Pearson makes pounds 312m US purchase: Acquisition of software firm will broaden multimedia capabilities

PEARSON, the Financial Times to Penguin books conglomerate, has made an agreed dollars 462m (pounds 312m) bid for New York-quoted Software Toolworks, the California-based publisher of computer games and educational software.

Pearson said the deal was designed to take it into the fast-growing market for interactive entertainment. It would also accelerate the broader development of multimedia capabilities within its existing operations, it said.

The price raised eyebrows in the City, and Pearson's shares slipped 26p to 641p. Set up in 1986, Software Toolworks over-expanded through acquisitions and ran into financial difficulties in 1990, losing dollars 14.5m in 1992.

New management and tough financial controls have restored the group to profit. In the nine months to end-December it made pre-tax profits of dollars 6m on turnover of dollars 101m.

Nevertheless, the deal is a multiple of 58 times earnings - it will slightly dilute Pearson's earnings this year - and 3.5 times revenues.

Earlier this year Electronic Arts, one of the world's biggest computer game companies, bought Broderbund, another software group, for dollars 400m - about four times its revenues. With profits of around dollars 20m a year the Broderbund deal represented a much lower earnings multiple, however.

Software Toolworks, which has a European subsidiary called Mindscape, is a leading publisher of entertainment software - particularly cartridge video games for machines made by the Japanese groups Sega and Nintendo, which account for about 42 per cent of its sales.

But the group is also a leading producer of information- and education-based software products such as the Miracle Piano Teaching System. It is strong in the fast-growing CD-Rom market - computer- readable compact discs that can be used to generate video images and sound. CD-Rom software is seen as a key growth area, mixing education, information and entertainment.

Frank Barlow, Pearson's chief executive, said the key reason for the purchase was Software Toolworks' 120-strong research and development team, which was 'audited' for Pearson by an MIT professor. The company estimates that three-quarters of new product ideas are generated internally.

Mr Barlow said that Pearson, which is offering dollars 14.75 a share in cash for at least 50 per cent of the shares, had been looking at the company for the last 12 months.

Software Toolworks' shares have benefited from a re-rating of games software shares in the US as media companies have increasingly looked to expand into the area. They climbed from a low of dollars 2 last June to peak at dollars 17 in October; recently the price has fallen back and before the announcement of the deal the shares were trading at dollars 10 each.

Most observers expect that before long, cable and satellite television systems will be delivering a range of interactive software, including games and shopping. But computer games are in any case big business, earning more revenues last year in the United States than films.

Pearson has separately confirmed that Nick Alexander, formerly head of Sega's European operations, is to join the company. However, he will play no part in running Software Toolworks; instead he is to become chief executive of Pearson New Entertainment Europe, which will publish videos, magazines and other entertainment products.

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