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Managing Reed Elsevier's About-Face

In 1999, everyone seemed to hate Reed Elsevier (RUK). The Anglo-Dutch publisher had two competing boards, underperforming units, and a stock price that seemed to only go down. Enter Crispin Davis, a Procter & Gamble veteran and former head of media-sales giant Aegis Group.

As CEO, Davis has turned Reed from a stock market dog to a darling. In 2000, it traded around $24 a share. As of June 25, it's in the $38 range. The turnaround is due in part to an impressive performance from its Lexis Nexis news- and legal-database operations as well as its year-old acquisition of U.S. publisher Harcourt General.

Davis recently chatted with BusinessWeek Associate Editor Diane Brady about the changes he has made since taking over, how the company's business model helps it succeed on the Web, and his outlook for the business. Following are edited excerpts from their conversation:

Q: Three years ago, your position was cast as the job that nobody in their right mind would want. Even you hesitated at first. What made you decide to take it?

A: Reed has always been a fascinating business with great assets and leadership positions in science, legal, and business-to-business [publishing]. That attracted me. What was unattractive was the corporate structure -- you had two boards, two chairmen, two chief executives. It had become an impossible working model. Once they had one chairman, one board, and were looking for one chief executive, that changed the situation.

Q: That was all it took?

A: I quite like turnaround situations. This was a company that had strong assets and a strong market position but -- how shall I put it? -- some cracks as well.

Q: What were the cracks? I noticed you replaced 11 of the 12 top managers when you came in.

A: We did need some new management in the company. That was probably our top focus for the first 12 months. In that first year, I did more than 110 interviews.... Below the top level, there was extraordinary commitment, [as well as] frustration and desire to make things happen. Once we got the senior management right, we unleashed a lot of energy.

Q: Tell me about the key parts of your strategy.

A: The most fundamental decision was to focus on the four core businesses -- science, legal, business-to-business, and education. At the time, it was thought we should break the company up, but I thought they were all great assets we could grow. There were two gaps: medical publishing and U.S.-schools education. Harcourt was the ideal acquisition that filled the gap perfectly.

Q: You've had to integrate the science and medical sides of Harcourt with the rest of your operations. How has that progressed?

A: It has gone very well. Overall, Harcourt is accelerating Reed Elsevier's growth. We've put the two science businesses together, and we'll deliver about $20 million in synergies there. On the medical side, we put in new management [and] a much stronger publishing program. We've reorganized the sales force. Last year, their growth was running at around 2% and our goal is to get it to 7% or 8%. I think we'll do it.

Q: With education publishing in general, you've seemed very bullish. Certainly, you're more optimistic than Marjorie Scardino of Pearson or my boss, Terry McGraw [head of The McGraw-Hill Companies, which owns BusinessWeek].

A: Over the medium to long term, the U.S.-schools education market is attractive. If you look at the last 5 or 10 years, it has grown between 6% and 9% a year. This year happens to be a low. Next year and the year after that will be much stronger.

There were concerns three or six months ago that, with the economic downturn, states would cut spending. But generally textbook expenditures aren't going down. In some states, they're going up.

Q: Have you had any aspirations to move beyond your business mix into more consumer-focused publications?

A: No! All our businesses are targeted at the professional end user. That's a customer we know and understand, and one where there's a much greater degree of sustainable revenue flow.

The consumer end requires different skills and is a more volatile business. The business model is less attractive in terms of cash flow and revenue sustainability. We're in markets that show very consistent growth. The demand for legal research or medical textbooks isn't going to go away.

Q: Your online operations are booming. How have you managed to make money there where others have not?

A: What we offer through the Internet is highly valuable, must-have, proprietary content, data, and information solutions. The Internet is...simply a means of distribution [for our content and solutions]. We're targeted at the professional end user -- the scientist, the lawyer, and others who are prepared to pay if they're getting the services and content they're looking for through the Internet.

