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A success story in paperback

Penguin is more than just one of the most venerable names in the book publishing world. It is an august institution - albeit one now tainted with the whiff of scandal.

Established in 1935 to help educate the masses with sixpence paperbacks of classics, Penguin has grown to become the largest consumer book publisher in the UK and number four in the US, with global sales of pounds 369m and profits of pounds 33.6m in 1995. It is also the leading publisher of children's books in the UK, using the famous Ladybird imprint.

Yet its financial fortunes have always waxed and waned. Bought by Pearson in the late Sixties, Penguin was suffering heavy losses when Peter Mayer, a brash American, took over as chief executive in 1979.

Mr Mayer wasted no time in scrapping Penguin's famous orange book covers - the green ones for thrillers also went. Traditionalists were also shocked when he bought hardback imprints such as Viking, Michael Joseph and Hamish Hamilton, bringing with them books such as Shirley Conran's Lace and Jane Fonda's Work-Out.

Mr Mayer was also a ruthless cost-cutter. In 1995 alone, 100 staff in the London headquarters were sacked, the managing director was replaced, some authors threatened to leave and morale plummeted. "There was some deal of fear about Mr Mayer," said a senior industry figure yesterday. "Questions were never really asked."

Mr Mayer was proud of the cultural changes he had unleashed. "Penguin has been liberated," he boasted to Publishing News shortly before announcing his surprise decision to quit last year. "We can publish any kind of book we want to."

But he was no barbarian at the gate, being prepared to take risks for the sake of literary freedom. Penguin published Salman Rushdie's The Satanic Verses and, like the author, Mr Mayer has lived under an Islamic death sentence since 1989.

However, Penguin has struggled in the UK over the past couple of years from substantial destocking, the collapse of the Net Book Agreement and big retailers discounting best sellers.

But in the US Penguin continued to do better than its rivals, ostensibly thanks to a strong list of authors and imprints acquired in the late 1980s.

Yesterday's unearthing of a pounds 100m black hole in the accounts, blamed by Pearson on one middle-ranking employee, raises questions marks about how much of that performance was down to cooking the books.

Mr Mayer's successor, Michael Lynton, a 36-year-old Harvard Business School graduate who ran the Disney studio Hollywood Pictures, recently described his new job as "a dream come true". Six weeks after taking over, it has turned into a nightmare.