Chapter 2 At Pearson

It took a bold Texan to finally shake up Britain's Pearson. But can CEO Marjorie Scardino transform it into a global media colossus?

Marjorie Scardino isn't the table-pounding type. Unlike many media moguls, she relies to a surprising degree on gentle humor to do her persuading. But that doesn't mean she's easily satisfied. Olivier Fleurot, the suave Gallic head of the Financial Times newspapers, discovered as much when he made his first presentation to the CEO of Pearson PLC in July, 1999. Fleurot was feeling pretty confident when he promised her that by 2005 he would push the pink business papers' global circulation to 750,000--an increase of almost 90%. Scardino's response: "I am disappointed, Olivier," she said with a smile. "I thought you were going to say 1 million." That taught Fleurot something about his boss: "One of Marjorie's great qualities is that she is pushy," he says.

That's putting it mildly. Four years after she left the Economist magazine to take charge of its part owner, the 53-year-old native of Texarkana, Tex., is making a splash on both sides of the Atlantic with her moves to remake stodgy Pearson into a media and education juggernaut. She has inked 120 deals, selling off a haphazard collection of businesses that included the Tussaud's Group of wax museums and Pearson's share of the Lazard Freres investment-banking group.

In their place, Scardino engineered a gutsy $4.6 billion purchase of Simon & Schuster Inc.'s education business in May, 1998. That instantly transformed Pearson from an afterthought in educational publishing to the industry leader, with 27% of the key U.S. school and college market.

But Simon & Schuster was just the biggest ticket in Scardino's $7.5 billion cash spending spree for a collection of education and publishing assets. She bought British children's and illustrated book publisher Dorling Kindersley Holdings PLC for $466 million in March. And her most controversial move came in July when she paid a hefty $2.5 billion for National Computer Systems (NCS), a little-known Eden Prairie (Minn.) educational-testing company. Scardino contends that she's building a 21st century learning company, capable of delivering its products and services to any audience, on paper or online. "People are going to school longer, and people are reeducating themselves professionally," Scardino explains. "This is a huge potential opportunity."

That whirl of dealmaking put a spotlight on the charismatic Texan. Scardino jolted London on her arrival at Pearson in 1997, becoming the first woman to head a top British company. An unlikely career climb--she once ran a muckraking weekly newspaper--guaranteed rapt attention in the British press for her every move.

BIG PUSH. Scardino gets credit for imposing a bold vision on what many have seen as a plodding industry. By building up education, which contributed more than half of Pearson's operating profits last year, she has provided a stabilizing element to the company's cyclical newspapers. Her recent acquisitions place Pearson atop a Big Five of education publishers, including McGraw-Hill (which publishes BUSINESS WEEK), Houghton Mifflin, Reed Elsevier (which is buying Harcourt General for $4.5 billion), and Thomson. Scardino is pushing her troops hard to transfer their content to digital formats. Says Greg Dyke, who ran Pearson's television unit before becoming director general of the BBC last year: "During the dot-com craze, she convinced the press that we were a dot-com without overcommitting the company. I was quite hostile to her appointment, but I was wrong."

Now, Scardino finds herself at a critical juncture. Most of the easy work is done. As a swashbuckling outsider, she was able to sell off Pearson's sacred cows. Scardino also got lucky: Her cleanup coincided with a booming world economy. She dove right into the business she knew best, news publishing, and parlayed a rising stock price to buy up goodies. But can Scardino nail a much more demanding second act?

That will be tough, considering the prices she paid--particularly in the case of NCS, for which she coughed up a 31% premium to the stock price. A recent report by Morgan Stanley Dean Witter notes that Pearson also paid 29% more for Simon & Schuster on a multiple-of-earnings basis than Reed Elsevier is paying for Harcourt General's education assets. Matthew Owen, an analyst at Morgan Stanley in London, estimates that Pearson Education's profits will fall short of its 7.7% aftertax cost of capital in all but one of the next five years. Owen credits Scardino with "the most coherent strategy in publishing," but worries that her drive to introduce online technology to schools will be slowed by the bureaucratic and conservative nature of the education Establishment. Terry Smith, an analyst at London broker Collins Stewart, is blunter: "What I disagree with is the cult of personality. When I get outside of all that and analyze the businesses...they've bought lots of things with very low returns."

