Pearson's `Shot In The Dark'

Surprise CEO Marjorie Scardino has to make big changes, fast

Within days of her surprise appointment on Oct. 17 as Pearson PLC's CEO, Marjorie M. Scardino faced a swirl of rumors that Rupert Murdoch's 40%-owned British Sky Broadcasting was preparing a hostile takeover bid. Scardino, now chief executive of Pearson's 50%-owned The Economist Group, didn't bat an eye. Recalls Bill Emmott, editor of The Economist and a close friend: "She laughed it off as her baptism of fire."

This won't be Scardino's last test in her new job. A $3 billion conglomerate, Pearson controls some of the best-known businesses in the world, but it has a reputation as an underperformer. Takeover talk has driven the stock to a yearly high. The pressure from shareholders is building so fast that when she starts her new job early next year, Scardino may have to consider breaking up Pearson herself--or face a real takeover threat. Scardino, 49, is not tipping her hand yet: "If I knew the answers already, I could polish off the job in six months, but I don't." But she notes that she has the board's assurances that "there were no sacred cows." So don't be surprised to see radical change at this conservative company.

Broken up, Pearson would be worth an estimated $7.6 billion, about $1 billion more than the current market value of its shares (table). Scardino could realize some of that value by shedding the TV unit. The company owns Thames Television Ltd., which produces a number of popular British programs; Grundy Worldwide, a producer of soap operas and game shows; and a stake in Britain's new Channel 5. This division makes money, but it has no chance of achieving the size of the television giants that now stalk the earth. "Unless they intend to spend lots building up the business, it's likely to be sold off," figures Anthony de Larrinaga, a media analyst at Panmure Gordon & Co. in London. Possible suitors include Granada Group PLC and Carlton Communications PLC.

LETDOWN. Selling the television business would free Scardino to focus more on publishing, which includes the The Economist magazine and other related publications, the Financial Times, and books. But Pearson would only get truly focused if it hived off a 50% stake in merchant bank Lazard Brothers & Co., as well as Madame Tussaud's, the wax museum and theme-park business. Yet several Lazard partners sit on Pearson's board and Lazard generated $20 million of Pearson's profit in the first half. That's why some Pearson executives have been reluctant to let go. In contrast, Madame Tussaud's has been a drain on resources.

Since The Economist Group, with revenues of $300 million, operates independently of its major shareholder, Scardino has little inside knowledge of Pearson. Nor does she have experience running a major public company. Thus her appointment disappointed some analysts and investors, who hoped for an outside media heavyweight. "It's a shot in the dark," says one London-based media analyst. "There's a big difference between running The Economist and running a big public company."

But Scardino could confound her critics. Since she started with The Economist Group as head of U.S. operations in 1985, the main magazine's circulation has risen from 265,000 to 625,000. And during her three-year tenure as the group's CEO, revenues have jumped 78% and profits have doubled, to $38 million, thanks to the main magazine's expanded reach and improved results at such businesses as the group's research unit.

Along the way, Scardino has not lost her American touch. A native of Texarkana, Tex., who with her husband founded a prize-winning paper in Georgia, Scardino often wears her son's baseball caps to work at The Economist's somber headquarters. She had better keep wearing those hats. They might inspire her to hit the home run investors expect.

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