Can Scardino beat Murdoch over The Wall Street Journal?

The fact that Pearson is examining a bid for The Wall Street Journal could turn out to be bigger news than its slim likelihood of success would suggest.

The company, which already owns the Financial Times, is talking to General Electric, owner of the business news channel CNBC, about a joint takeover that would snatch the Journal from under the nose of its other suitor, Rupert Murdoch. Observers in the media world, in the City and on Wall Street, and even within the companies themselves all describe the idea as "a long shot", talks are "preliminary" or even "exploratory", Pearson is merely pursuing its duty to examine all its options.

And yet the very fact of the talks - never publicly confirmed by the company - raises anew the question of the FT's place within the Pearson group.

Shareholders who have long grumbled that it should be sold have been marking management's card once again. For Dame Marjorie Scardino, the chief executive who once said that the FT would be sold "over my dead body", failing to make a move on the Journal may not simply mean a reversion back to the status quo. In the words of one analyst yesterday, this could be "double or quits".

Mr Murdoch's attempt to get his hands on the Journal is characteristically bold, characteristically blunt: $5bn, cash, for the entire parent company, Dow Jones. That's $60 a share, two-thirds more than it was worth the day before he turned up, and realistically two-thirds more than it will be worth if his offer disappears. No wonder the controlling Bancroft family, laissez-faire stewards of Dow Jones for more than a century, have swallowed their distaste and begun to seriously consider the offer.

Pearson's tilt at Dow Jones, by contrast, will necessarily have to be fiendishly complicated. It could not simply pay $5bn out of its own coffers, since that would dilute the company's earnings for years to come. In $1.4bn of acquisitions over the past five years, Pearson has always insisted that a deal enhances earnings and return on capital within two years - and its shares would be heavily punished should Dame Scardino abandon that financial discipline now, even for a once-in-a-lifetime chance of merging the FT with The Wall Street Journal.

So Pearson has been casting about for a partner, with the latest mooted structure being a joint bid with GE, the outcome of which would be a joint venture where the two own equal shares of 40-45 per cent and the Bancroft family retain a stake of 10-20 per cent. GE would put CNBC into the joint venture, Pearson would put in the FT and possibly some of the other assets from the FT Group, which also owns The Economist and a host of specialist financial magazines and databases. One or both would also have to contribute some cash so that the Bancrofts and Dow Jones' other shareholders could get something close to Mr Murdoch's $60-a-share for their holdings.

Even visualising it generates a headache, but deciding who contributes what will be fiendish. "Given the number of parties involved and the diverse range of properties they are talking about, it will be very complicated deal to structure," says Paul Richards, analyst at Numis Securities. "They must all agree of the relative valuations of the Financial Times, The Wall Street Journal and CNBC and of any ancillary revenues from other businesses that may or may not be included."

Putting the odds of a successful agreement at "pretty slim", Mr Richards added that he was sceptical over the whole notion of creating a new private media company, which would be hard for GE and Pearson shareholders to value and equally hard for any of the shareholders to get out of later. "Any one of General Electric, Pearson or the Bancrofts may balk at the having so much capital tied up in an unlisted entity that is the equivalent of a FTSE 100 company in terms of its scale," he said.

From the soup of speculation, a number appears to have emerged for the likely cost savings to be reaped from putting the Journal and the FT together. The different brands are strong in different markets, the FT in Europe and the Journal in the US, so investment can be concentrated on the stronger. Foreign bureaus could be shared and jobs cuts. There are plenty of synergies in administration and distribution. Anthony de Larrinaga, analyst at SG Securities, says that may add up to the $200m in annual savings that is being talked about on Wall Street - though he is sceptical about the number because it too neatly fits the amount required to create the returns that might justify a $5bn price tag.

And in any case, $200m is less than 10 per cent of Dow Jones' annual revenues, and it is by no means impossible to imagine all those savings being eclipsed by a decline in the company's sales if newspaper readership and advertising goes into a sharper decline.

Pearson is frightened by the prospect of Mr Murdoch's News Corp winning control of Dow Jones. The media mogul has already promised an all-out war to take on the FT in Europe if he gets his hands on the Journal. CNBC, too, is threatened by News Corp's planned new Fox Business channel, for which Mr Murdoch wants to use Wall Street Journal content and expertise from Dow Jones other financial information businesses.