Some competitors are especially skeptical of Scardino's digital investments, saying it might take decades for her to build a powerhouse in electronic learning--if she's able to pull it off at all. And huge questions remain about how she will integrate the many new assets. If Scardino stumbles, she will lose the halo effect generated by her early cleanup efforts. It may already be fading: Pearson's stock has returned 137% since Scardino took over, compared with a 69% return for the FTSE 100. But the shares are sharply off their high of $36 last March, to about $24 today.

While much of the attention these days is on Scardino's digital dreams, Pearson's foundation is built on three solid, cash-generating businesses: the Financial Times Group; Pearson Education, now the world's leading purveyor of textbooks; and Penguin Group, which includes Penguin, Putnam, Viking, and other imprints and offers a stable of best-selling authors, such as Tom Clancy and Patricia Cornwell. Morgan Stanley's Owen expects the company to report 2000 sales of $5.93 billion, up 19% from 1999. Operating profits, before Internet expenses, goodwill, and exceptional items, should rise 16%, to $1 billion. However, if some $300 million in Internet spending is included, Owen points out, Pearson's profits would fall 19%.

When Scardino was hired four years ago, Pearson was a hodgepodge of blue-chip assets down on their luck. Management was lambasted for a disastrous $405 million loss from an investment in Mindscape, an electronic-games maker. The FT newsroom was close to rebellion, thanks to fear of staff cuts and rumors that the paper--which is the bible of the City, London's Wall Street--might be put on the block.

Scardino had been running the Economist Group in London for four years, during which time she made a name as an aggressive yet collegial manager. Still, she wasn't on the Pearson board's initial short list. That changed after a lunch in fall of 1996 with Dennis Stevenson, a politically well-connected business consultant. Unbeknownst to Scardino, Stevenson had been tapped as Pearson's nonexecutive chairman. He had read the latest Economist Group annual report--the company is half owned by Pearson--and came away impressed by its eloquent enthusiasm. During their meal, a lightbulb went on in his head: "Why shouldn't it be her?" Stevenson thought. The appointment was announced in October, 1996.

SHARE THE WEALTH. The new CEO's first priority was to change Pearson's dawdling mind-set. Its managers weren't pushed very hard to perform or to work with other parts of the group. Annual earnings growth of 3% was O.K. That didn't last long. "The company had not had a performance culture," Scardino says today. "So we said we were going to produce double-digit earnings growth because that was a simple idea and easy to communicate." Some well-placed performance incentives worked wonders. This year, for instance, even the lowest-level FT staffers will likely get $3,000 individual payouts for producing margins above 28%. "When you have such goals, you tend to make them," says Stephen Hill, CEO of Pearson's Financial Times Group, which includes the newspapers and various Internet and financial-data ventures. Scardino also extended stock options far down the ranks. When she started, about 300 employees were included. Now, some 4,000 are, out of 28,000 total.

Scardino's tireless cheerleading and readiness to back others' projects with serious money infused Pearson with an American-style entrepreneurial esprit de corps. "She has real courage of her convictions," says Michael Lynton, who ran Penguin Books and now heads AOL International. "She is willing to try things and fail and try again. And she encourages her managers to do the same." Pearson's CEO has become known for her folksy "Dear Everyone" motivational memos. Soon after arriving, she ended one with: "I've found a lot I like here. I think I'll stay. There's plenty for us all to work on together." Scardino also is relentless about sharing credit. She rarely agrees to be photographed without finance director John Makinson, who has negotiated most of Pearson's deals, at her side.

Her refreshing informality can be traced to growing up in a small, hardscrabble city on the Texas-Arkansas border. Scardino enjoyed a real Texas girlhood, riding in rodeos with her father, Robert Morris, an engineer in a local defense plant. Her mother, Beth Morris, remembers a girl who was "never frivolous" but always fun. Scardino's maternal grandfather, H.L. Lamb, a school principal, helped raise her sights beyond small-town Texas. He introduced her to Representative Wright Patman of Texas, who employed her in his office during a college summer and sent her to Europe on business.

Scardino took a meandering route to the executive suite. Upon graduating from Baylor University in Houston in 1969, she started law school, then dropped out. She later finished law school at the University of San Francisco. Moving in 1970 to Charleston, W.Va., Scardino worked as an editor at the Associated Press. There she met the man she would marry, Albert J. Scardino, who was a young reporter at the wire agency. They still joke about their first encounter--she spiked a story he had written about "John Henry: The Steel Driving Man." Not newsy enough, she said. Later, another editor transmitted it anyway.

