Will Marj stay in charge?
By Kate Bulkley
Sept 19, 2001
Shares in the publishing giant Pearson have been hammered by the slump in advertising and fallout from the burst dot.com bubble, but charismatic chief executive Marjorie Scardino believes the educational divisions will protect her long-term strategy for the company.
Any business caught up in the violent attacks on New York and Washington will be changed forever, and London-based Pearson is among them. One of its US units, The New York Institute of Finance, and its distance-learning unit FT Knowledge, had their offices on the 17th floor of the north tower of the World Trade Centre. Fortunately, all 65 of the Pearson "family" got out in time and are accounted for.
The day after the attacks, the chief executive Marjorie Scardino sent one of her internally famous "Dear Everyone" e-mails. "I want to make sure you know that our priority is that you are safe and sound in body and mind," she wrote. "Be guided by what you and your families need right now. There is no meeting you have to go to and no plane you have to get on if you don't feel comfortable doing it. For now, look to yourselves and your families, and to Pearson to help you any way we can."
The note was heartfelt at a difficult time, but it was also typical of how Mrs Scardino, the only woman heading a FTSE 100 company, communicates directly. She has created an inclusive culture at Pearson that may stand the company in good stead in the next few fearful months. "She is Marjorie to 28,000 people," one Pearson executive says. Also more colloquially called "Marj in charge".
Until the recent dot.com downslide, the "Marj factor" was one of the distinct advantages that Pearson had over its rivals. Mrs Scardino, who became chief executive in 1997, dislikes taking the limelight, always sharing credit with her executive team, but it is Mrs Scardino the City watches. Inside Pearson she has championed employees owning company stock from a level of about 20 per cent in 1996 to 96 per cent. "They all know my e-mail address and I encourage them to write all the time," she says. "So when the stock goes down I get a lot of, 'Marj what are you doing? Get the stock up'."
She must have had a lot of e-mails recently. Rocked by a shrinking advertising market and the fallout from the tech and dot.com bubble bursting last year, Pearson shares have taken a beating, falling almost 60 per cent since the beginning of the year and 22 per cent down relative to the Dow Jones Euro stock index. Pearson shares have also underperformed the FTSE Euro 300 index by 45 per cent since the 2,301p peak in March 2000.
Because Pearson had been trading at a healthy premium to peers such as Reuters and Reed Elsevier, it took a harder hit and the pain may not be over. The FT Group, which publishes the Financial Times, has had to grapple with what Mrs Scardino says is the biggest advertising downturn in a decade, with the result being that its profits will likely decline 15 per cent compared to last year. Pearson's 22 per cent stake in TV group RTL Group is also being hurt by the ad downturn. RTL is expected to announce today full-year earnings before interest, tax, depreciation and amortisation to be 10 per cent to 15 per cent below the pro forma £555m reported in 2000. Mrs Scardino's response to the anaemic share price is that she is working for the long-term future of the company as well as the short-term stock price.
Pearson is better protected from the ad-downturn than some, because advertising represents only 10 per cent of its revenues and 20 per cent of the profits. Like others in the telecoms, media and technology sector it has being dragged down somewhat indiscriminately. "No one is looking at individual companies right now," says Meg Geldens, media analyst at Merrill Lynch. "They are just playing the sectors to limit the damage in this market."
At Pearson's half-year results report in July, Mrs Scardino told reporters: "The combination of our businesses will protect us." Only about 30 per cent of Pearson's business –The FT Group and RTL Group – is impacted by the cyclical advertising business. Today 70 per cent of Pearson's operating profits come from its educational and publishing businesses, including its Penguin books division, which is still in the process of integrating Dorling-Kindersley, the UK-based children's book publisher it bought last year. Three-quarters of Pearson's education business is in the US, where it expects to exceed the expected market growth rates. The consumer publishing market is growing at 5 per cent, but Pearson's publishing business has outperformed that by several points, partially due to a remarkable hit rate for new authors.
In publishing it is all about finding and promoting new talent. Penguin has big hopes for its third Naked Chef cookbook by Jamie Oliver. The first two have sold 2.6 million copies since 1999. Mrs Scardino also thinks that even in a down economy, there are ways to grow new revenues on both the consumer publishing and educational publishing sides by having them work more closely together.
But since last Tuesday some analysts are saying that a US recession could be longer and deeper than originally anticipated, which could impact on the most stable part of Pearson's portfolio. "Education has been the primary concern of US politicians for several years," says Colin Tennant, equities analyst at Lehman Brothers in London. "But there is now a focus on security, so education may get put on the back-burner." Mr Tennant is keeping his buy recommendation on the stock because "knocking a couple of points off [the growth] won't make any real difference to our view of the company". Besides, education budgets in the US are nearly all done at the state and local level.
The US testing company National Computer Services (NCS) that Pearson bought for $2.5bn in July last year, is expected to grow in the mid-teens annually. There could also be an upside for the testing business if a bill calling for compulsory national testing before the US Congress is passed. The legislation could pump at least $400m into school testing, representing a doubling of that market by 2004-2005. Mrs Scardino says: "Right now our testing business's profits are up 26 per cent [in the first half] and that doesn't have any of this new federal government spending in it."
