Why the pink queen might turn deep red

In 1997 Marjorie Scardino set the owner of the 'FT' a five-year target to double its share price. So what went wrong? asks Clayton Hirst

Pearson is bust. Or at least it will be next Sunday according to its chief executive, Dame Marjorie Scardino.

Back on 4 August 1997 when the go-go Texan was promoted to head the media group, the then plain old Ms Scardino set the company an ambitious five-year target. Earnings should grow by at least 10 per cent a year and its share price, then standing at 666p, would double. "We've already begun this '1,332 or bust chant'," she quipped at the time.

But when Pearson publishes its interim results tomorrow, there will be little chanting because the company that owns the Financial Times newspaper, Penguin books and is one of the world's largest educational publishers is expected to warn that trading is still "challenging".

What Dame Marjorie probably won't remind the City of is that it is almost five years since she set those targets. So barring an unprecedented 57 per cent jump in the Pearson share price, she has failed.

"Things have come unstuck for her. These were quite optimistic predictions," says Kingsley Wilson, media analyst at stock- broker Inves- tec Securities.

Despite her early exuberance, the City has been relatively kind to America's best- known Dame Commander of the British Empire.

Yes, she may have got a little carried away with ambitious numbers and, yes, she perhaps invested too much money in loss-making internet ventures, but Dame Marjorie has nonetheless transformed the company. When she was plucked from the Economist Group to run Pearson, the business was sprawling and unfocused. The joke at the time was that it was like an investment trust without the tax advantages. Dame Marjorie set about tidying it up through a string of deals that included the sale of Madame Tussaud's and investment bank Lazards.

Today, Pearson is three businesses in one: news publishing, including the Financial Times and its half share in The Economist; consumer books, including Penguin and Dorling Kindersley; and educational publishing, concentrated on the US.

The idea is that while there are synergies between the groups, Pearson's portfolio should mean it is shielded against wild swings in the stock market.

In practice, Dame Marjorie has to fight fires in almost every area of her empire.

The biggest problem is Pearson's education interests. The company has invested $7.2bn (£4.6bn) in this sector, which now accounts for 60 per cent of its overall revenues.

But fellow Texan George W Bush is causing Dame Marjorie a few problems.

More than 90 per cent of school funding in the US comes from the state in the form of corporation, property and retail taxes. The decline in the Amer- ican economy combined with President Bush's package of economic stimuli, largely driven by tax cuts, means that schools are cash strapped and spending less money on Dame Marjorie's books.

"We don't expect education to gain momentum until 2004," says Paul Sullivan, media analyst at investment bank Merrill Lynch. "Pearson's strategy on education will work well in the long term, but it has proved a more cyclical business than first thought."

Similarly, the company's top-of-the-market swoop on US educational software firm NCS is proving hard to justify to some investors. Pearson fended off calls earlier this year to write down its investment by setting a 15 per cent revenue growth target. But investors with long memories remember other heady targets bandied around, but not met.

"We have big reservations about the likelihood of schools implementing aggressive software/ technology plans while funding issues loom," says a recent report by Investec Securities. "These issues will extend well into 2003."

In the UK, Pearson is also expanding into the market of providing educational material electronically, most recently through a joint venture with Channel 4. But here the company's ambitions could be thwarted by Greg Dyke. The BBC director-general – ironically a former main board director at Pearson – is seeking government permission to use as much as £170m of licence-payers' money to offer National Curriculum material online to teachers for free.

According to management consultancy SRU, co-founded by Pearson non-executive chairman Lord Stevenson, if the plans go ahead then private companies could miss out on up to £400m in new revenues.

Dominic Savage, co-chair of the Digital Learning Alliance, a trade body for companies involved in e-learning of which Pearson is a member, says the BBC is already "destroying" the market. "Companies seeking funding from venture capitalists are being turned away, with the BBC cited as the reason," he says. "It is incredibly difficult for commercial companies to compete with something that is free."

Last Thursday Mr Savage met Bill Bush, special adviser to Culture Secretary Tessa Jowell, to put forward the case for rejecting the BBC's application.

The dispute over the BBC's plans has been well covered in Pearson's flagship title, the Financial Times. Bought in 1957, Pearson has turned the news-paper into one of the world's most recognised brands.

But this hasn't prevented the Financial Times from being hammered by the sudden slowdown in advertising spend. In the first half of this year, according to Merrill Lynch, revenues could have fallen by as much as 25 per cent with few signs of a recovery.

The paper's new editor, Andrew Gowers, has been forced to ditch the three-year-old Saturday magazine, Business. Together with other cutbacks, this is estimated to save the paper around £2m a year.

With Pearson's focus now firmly on education, people are beginning to ask whether Pearson should sell its flagship title.

"Over my dead body," has been Dame Marjorie's response. And most analysts agree there would be little point in selling the Financial Times when the bottom of the market is probably close.

When the market recovers, there would be plenty of interest. In particular, Dow Jones, parent company of arch-rival The Wall Street Journal, hasn't hidden its interest in the pink 'un.

Over at Penguin, which includes Dorling Kindersley, things are a little quieter. Perhaps they're too quiet.

Investec Securities predicts just a 3 per cent increase in Pearson's book sales this year and has warned that retailers could put pressure on publishers to reduce margins. Ominously, Peter Olson, chairman of the world's largest consumer publisher, Random House, recently warned: "We are prepared for a recession that may be very protracted and very difficult."

So, instead of the focus being on a possible sale of the Financial Times, Mr Wilson at Investec Securities says: "Pearson has built up a focused media company. There is a question over whether Penguin fits into that. It is a low- growth business. I don't know how much more it can drive margins."

On Monday, with the interim results, Dame Marjorie is expected to address this head-on by outlining measures to grow the division.

Just don't expect any references to 1997.