DREAM TEAM. By all accounts, theirs has been a stimulating union, with Marjorie playing the role of breadwinner and often supporting Albert's creative projects. Albert is said to be a great cook, while Marjorie avoids the kitchen. And, as her business career flourished, Albert has taken more and more responsibility for their children: Adelaide, 22, William, 21, and Hal, 16. That includes managing Hal's acting career--he has appeared in several films, including the starring role in The Indian in the Cupboard. "She had the babies. Albert raised them. He's the nurturer," says Elaine Longwater, a family friend in Savannah, Ga., Albert's hometown.

It was around Savannah that the pair embarked on several formative ventures in the '70s. Albert briefly owned a shrimp boat, and the couple made a TV documentary about Georgia's barrier islands. Marjorie practiced at Savannah law firm Brannen, Wessels & Searcy, eventually becoming a managing partner. With money they borrowed from friends, family, and a bank, the couple threw themselves into launching a progressive weekly paper, The Georgia Gazette. It tackled "investigative stories that nobody else in town did," recalls Charles H. Morris, president of Savannah-based Morris Newspaper Corp. That included an expose of improprieties at the state Labor Dept. and reporting on the kidnapping of the son of a prominent local family, which upset some residents, who thought the stories endangered the victim.

The Gazette, circulation 4,000, was more of a crusade than a business, say acquaintances. Albert did much of the writing and editing. As the paper struggled, Marjorie took over the business side, working as a lawyer by day and as publisher nights and weekends. "The Gazette was an act of love," says William T. Daniel Jr., a colleague at the law firm. "Albert had the journalistic talent. Marjorie fought the day-to-day battle of keeping the paper going." Their efforts paid off in 1984 when Albert won the Pulitzer Prize for his crusading editorials. But it couldn't keep the paper afloat. After the county moved its legal ads to a competitor, the Gazette closed in 1985. Albert landed a job at The New York Times, later becoming press secretary to Mayor David Dinkins. Marjorie decided to go into business.

In 1985, the Economist was looking for a U.S. chief to boost its low profile in America. John Evans, then publisher of the Village Voice, recommended Scardino, a recent acquaintance. "The headhunters were very reluctant because of her track record of failure," recalls David Gordon, then CEO of the Economist. But Gordon, a journalist-turned-manager himself, was a believer in unconventional career paths. While that choice may seem reckless now, in 1985, the Economist was relatively obscure in the U.S. Its North American circulation was just 108,000. By 1993, when Scardino succeeded Gordon as CEO of the overall group, circulation had climbed to 243,000 through aggressive marketing.

Scardino was hardly in the door at Pearson before she started disposing of businesses. The Tussaud's Group was sold for $528 million in 1998. Pearson's 18% stake in the Lazard investment banks went to Lazard boss Michel David-Weill in 1999, for $615 million. And last spring, Scardino merged Pearson TV, a producer of soap operas and game shows, with the broadcasting interests of Germany's Bertelsmann and Belgian investor Albert Frere. Pearson got a 22% stake in the combined RTL Group, worth $2.6 billion.

IMPRESSIVE GAINS. At the same time, she lavished funds on the FT, which was a big name with a small circulation. In March, 1997, Pearson announced that it would put up as much as $150 million, most of it to expand in the U.S. The resulting gains have been impressive--U.S. circulation for the FT rose from just 36,000 at the end of 1996 to 120,000 today. The makeover of Pearson's traditional businesses helped boost its stock price, which fueled the subsequent buying binge.

Scardino's challenge is to show that she can deliver on her boldest move, into education. She is convinced that it represents a vast opportunity of untapped growth. Demographic trends and political pressure to upgrade teaching have boosted spending growth at an 8% annual clip in the U.S. and about 10% worldwide. At the same time, she believes that schools and local governments see the potential of using new technologies to improve teaching.

When she arrived, Scardino found that Pearson, then ranked fifth, was ill-equipped to take advantage of those trends. "We had management that wasn't up to doing all that much more," she says. So she lured away Peter Jovanovich, head of the education unit at The McGraw-Hill Companies, in August, 1997, promising him the resources to make Pearson Education the global leader. With the purchase of Simon & Schuster's education unit, Pearson became the U.S. leader in college texts and a close rival to McGraw-Hill in schoolbooks. The deal "was a once-in-a-lifetime opportunity," says Jovanovich. But competitors say the Pearson juggernaut has had problems hanging on to market share, particularly in elementary school texts. Pearson stumbled in a recent $200 million round of textbook adoptions in Texas, one of the bellwether states. It finished a disappointing third behind Harcourt and McGraw-Hill, according to Simba Information Inc. in Stamford, Conn.