She believes NCS, which controls about half the US market for state-level school testing, is an integral part of Pearson's education vision and a way to take its textbooks sales and other educational businesses into the 21st century, namely online. "Forty per cent of US schools run an NCS system," Mrs Scardino says. "It is the student management system, it has all the student data, creates schedules, collects the grades and every test they have ever had and on and on." The vision sounds convincing, but not all analysts think US schools will embrace mass online education and testing as quickly as Pearson believes. Mrs Scardino's view of education and business information is tightly wound with what many observers see as her biggest gamble: internet investments. After a modest £39m spend two years ago, she upped the ante last year to £196m. The dot.com crash and loss-making FT.com forced a re-think and should cut the investment in 2001 to £140m. This is still high, say some analysts, but Mrs Scardino adds: "The ability to develop, manage and disseminate online business data and news analysis is pretty fundamental. People laugh at others going around getting their stock portfolios and news flashes on their phones, but I can tell you, people are doing it."
Pearson's internet cutbacks were felt mostly by the consumer education portal Learning Network (LN) and FT.com. LN's focus was reduced to school-age children only, and 40 jobs were lost at the FT online service. Pearson has set the end of 2002 as break-even for FT.com and the end of 2003 for LN, although some analysts are sceptical. But Mrs Scardino defends her internet strategy. "Our attitude to the internet has not been to follow fashion but to see how it can help us grow our business."
When Mrs Scardino, 54, was first appointed to run Pearson, the City of London was nervous. She had been running The Economist, half-owned by Pearson, but the blond Texan with just a trace of a southern accent was a far cry from Pearson's male, pin-striped past. "Before Mrs Scardino cleaned house, Pearson was a mini-conglomerate of trophy assets without much strategic vision," says one London banker. She sold Pearson's unwanted assets, including Madame Tussaud's wax museum and a stake in Lazards investment bank, and made strategic buys starting with Simon & Schuster's education business in May 1998, kick-starting the conversion of Pearson into one of the world's largest education and publishing companies.
She also triumphed in a complex television deal with Bertelsmann that gave her a stake in RTL Group and improved the newspaper side of the business through expansion into Germany and with the US edition. Since 1997, the FT's circulation, not including FT Deutschland, has grown to 500,000, up from 300,000 when she became CEO in early 1997. The question marks over her leadership of Pearson now are mainly about how she will execute the strategic vision put in place over the past four years. Mrs Scardino has been delivering double-digit earnings growth since she arrived, but unless there is an upturn in the economy, 2001 will likely miss those levels.
Mrs Scardino has put together a good group of assets and a formidable management team that clearly enjoys working together. But she may have to rely on her compelling personality to ride this storm. It helped overcome the City's early nerves after her appointment and now it needs to work again, but in a much more challenging economic environment and with a slumping stock price. Mrs Scardino, an advocate of life-long education, is already finding a way to turn her empathy for America's terrorist atrocities into a tasteful plus for Pearson. The Learning Network this week added a new option to its list of topics – how to talk to your children about disasters.
Market Capitalisation: £6.2bn
Half-year 2001: £5m, compared to £4m loss the year before (education profits all come in the second half of the year)
Key businesses: Publishing company specialising in education, business, financial information and consumer books. Its biggest brands are the FT, Penguin, Dorling Kindersley, Prentice Hall and Scott Foresman
Key executives: Marjorie Scardino, chief executive; Lord Stevenson, chairman; John Makinson, finance director and chairman of Penguin; Peter Jovanovich, chief executive Pearson Education; David Wan, president Penguin; Stephen Hill, chief executive FT Group; David Bell, director for people
Shareholders: Capital Group of US (6 per cent); Telefonica of Spain (5 per cent)
THE BUILDING OF A WORLD-CLASS PUBLISHER
1844: Pearson founded as a small construction firm
1882: The company moves its HQ to London and is among the country's leading construction firms
1888: Financial Times launched
1908: Pearson is involved in building tunnels under New York's East and Hudson rivers
1920: The company moves into media, buying a group of UK regional newspapers
1936: Penguin founded
1942: Addison Wesley founded
1957: Pearson acquires the Financial Times
1969: The company floats on the London Stock Exchange
1970: Penguin acquired
1985: Financial Times starts printing in the US
1988: Addison Wesley acquired; Financial Times acquires Les Echos and Expansion magazine (France)
1993: Pearson TV created with acquisition of Thames TV
1995: FT.com launches
1997: Marjorie Scardino becomes CEO; Launch of US edition of Financial Times
1998: Tussaud's Group sold for $528m; Simon & Schuster bought for $4.6bn, making Pearson the world's largest educational publisher
1999: Lazard's stake sold for $615m; Acquires stake in Recoletos (Spain); Joint venture with Wall Street Journal to launch Russian business newspaper
2000: FT Deutschland launches; Dorling Kindersley acquired for $466m; Pearson TV merges with broadcasting assets of Bertelsmann and CLT-UFA to create RTL Group and Pearson assumes 22 per cent stake; acquires National Computer Systems for $2.5bn to become an integrated education company; NYSE listing (August)
2001: Financial Times and Carphone Warehouse launch FT Mobile; Bertelsmann takes majority control of RTL Group, increasing its stake to 67 per cent; Financial Times reaches 500,000 circulation worldwide; Andrew Gowers succeeds Richard Lambert as Editor of the FT; NCS wins online school testing contract in US