Outlook: Pearson bounces but no room left for mistakes

Technology rejects; City nostalgia

If anyone out there wants to buy the Financial Times, they will first have to kill off Dame Marjorie Scardino, Pearson's chief executive. The FT will be sold only over her dead body, she insisted yesterday in response to persistent press and City speculation that Pearson may be preparing to get out of business publishing altogether to concentrate on its interests in education.

After yesterday's near 14 per cent surge in the share price, Dame Marjorie looks a good deal less vulnerable to being killed off than she did before. Profits for last year, though down, came in above market expectations, and with internet losses now falling fast and the money from the RTL disposal working away at interest charges, there's every prospect of a sharp rebound over the next two years.

It may none the less still be premature to think Dame Marjorie is entirely out of the woods. In her first three years in the job, she could do no wrong. The City loved the business, loved the strategy, and loved Dame Marjorie. Her position as "first lady" of the FTSE 100 added to the cachet and Pearson was transformed from a dowdy old, aristocratically run media conglomerate into one of the market's favourite glamour stocks.

Then came the dot.com meltdown and the collapse in the advertising market. At Pearson it culminated in last December's profits warning. Both Dame Marjorie's long term business goals – annual double-digit earnings growth over five years and a doubled share price – sunk beneath a mountain of internet losses and a severe downturn in advertising revenues at the FT. Yesterday's results show that the situation has been stabilised, but the cost is there for all to see. Pearson has lost a packet on its two main websites, FT.com and the Learning Network, and although both sites are now fully integrated into their parent operations and on track to break even, it is apparent that much of the initial investment was a complete waste of money.

The acquisition and disposal programme hasn't been brilliantly timed either. NCS, the US-based examination service, was bought at the top of the market and the stake in RTL sold at the bottom. The stock market will be only partially comforted by the fact that no goodwill impairment charge has been taken against NCS. Most companies have been forced into big write-offs on their new economy acquisitions. Dame Marjorie takes the view that NCS is still worth what was paid for it.

Let's hope she is right, for although the shares are close to their three-year low, even after yesterday's dramatic surge, they are still on a demanding, growth stock multiple of 29 times this year's likely earnings. There's not much room for further disappointments there. Nor is there much evidence as things stand that Pearson's two main spheres of interest, educational and business publishing, are indeed growth businesses at all.

Technology rejects

After two profit warnings, it is little wonder that Logica, the text messaging and software company, stands on the verge of relegation from the FTSE 100 share index. The game may already be up, but the company is fighting like an alley cat to avoid it. Since the results a couple of weeks ago there's been a steady feed of upbeat news announcements, from directors' share purchases to new orders.

Yesterday's news that Logica has signed up Genie, the mobile internet business, to its Open Messaging Gateway, managed to drive the shares up 6 per cent, but is it enough? We'll know by tonight, when the relative market capitalisations are measured to decide who's in and who's out.

If Logica goes, then there will only be two technology stocks left in the FTSE 100. You cannot argue with what the markets decide, and in any case, the FTSE 100 is only an index. Even so, Logica's ejection would carry an important symbolic significance, and because many foreign funds and some British ones benchmark themselves against the the FTSE 100, it might result in some selling pressure as well.

But most of all it will reflect on Britain's entrepreneurial failure. There are still a few examples of recently created companies nestling in the FTSE 100. BSkyB is one and Canary Wharf is another. But the great bulk are the same tired old dinosaurs of British industry that have been there for donkeys years. Many of them these days hide behind silly new names, or are the products of wave upon wave of merger and consolidation, but essentially they are the same old companies.

Despite the bursting of the technology bubble, the same is not true of the United States, where a very substantial proportion of the country's major companies are still little more than 20 years old, in some cases even less. It will be a shame to see Logica follow so many of the young hopefuls out of the FTSE 100.

City nostalgia

Many will remember the way the City was before the great revolution of Big Bang with more than a touch of nostalgia, but Rod Kent, outgoing managing director of Close Brothers, surely goes too far in arguing that a "culture of trust" has been replaced with one of "litigation and greed". There was much which was good about the City prior to Big Bang, but the great bulk of it was bad. The City was slipping into the sea, and without the liberation Big Bang entailed, its present position as a boundless source of British wealth, jobs and prosperity wouldn't today exist.

The worst thing about the City prior to deregulation was that it was a closed shop. Just as bad, it regulated itself in defence of its own self interest. Sloppy, unprofessional and untoward practice ran riot, and the City was to a large extent the preserve of a self-perpetuating oligopoly of upper class stuffed shirts. The result was that when the Square Mile's doors were eventually opened to all comers, the existing inhabitants were almost wholly unprepared for the onslaught of new competition that then arrived.

Mr Kent may be right that "the demise of independent investment bank is bad for the City and for the country" but that the City is now dominated by companies, nearly all of them foreign, that have some idea of what they are doing most certainly isn't. The old City only had itself to blame for its demise. Rather than embracing change, it fought it tooth and nail, until eventually it was forced into submission under the cosh of Margaret Thatcher's handbag. Nobody can know for sure how things might have been in the absence of Big Bang, but that the City would not today be the world's leading international financial centre seems pretty much a certainty.

j.warner@independent.co.uk