Increasingly, the consumer has come to expect the Internet to be free. That is not the case with our customer. We should get about $1.5 billion in revenues from that this year, and with fairly good margins as well.

Q: Overall, do you think there's too much obsession about share price? That's certainly been a subject of much debate in the U.S.

A: I do. And it can put pressure on a company's management to take short-term actions that may not be in the best long-term interests of the business.

Q: People have said you're more attuned to stock price than some of your countrymen.

A: I don't think that's true. I'm much more oriented to getting the fundamentals right. If you get it right, the share price should reflect that. I try to look at our share price once a month only (unfortunately, people are telling me [the price] every other day). Otherwise, you get too orientated to price. The CEO shouldn't be trying to influence the share price on a short-term basis. His job is to get the business on a long-term growth trend.

Q: Do you see any differences in the style or focus of American CEOs vs. those in Europe?

A: American CEOs get paid a lot more!

It's dangerous to generalize, [but] perhaps American business leaders are bolder and more direct than their European counterparts. Perhaps the European leaders are rather more thoughtful, strategic, and perhaps cautious. But there are so many exceptions on both sides.

Q: What's your view of stock options?

A: I believe in giving incentives to management, and I think options are a perfectly valid way of doing it. But management should earn good rewards only if they perform. There have to be carefully thought-through objectives that are right and relevant for the business. If [management] delivers against challenging objectives, then fine.

Where I think it's going wrong is when a lot of these objectives are not relevant or challenging enough. Equally, I think there are too many safety nets that allow management to still earn strong rewards for only average performance or even mediocre performance.

Shareholders should be proactive in making their views known if they think incentive packages are inappropriate. When remuneration policies are put forward for shareholder approval, they should exercise that right to make them appropriate.

Q: There has been a lot of talk lately about the bad behavior of corporate leaders in the U.S. -- from Tyco's Dennis Kozlowski shipping his art out of state allegedly to avoid sales taxes to questions about Martha Stewart's possible insider trading of ImClone stock. What do you think is going on?

A: It does seem to be more an American phenomenon than a European one. It may be just one of those coincidental periods where a number of incidents happen. It may also be that the rewards now are potentially so huge that they can turn people's heads.

Q: Which business leaders do you think are doing a great job at the moment?

A: To be honest, I'm not sure there are any particular leaders I would pick out. The more I meet successful business leaders, the more I realize there's no simple formula. Almost every one has their own unique strengths and makeup.

Q: Is there anyone you admire?

A: I probably get more inspiration from my three children than anyone else. They're all in their 20s. One is a teacher at a quite tough inner-London school for minority children. One has just qualified as a doctor, and one is working in Africa in refugee camps. She's currently in Sudan. They bring a sense of goodness and giving that you don't find that often in the business world.

Q: It's interesting because, during the dot-com boom, that generation was accused of being greedy and imbued with a sense of entitlement beyond their years.

A: My experience is the opposite. My children and their friends have a much more principled purpose in life than my generation did. We were much more orientated towards career, material rewards, and ambition. Their generation seems different. Of course, it's hard to generalize. I can only comment on what I see.

Q: Do you consider yourself a workaholic?

A: Unquestionably, my biggest challenge is time and trying to balance it. When I first joined Reed Elsevier, I was working very long hours and took no holiday for the first year and a half. In the last 12 months, I can get a bit more balance. I try very hard to get balance. My wife would not agree with that.

I have said very firmly to my secretary that her job depends on making sure I play one game of tennis, one game of golf, and one game of squash a week. And I will always go skiing.

Q: What are the challenges over the next 12 months?

A: A key priority is consistent, above-average growth. That means above-market revenue growth and double-digit earnings growth. There will continue to be bolt-on, fill-in acquisition opportunities that we can fund from free cash flow. [There are gaps] in the legal and science/medical areas we would like to fill.

And, in the short term, any surplus cash we have can be used to reduce debt. We're certainly not looking for another major acquisition.

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