However, the difficult-to-quantify financial hit that Pearson would take from additional competition may not be enough to persuade shareholders to back the counter-bid. "Google, Microsoft and Yahoo are all getting massive in financial news," says Mr de Larrinaga, "and there are bloggers everywhere. There is a profusion of content, so I do wonder whether Pearson can demonstrate a unique threat that would make a case for stopping Murdoch."

So, there is an extra-long list of reasons why Dame Scardino looks unlikely to be able to structure a compelling deal that would allow her to take on Mr Murdoch. But one must never underestimate the creativity of the combined brains of Wall Street and the City of London, particularly when bankers have such juicy fees in prospect. One must also remember, too, that strange things happen when family-controlled companies are in play. The Bancrofts are currently stalling on talks with Mr Murdoch as they try to come up with demands that he guarantee the Journal's editorial independence. The fractious clan may decide that a Pearson-GE consortium offers the face-saving alternative they need to agree the sale of an organ of national importance, and agree to deal on less favourable terms.

In the end, the biggest problem may be Pearson's own stakeholders. First there are the FT journalists who may be resistant to a cost-cutting, job-slashing merger, undermining the point of doing a deal. And most important of all, the shareholders. One clue as to their view is that Pearson shares are down 3.6 per cent since the idea of a bid for the Journal surfaced over the weekend, with the decline accelerating yesterday.

The FT is a relatively small contributor to revenues at Pearson, which has focused in recent years on the business of academic publishing. It is an even smaller, and occasional, contributor to group profits. For these reasons, and the uncertain future of the newspaper industry, many shareholders have grown to see the FT Group as non-core, even if Dame Scardino has not. They had hoped that the FT would go the same way as Les Echos, its French stable-mate, which Pearson confirmed yesterday was on the auction block.

Many of the most bullish analysts and investors believe it is only a matter of time before the company is broken up, releasing value from an auction of the FT. So it is in this context that shareholders have queued up this week to express "surprise" and other polite public versions of their private fury that Pearson is now considering doubling up its exposure to the financial newspaper industry.

Others have said they could welcome a deal only if it appeared to be the start of a process of Pearson getting out of financial newspapers all together. Schroder, one of the top three shareholders, said it would oppose a deal that involved Pearson putting any additional capital into the business.

Richard Buxton, head of UK equities at Schroder, was quoted saying that a deal to merge the FT and the Journal could be seen as an admission that the FT's expansion into the US has been a failure - an admission that others said reopens again the question of whether the FT should be sold.

Mr Richards at Numis said that the failure to do a deal would immediately pile more pressure on Dame Scardino. "I think it is 'double or quits' at the moment. If Pearson can't manage to structure a deal, then I think that it has to take a long hard look at the future of the FT newspaper within Pearson, and certainly a new management will do that when Dame Scardino moves on, be that next year, the year after or the year after that."

It is an era of activist shareholders, and in the US in particular hedge funds have forced a string of newspaper groups into asset sales over the past few years - most notably the Tribune Group last year and Knight Ridder the year before. Dame Scardino will be forgiven a nervous glance at these examples across the Atlantic as she considers her next move against Mr Murdoch.

The financial newspapers

The Financial Times

* Founded as the Financial News in 1884, it changed its name to the Financial Times in 1888. The paper initially billed itself as "the friend of the honest financier and respectable broker". It turned pink in the 1893.

* It launched the FT Ordinary index in 1935, with 30 shares. The FTSE 100 was launched in 1984.

* Pearson bought the FT in 1957.

* The FT's global daily circulation is nearly 453,000, including 142,000 in the UK and Ireland.

* In 2006, the FT's profits (including newspaper and website) were £11m on sales of £238m.

* Editor: Lionel Barber

Wall Street Journal

* The newspaper was founded in 1889 by three journalists, Charles Dow, Edward Jones and Charles Bergstresser. In 1902 the WSJ was sold to Clarence Barron, whose descendants, the Bancrofts, still control more than 60 per cent of the voting stock in Dow Jones.

* It began publishing the Dow Jones Industrial Average in 1896. The only one of the 12 original stocks to still feature in the DJIA is General Electric.

* The newspaper still shuns photographs of people in its columns, preferring ink dot drawings called "hedcuts".

* Its US circulation is 1.7 million. Another 931,000 pay for the online version.

* Managing Editor: Marcus W Brauchli