Wednesday, November 11, 2009

Cutting Losses: Smith Bows Out as Reed Elsevier CEO

In a move that shocked many B2B media insiders - including Incisive Media CEO Tim Weller - global information provider Reed Elsevier has announced the resignation of their CEO Ian Smith, to be replaced by Erik Engstrom, CEO of their Elsevier division. While early speculation from FT's Alphaville blog depicted the management shift as "a proper executive-level knifing," more considered comments from industry analysts and insiders in The Independent seem to indicate that Smith was falling on his own sword in recognition of some major challenges not easily resolved by someone with limited media experience. Three key factors were arguing strongly for changes at Reed Elsevier sooner rather than later: the selloff of Reed Business Information assets had stalled, pre-tax profits were down 52 percent in half-year results and investors lacked confidence in both projected earnings and Smith's aggressive recapitalization efforts. With Smith's mentor Jan Hommen having departed from Reed Elsevier's board in January to head the ING bank, a graceful exit was probably in order.

For all of the corporate drama that this move has generated, it's easy to forget that Smith's move to float more stock to reduce debt and to fund Reed Elsevier for more aggressive organic growth was a very sound move, even if it is one that displeases investors in the short term. The real question is whether Engstrom will be up to the challenge of using that capital effectively in a struggling economy. Certainly Engstrom's Elsevier unit is the most effectively positioned business unit in the Reed Elsevier empire today, with deep and widely successful enterprise information products and a growing folio of academic and scientific publications. Yet as relatively strong as Elsevier may be, growth will be a major challenge for Reed Elsevier, even if the economy is laid aside as a contributing factor.

The key problem that Engstrom faces is that few of the tricks that have worked for Reed Elsevier in the past are likely to lead to growth in the future. B2B magazine publishers over-romanticized the likelihood of revenues from traditional channels in the face of massive changes in online information delivery and were therefore ill-prepared to adjust to cutbacks in events attendance and slimmer online ad revenues. At the same time growth by title acquisition, licensing and data integration was making for a relatively rosy top line for Elsevier and LexisNexis but failed to leave enough room in budgets after debt and development costs to fund new product development. Fairly aggressive staff and operations streamlining at LexisNexis have improved the outlook for their business information operations somewhat, but the overall forecast for both LexisNexis and Elsevier highlights modestly incremental product development.

On the surface the smart approach would seem to be to "Glocer-ize" operations at Reed Elsevier as rapidly as possible. Thomson Reuters CEO Tom Glocer moved rapidly in recent years to pare away redundancies and legacy products with limited upside and to focus operations on enhanced integration of enterprise content services across their holdings. Unfortunately there are far fewer synergies available between LexisNexis and Elsevier than those found in Thomson Reuters holdings, with the cultures of the two divisions still remaining miles apart, both literally and figuratively. With ever-broadening competition for the core content licensing services of LexisNexis, including more aggressive development of Dow Jones' enterprise information holdings, Reed Elsevier looks increasingly like a company with one fairly stable boat and three heavy anchors failing to find a bottom.

While speculation remains in the air about a possible move to merge Wolters Kluwer operations in to Reed Elsevier, the more probable short-term solution would seem to lie in disposing of some or all of LexisNexis as promptly as possible while its asking price is still worthy. One possible solution would be to spin off LexisNexis operations to Thomson Reuters or Dow Jones to bolster their competitive positions in legal and business information. Thomson Reuters would be a better strategic fit overall for a spinoff, especially if Thomson Reuters could flip back some or all of its scientific holdings to Reed Elsevier, but regulatory concerns about merging LexisNexis into Thomson West would probably make a wholesale spinoff to Thomson Reuters doubtful. A more probable resolution to overcome regulatory hurdles might lie in offering LexisNexis legal assets to Dow Jones and its news licensing assets to Thomson Reuters, which has lacked archives depth since returning its interest in Factiva to Dow Jones.

Whatever the specific solution may be, Reed Elsevier needs cash to focus on building up its scientific and medical assets for growth as rapidly as possible. Cheap financing as a means to grow stables of titles is off the menu for a while, thankfully, so Smith's forecast for organic growth requires an acceptance that it will have to come by focusing far more aggressively on its Elsevier division. Elsevier is not without its own challenges - scientific publishing faces strong pushback from corporate and academic libraries that find it increasingly hard to afford the full range of journals that most publishers offer - but both scientific research and applied sciences are markets still crying out for productivity gains that would warrant increased product investments. By contrast, productivity in legal markets are moving away from many of LexisNexis' core database strengths, which would benefit from more integration with other platforms.

There's always the possibility that Engstrom may decide to go for short-term gains and shuffle the Reed Elsevier portfolio just enough to tweak out a year or two of decent earnings. Here's hoping that he finds the courage to make some very tough decisions as to what is likely to provide the best returns for Reed Elsevier investors in both the short run and the long run. Moving on a sale of LexisNexis, by far the most attractive disposable asset available from Reed Elsevier, will enable them to take advantage of its value while it still has some attractiveness in the enterprise information marketplace. Without further integration of their information with financial market information and successful media operations, LexisNexis is not likely to contribute significantly to Reed Elsevier growth for some time to come. We'll see how Engstrom decides to cut his losses, but here's hoping that his moves help to strengthen both Reed Elsevier and enterprise information markets overall.
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