Corporate Profile: Reed this and weep

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The Independent Online
The Reed Elsevier story has it all. Bust-ups in the boardroom, an international power struggle, allegations of financial impropriety, profit warnings and clashing egos. What it doesn't have is a chief executive to fill a seat that has proved too hot for an embarrassing number of top men. Can anyone be persuaded to ride to the rescue of the floundering publishing giant?

THIS IS a tale of clashing corporate cultures, rival egos and failed strategies. One of the biggest publishers in the world lurches from one crisis to another. After an international power struggle, a scandal over circulation figures and a boardroom bust-up, it is left leaderless and struggling to cope with fierce competition from rivals and a technological revolution that threatens to wipe out large parts of its business.

Just as you thought things couldn't possibly get any worse the company faces a Stock Exchange investigation amid allegations of financial impropriety, after it is forced to make yet another profits warning. As investors turn against the group and its share price slumps, it faces a race against time to find a new leader to try to save the group from falling into the hands of one of its main rivals.

This is the sorry state in which Reed Elsevier finds itself. The company is a giant in the publishing world, a leader in business, legal and scientific publishing, whose magazines such as The Lancet, Variety and Computer Weekly crowd the shelves of newsagents. The more glamorous parts of its publishing portfolio, the Irvine Welsh-to-Thomas the Tank Engine book division and its Loaded-to-Marie Claire consumer magazine business were ditched by Reed Elsevier in a sell-off that dragged on for years. Reed Elsevier reckoned it would make more money from lawyers and scientists poring over research documents from its other divisions, than from customers snapping up copies of The Joy of Sex.

That was the idea, but Reed Elsevier is no longer making as much money as it used to. Last week it came out with its second profits warning in six months and alarm bells have been going off all over the City. So what went wrong and how will the company dig itself out of a deepening hole?

The story began in 1993 when Reed Elsevier was born out of the merger of British publisher Reed and its Dutch rival Elsevier. At once cracks began to appear - and not cracks that could easily be papered over. A very complicated management structure was introduced to keep Dutch and British sides happy and to get the merger off the ground. Each company kept its board. Worse, Elsevier adopted a continental two-tier structure while Reed used the traditional British board packed with executives and non- executives.

Not surprisingly the system proved flawed. Dutch and British directors clashed over management style and the company's direction. As in so many top companies, egos played a big part. Pierre Vinken, a former brain surgeon, founder and driving force behind Elsevier, found it difficult to release his grip. Two Reed chief executives - Sir Peter Davis, who later resurfaced at Prudential, and Ian Irvine - were casualties caught in the boardroom cross-fire.

In the fast-moving world of publishing Reed Elsevier was in danger of losing to more nimble opponents. The group finally tried to end years of management turmoil by announcing its intention to merge with Wolters Kluwer, a smaller Dutch rival, in the autumn of 1997. Wolters' chief executive, Cor Brakel, was to run the group, replacing the joint chief executives, Briton Nigel Stapleton and Dutchman Hermann Bruggink. It seemed likely to be the answer to all Reed Elsevier's problems, especially its leadership hiatus.

Then the group was dealt a double blow. First it was forced to admit it had overstated circulation figures on some US publications to its advertisers. At the start of 1998 it said the advertisers would be paid $325m (pounds 200m) in compensation and that would cause a hefty pounds 472m charge.

Then, in March, the Wolters Kluwer deal collapsed. Officially the reason was that the European Union was demanding too heavy a price to allow the merger. But there were suggestions that the Dutch and British were again at loggerheads on the deal.

The collapse was a catalyst for change. The days of Mr Stapleton and Mr Bruggink as co-chief executives were numbered. Last August the group announced plans to seek a new chief executive. Filling one of the top jobs in publishing should have been relatively simple. But Reed Elsevier has shown it is quite capable of making a drama out of a crisis.

Jonathan Newcomb, head of US publishing house Simon & Schuster, was lined up, only to pull out at the last minute amid conflicting rumours; there are suggestions he declined for personal and family reasons or he may just have got cold feet about a company split by management infighting. But whatever the reason, it re-ignited tensions between Dutch and British camps.

Pierre Vinken and his Dutch colleague Loek van Vollenhoven were furious at David Webster, then chairman of Reed. Well respected in the City as the head of Safeway, Mr Webster, was charged with finding a chief executive, but was lampooned for finding only one candidate. The Dutchmen quit the group in pique.

Ten months after the search began, Reed Elsevier has still not found a new chief executive. Analysts feel the group's management has scored an own goal after taking its eye off the ball.

Reed Elsevier's latest profits warning concerns Lexis-Nexis, the legal and business information database on which the group is pinning its hopes for the future. The money it raised from selling its consumer publishing interests, including the pounds 850m from selling the Loaded-to-NME magazine business IPC, was spent on two legal businesses, Matthew Bender and Shepards, publishers of legal analysis and case citations.

But integration of these businesses has taken time and competitors such as Thomson's Westlaw have been keen to kick Reed Elsevier while it is down by dropping their prices. Further problems are caused by business information becoming cheaper to access on the Internet. "Companies like the convenience Lexis-Nexis can provide, but they are not willing to pay as much for it," said Louise Barton, analyst at Investec Henderson Crosthwaite.

