retain S&P and J.D. Power and Associates, a market research company. It also includes S&P Capital IQ, a provider of data, research, benchmarks and analytics and Platts, a provider of information and indices in energy, petrochemicals and metals.
The markets business expects 2011 revenue of about $4 billion, with almost 40 per cent of it from international markets. The education segment is forecasting revenue of about $2.4 billion for the year.
The company said the split will create more "sharply defined," focused companies that will make it easier for investors to assess their value.
Activist shareholders — the hedge fund Jana Partners and the Ontario Teachers' Pension Plan— have been pushing the company to spin off into four separate companies. Under this plan, the four businesses would have been the education division, the information and media division, which includes Platts and J.D. Power; the financial division, which includes Capital IQ and would include S&P's ratings division; and the index business that includes the S&P 500.
McGraw-Hill had disclosed a strategic review of its business in June, several weeks before Jana and the Ontario Teachers' Pension Plan Board increased their collective stake in McGraw-Hill to 5.2 per cent.
Terry McGraw, chairman, president and CEO of the company, will lead the Markets business. A search has begun for a leader of the education business, the company said. Its board has approved the split.
Shares of McGraw-Hill rose 89 cents, or 2.3, to $39.61 in morning trading after rising as high as $40.44 earlier in the session. The stock has traded in a 52-week range of $29.43 and $45.47.