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Top of the class in America

IN 1997 sales of primary and secondary school textbooks in the United States rose 13 per cent to nearly $3bn (pounds 1.8bn), while sales of college textbooks increased 7.4 per cent to $2.7bn, the Association of American Publishers reports. In a good year, several publishers experienced double-digit growth.

But not Pearson's educational publishing group, Addison Wesley Longman, where sales rose only 1.7 per cent and operating profits inched up by less than 1 per cent.

With those figures, Pearson chief executive Marjorie Scardino clearly understood that Pearson's choices were to "get bigger or get out". Other publishing companies came to the same conclusion years before, including Rupert Murdoch who sold the HarperCollins college division and the Scott Forseman school division to Pearson in 1996 for $580m. Unlike Mr Murdoch, however, Ms Scardino decided she did not want to get out of educational publishing, but wanted to get bigger.

When the sale of the Simon & Schuster educational units to Pearson is completed, Pearson will become America's largest educational publisher in both the school and college markets. Its worldwide educational sales will total more than $2bn.

Winning Simon & Schuster's educational operations was not simple or inexpensive. Pearson faced two of the toughest players in US financial circles: Knowledge Universe, a leveraged buy-out group led by the junk bond king Michael Milkin, and Kohlberg Kravis Roberts, the huge buy-out group whose holdings include Primedia, a diversified media company.

Bids for Simon & Schuster were due on 13 May. Sources say the first offers were at $3.8bn, and the bidding escalated to the $4.6bn Pearson agreed to pay. To finance the bid, Pearson was joined by the Dallas leveraged buy-out firm, Hicks, Muse, Tate and Furst, which agreed to buy Simon & Schuster's financial division for $1bn, leaving Pearson with a bill of $3.6bn.

The units bought by Pearson had sales of about $1.4bn in 1997 and operating profit of $210m, giving the purchase a multiple of about 2.5 times sales: steep but not unreasonable.

Ms Scardino was willing to go the extra dollar for two reasons. First, Pearson needed Simon & Schuster more than its competitors in trying to move from a struggling mid-pack publisher to a major player. Second, Pearson could pay more because it already owns publishing companies which, when combined with Simon & Schuster, will give economies of scale. Ms Scardino has promised shareholders that by 2000 the integration of Simon & Schuster and Addison Wesley Longman will result in savings of $130m.

The purchase is also about accelerating Addison Wesley Longman's growth in a number of areas. It gives Pearson a significant presence in nearly every major subject area in the school and university markets. Simon & Schuster has some of the best-known names in the industry, such as Silver Burdett Ginn, Allyn & Bacon, Prentice Hall, Modern Curriculum Press and Globe Fearon. Pearson also gains the strength of Simon & Schuster's technology: nearly all its copyrights are in digital form and can easily be "re-purposed" into electronic formats.

The acquisition will further bolster Pearson's international presence, as it includes subsidiaries in Asia, Latin America, Australia and Europe.

The man who will lead the integration of Simon & Schuster and Addison Wesley Longman is Peter Jovanovich, who joined Pearson in September 1997. He served as president of McGraw-Hill's educational and professional publishing group and has also run Harcourt Brace Jovanovich. It will largely be up to Mr Jovanovich to create what Ms Scardino envisions as "the world's leading educational publisher".

Copyright: IOS & Bloomberg