To make matters even worse, the Amsterdam Stock Exchange is said to be investigating claims by the Dutch newspaper De Telegraf that Reed Elsevier briefed selected analysts about its profits warning before it was officially announced.

So the share price has continued to fall. "They have been a complete dog," said Ms Barton. "The company has disappointed the City by not appointing a chief executive, and shot themselves in the foot with poor PR. It needs direction, better marketing and some reinvigoration."

At best, Reed Elsevier has been accident prone; at worst, the management strife and strategic blunders will have a lasting effect on profitability. But there is cause for optimism. The group's management structure has been returned to near-normality with the well- respected Morris Tabaksblat, a former senior executive at Unilever, now installed as chairman of the new-look board.

With Reed Elsevier claiming vehemently it was guilty of no wrongdoing over the profits warning the Amsterdam investigation could prove to be a storm in a tea cup.

Most importantly, Reed Elsevier's long-term strategy looks sensible. The Internet represents both a huge threat and a huge opportunity to its business. The group is building its own electronic publishing arm, which would use its titles and information databases to establish a significant presence online. It has the brand names, including Shepards - a big-hitting name in the US - to carry it off. But to build up a large Internet business is costly and the big spend has hit margins and profits this year and last.

This strategy can work only if Reed Elsevier finds the right person to carry it through to its conclusion. Now the search for a new chief executive may be ending. Reed Elsevier has a shortlist and hopes to appoint somebody in two months. The appointment could also herald a more aggressive expansion plan, with mergers and acquisitions on the agenda again.

Whoever is appointed, Reed Elsevier stands at a crossroads. By investing in the Internet it has gambled that short-term pain will lead to long- term gain. The secret will be providing information that is worth paying for. The gamble could pay handsome rewards. But if it doesn't Reed Elsevier could fall prey to hungry rivals. This time Wolters Kluwer could be calling the shots rather than the other way around.

So how will this particular saga end? Will a dashing new chief executive come riding to the rescue and lead Reed Elsevier to a dominant position in the new digital age? Or will the net close quickly on the group as predators circle?

Horror Story


1993: Nearly a century after it was founded, Reed International merged with the Dutch publishing group Elsevier. The following year, Reed Elsevier bought Lexis-Nexis, the legal and business information database, but by the end of 1996 the troubled group had already lost two chief executives, Sir Peter Davis and his successor, Ian Irvine.

1997: Reed Elsevier starts merger talks with smaller Dutch rival Wolters Kluwer.

1998: IPC consumer magazines division sold for pounds 850m, but the upbeat mood was shortlived when Reed Elsevier was forced to pay $325m (pounds 200m) in compensation to advertisers for overstating circulation figures for some US publications. In March, the Wolters Kluwer merger collapsed. In July, the group bought legal businesses Matthew Bender and Shepards, for a strong presence in the US market. By August, the search was on again for a new chief executive. In December, the group issued a profits warning due to a decline in earnings at its travel division, a slowdown in economic growth and the sale of IPC magazines.

1999: Things went from bad to worse, as Jonathan Newcomb, of Simon and Schuster, turned down the job of chief executive, and Pierre Vinken and Loek van Vollenhoven resigned from the board. This month, Morris Tabaksblat became chairman, only to find himself amid controversy over the group's warning over 1999 profits. Intense competition at Lexis-Nexis and weak advertising revenue at Cahners, its US business-to-business publisher remain the challenges.


Market capitalisation: pounds 5.5bn

Turnover in 1998: pounds 3.2bn (up 6%)

Pre-tax profits: pounds 773m (down 6%)

Main markets: Reed is a leading global publisher and information provider. It publishes many trade magazines. The publishing business is divided into three categories: business, which accounts for 44 per cent of group turnover; professional, with Lexis-Nexis, Matthew Bender and Shepards, contributes over one-third of turnover; and scientific, including The Lancet and its Science Direct information service, provides one-fifth of turnover.

Key executives: Morris Tabaksblat (chairman); Nigel Stapleton and Hermann Bruggink (co-chief executives); Mark Armour (finance director)

Number of employees (1998): 27,000 (5,400 in UK)


The septuagenarian Dutch former brain surgeon who founded and built up Elsevier, and who has been at the centre of most of the boardroom rows since the Reed merger. Blamed for the leadership vacuum, he himself resigned in April this year, just days before retiring


As the head of Reed International, after the merger with Elsevier he took on the co-chairman and chief executive's role. In June 1994 he spectacularly resigned with a pounds 1.25m pay-off, unhappy over board restructuring plans


Had been with Reed since 1987, and stepped into Peter Davis's pounds 630,000- a-year shoes on his abrupt departure. But in July 1996 he surprised everyone by suddenly retiring amid reports of more rifts between the British and Dutch board members


Somewhere out there is the executive who could steer Reed Elsevier through the challenges and threats of the online age, restore profits, and rescue the share price. The only problem is finding him or her