Is Pearson Poised For A Breakup?
Michael Blakenham, chairman of London-based Pearson PLC, and his managing director, Frank Barlow, want to be remembered as media executives who have wisely prepared for the future. For Pearson, that has meant shedding the oil-services company and Royal Doulton china business and adding television production to its media holdings, which already included the Financial Times, 50% of The Economist (both competitors of BUSINESS WEEK), and Penguin Publishing. To throw some multimedia sexiness into the mix, the pair also acquired Mindscape Inc., a California-based maker of electronic games.
The result of this three-year flurry of buying and selling has been exactly what Blakenham and Barlow did not expect. The biggest problem is Mindscape. A $60 million loss there contributed to Pearson's 40% earnings drop in the first half, announced Aug. 5. Angry investors now question how focused this $2.9 billion company really is. Adding to the pressure, rumors of takeovers and big asset sales are dogging the company, which finds itself vulnerable at a time of major transition. Barlow, 66, is on his way out, joining other retiring senior managers. The stabilizing influence of the Pearson family is waning. Blakenham, a descendant of the founder, is 58 and will probably not be succeeded by a Pearson family member. Blakenham pegs family shareholdings at between 7% and 12%--not much of a takeover deterrent.
NEW AGE. Despite some real achievements, Blakenham and Barlow still have to prove the soundness of their strategy. The Mindscape deal has stung the company. Pearson paid $484 million for Mindscape in 1994, roughly 70 times earnings. The price was justified, board members convinced themselves, because Mindscape was the ticket to the new media age. It could help dream up CD-ROMs and other electronic vehicles for everything from Financial Times articles to Penguin's Beatrix Potter books. But Mindscape bet too much on an expansion into action games that fizzled.
There's no longer a lot of talk about synergy. Andrea M. Kirby, an analyst at Daiwa Europe Ltd., says Mindscape may now be worth just half what Pearson paid for it. Under a new boss, former Penguin executive John Moore, Mindscape is concentrating on teaching and war-strategy games, such as its well-rated series, Panzer General and Chessmaster.
The Mindscape pratfalls come after two years of lackluster performance for Pearson stock and a drop in operating profits in 1995. This record has prompted investors to wonder if Pearson is out of touch with the fast-changing media environment where it has such huge ambitions. Company insiders are acutely aware of the criticism. The problems at Mindscape "dented the group's reputation for being reasonably skillful at acquisition and disposal," says John Makinson, Pearson's group finance director.
Pearson's stock did pop up after the earnings announcement, as the market noticed signs of improvement at Penguin and the Financial Times, where results had been spotty. But serious questions remain, including who will run the company. Pearson has said that it will likely name a successor to Barlow by next May's annual meeting, but the City would like to see the uncertainty ended sooner.
There is strong pressure to bring in an outsider, perhaps an American, with experience managing a diversified media empire. Inside candidates include Makinson, 41, and David Bell, 49, a former journalist and Financial Times chief who now heads up the Information Div., and Greg Dyke, 49, a respected media executive who was brought in to head up Pearson's television interests. All three joined the board this year in a management shuffle. The City likes Dyke, but he is said not to be interested in the top job. Makinson, like Bell a former Financial Times journalist and chief executive, is also well-regarded but may not be seasoned enough to please investors.
The choice will likely have a huge influence over Pearson's future shape. If one of the ex-Financial Times men wins out, for instance, Pearson could be expected to continue to build up its business information services. Pearson's electronic data arm, Financial Times Information, already rivals the newspaper in profits. Such an executive would probably also authorize a major new international push for the Financial Times. The paper's 35-year-old chief executive, Stephen Hill, is dangling such an expansion before the paper's editorial staff, which has been demoralized by recent cost-cutting. In contrast, a recruit from a company such as Walt Disney Co. or Time Warner Inc. might prefer to invest in television and Penguin.
MARKET LAGGARD. Until the issue is resolved, the City will keep chiding Pearson for a lack of focus. Pearson "is frustrating because you know it could be a significantly better business than it is," says Kirby of Daiwa Europe. "They don't seem to be able to get everything working at the same time." Frequent shuffling of assets also makes earnings hard to analyze.
The fact that Pearson stock has lagged other London-traded media shares has triggered a spate of takeover rumors. Television producer Granada Group PLC has been mentioned recently as a potential suitor. The theory is that shareholders might see a significantly greater return under different management. A recent study by Nick Ward of Credit Lyonnais Laing in London pegs Pearson's breakup value at $7.5 billion, well above its recent $5.7 billion market cap. Such talk is galling to Blakenham. "I think we have been going in a very clear direction," he says. Executives point out that by buying Thames TV in 1993, Pearson got what is now Britain's largest independent television producer as well as a 6% share in the very profitable, Luxembourg-based satellite company, SES.
Still, management concedes that further slimming down may be necessary. One frequently mentioned disposal candidate is Madame Tussaud's, the wax museum and theme park business. Another is the stake in Lazard Freres & Co., the investment firm. Pearson owns 50% of London's Lazard Brothers and 9% each in the bank's New York and Paris sisters, and Lazard partners sit on its board. Yet Makinson says that it would be difficult to find a better profit generator than Lazard, which contributed $20 million in the first half. The TV business could also be easily sold for a rich price, but that would mean undoing years of careful acquisitions. Textbooks could also go on the block.
These difficult choices suggest that the key question is not so much what Pearson should sell as who replaces Barlow. If Pearson directors get that right, the City will calm down and whatever strategy is settled on will make sense. If they don't, they could find themselves pressured into parting with irreplaceable gems.