Jovanovich acknowledges that the company probably didn't gain any market share in U.S. school publishing last year, after picking up 1% to 2% in 1999. Still, Pearson says its schoolbook revenues grew by high single digits. "I have been in the business for 29 years, and this market is the best I have ever seen," Jovanovich says. "I worry about a lot of things, but not about Marjorie's and my bets paying off."

If the bulk of Pearson's education sales and profits are still in old-fashioned textbooks, its most high-profile effort is in the online arena. Scardino is a huge fan of the Web, which she views as a tool that can tap into all of Pearson's content offerings and deliver them to a broad audience. Pearson already has some 2,500 Web sites, mostly for textbooks that come with online access. Such products brought in sales of about $660 million last year, up 20% over 1999. Scardino, who describes her own children as having "variable learning styles," says educators are excited about the Web's potential to enrich and customize education: "We have a chance to find solutions, and it will be a good business for our shareholders."

She plans to draw not only on traditional textbooks but also on other Pearson products, such as Penguin's mammoth library of classics and reference books. Scardino was looking for more such content when she bought Dorling Kindersley. She thinks the publisher's distinctive illustrated pages and 2 million digitalized images can be sprinkled into other Pearson products, from history texts to educational games.

Pearson isn't alone in this vision. All book publishers are speedily making the transition to digital, believing that students will increasingly dial up for study materials. "You will go to your room and study from your computer," says Nader F. Darehshori, CEO of Boston-based Houghton Mifflin Co. Houghton Mifflin just announced a deal with netLibrary--a leading producer of e-books--to create electronic versions of its texts. McGraw-Hill also is moving fast, with ventures that include Primis Online, which enables professors to design custom online texts.

Scardino seems to boast the most aggressive online effort, though. She's spending big money on a portfolio of distribution channels. Last June, Pearson shelled out $129 million to acquire 87% of Family Education Network, a leading supplier of education content on the Internet. That became the core of Pearson's Learning Network, a portal that offers everything from homework help for kids to teacher aids to training programs for professionals. The network currently generates revenues of about only $10 million a year from product sales and advertising. But Jovanovich figures Pearson can also interest school districts in sharing ad revenues. It is already talking with the Denver school system about setting up a portal.

Scardino's main bet for penetrating the online school market, though, is NCS Pearson. The unit's $2.5 billion price tag, 35 times its operating income of $70 million, raised eyebrows. Pearson defends that by pointing out that income has grown at a 24% annual clip. NCS makes much of its money from scoring tests but also supplies software to 40% of U.S. and Canadian schools to manage payrolls, send out report cards, and keep track of attendance and discipline records. It also sells nifty electronic wares for teachers, such as online lesson plans and tests.

SCHOOL TIES. Scardino plans to use NCS as a platform to wire America's 2.5 million teachers--the last large group of professionals who don't widely use the Web. She wants to distribute reams of educational content from Pearson and others for a fee. And a new product called NCS 4 School, still in development, will allow students and parents to interact with the school. At a cost of $25 per pupil per year, students could check grades and teachers' comments and download recommended materials.

Some school administrators are excited about the technology. Says Don Hooper, superintendent of the Fort Bend school district, outside Houston: "The Web-based approach will ultimately be the best way for districts to go." But others in the industry are skeptical that Pearson can execute its plan. NCS's strength is in accounting and other management software for school back offices, they say, and it's a stretch to think that such systems can be upgraded to serve classrooms. "The systems those guys have are low-end and can in no way be used to deliver content," asserts one publishing insider. Another exec says Pearson isn't factoring in the resistance that a revolutionary system is likely to encounter from the education bureaucracy. Even if it works, it could take years. "Schools are not like Internet companies," he says. "They are bureaucracies. This will be like turning a battleship around."

If an advertising recession hits the FT, it will only put more pressure on Scardino to make her vision in education pay off. "She has a lot of ingredients in a huge pot," says Jeffrey T. Leeds of Leeds Weld & Co., which invests in education companies. "But when it is all cooked, does it wind up a delicious bouillabaisse or just dead fish?" If dead fish is the answer, Scardino will quickly come under fire from the markets. But if she's worried now, she isn't letting it show.

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