The difference between the dot-com boom of the late 1990s and the renewed
excitement of the Web 2.0 age is simply this: companies are not talking
about future earnings online, they are making money from the internet now.
The digital age is not a promise, it has become a profit stream.
Reed Elsevier’s decision to put its education business up for sale is a
dramatic expression of this new dynamic. Sir Crispin Davis, the chief
executive, has essentially decided to offload a lumpy, low-growth
book-publishing business in order to ensure the company can concentrate on
higher-margin, internet-based information services.
It has taken some courage for Sir Crispin to put the Harcourt education
business on the block. There are other education businesses on the market,
put on sale by Thomson and Wolters Kluwer. Reed, no doubt, hopes that a
potential buyer has the appetite to put Harcourt and Thomson’s higher
education businesses together and pay for the synergies. But the Harcourt
education division is valued on Reed’s books at $2.6 billion (£1.33
billion). Sir Crispin’s bankers at UBS have a job on their hands to elicit a
buyer who will pay that — or more.
More importantly, Sir Crispin is selling a business which he himself bought.
It was his decision to purchase Harcourt for $4.5 billion in 2001. Nearly
half of Harcourt was healthcare publishing, which has doubled its revenues
in the past six years.
But the education division — valued at $2.5 billion — has had erratic returns.
Reed was part of a European scramble for US education assets at the turn of
the century, which were rooted in the misplaced expectation that the
American classroom would be transformed by digital technologies. So far, it
has not. While other parts of Reed’s businesses have migrated online, only 5
per cent of the US education business is digital. Harcourt may have been his
deal, but Sir Crispin has calculated simply that the share price is stronger
than pride. And the disposal of the education business will liberate Reed to
grow by focusing on scientific, healthcare and legal publishing.
These are media businesses which are not being disintermediated by the
internet, but invigorated by it. In 2000, healthcare publishing meant
producing books. Three years ago, it meant providing that book content
online. Today, it means selling doctors online services which enable them to
keep patient records, trawl databases for clinical studies, analyse the
efficacy (and side-effects) of pharmaceuticals and then issue the
prescription direct to the local pharmacy.
Media companies selling to general consumers may wish that the pace of digital
change would slow. Companies like Reed, which for years inhabited the dull,
geeky world of niche publishing, are relishing the rapid migration online.
Digital information services mean higher margins and consistent growth.
Reed’s decision underlines a fundamental change in professional publishing, an
abandonment of the printed word on dead trees and an embrace of a new
information services business model. Professional publishing has crossed a
threshold, shelving books to embrace bytes: it is offloading the creation of
Johannes Gutenberg and placing his faith in the ‘invention’ of Al Gore.
Cool lead from Credit Suisse
Credit Suisse is not the bank it once was. There was a time, when it could be
relied upon for a good succession battle, a stream of high level defections,
a series of damaging leaks in the press, a poisonous argument in the
boardroom and, ultimately, an unceremonious exit for the chief executive.
Yesterday, the bank delivered the kind of drama more befitting a Swiss
financial institution: one diligent, low-key executive quietly handed over
to another, at a time of his choosing and accompanied by a strong set of
results.
Oswald Gröbel is returning to the retirement from which he was plucked in the
midst of the John Mack saga just a few years ago. Brady Dougan, a 17-year
veteran of Credit Suisse who at present runs the investment banking business
out of New York, will take over. Lovers of drama may have been disappointed,
but the staff and clients of Credit Suisse have applauded.
Within the Swiss corporate landscape, it is significant that Credit Suisse has
chosen an American investment banker who does not speak German and has never
lived in Zurich as its next chief executive. Swiss companies have preferred
Swiss — or at least continental European — leadership. Credit Suisse might
have been excused for shunning American chief executives, given its recent
turbulent history. But the Dougan appointment shows that the bank has made a
sober choice on merit. It also raises the question of whether other Swiss
banks, notably UBS, will look abroad as they prepare for generational change.
The appointment of Mr Dougan also lays to rest the recurrent speculation over
the place of CSFB, the investment bank, within the broader group. It will be
at the heart of Brady’s bank.
It is time, it seems, to take Mr Gröbel at his word: this is, indeed, “one
bank”.
Rates riddle
The puzzle created by yesterday’s official retail sales data is as intriguing
as it is, ultimately, unimportant for discerning where interest rates go
next.
Attempting to unravel this latest conundrum from the Office for National
Statistics proved an enticing game for analysts. Retail surveys had shown
buoyant sales last month. Yet the ONS says that January was bleak on the
high street. Economists, who can’t resist such Su Doku-style enigmas, went
to work and hatched a flurry of theories: seasonal adjustment is being made
far harder by changes in consumer spending patterns, discounting means that
even quite high spending can translate into much lower sales volumes, and so
on.
Well, as Mervyn King likes to say, the truth about Christmas in the high
street will probably not be clear until Easter.
Meanwhile, there are two, straightforward bottom lines.
The first is that consumer spending still faces significant and persistent
headwinds, from higher taxes, bills, and base rates, and so may well slow.
The second is that none of this is likely to prevent another rate rise, and
nor should it. Rapid growth of money and credit has clearly spilled into
asset markets, whether for houses or in the financial sector. In turn, the
wider inflationary pressures this spells are enough, on their own, to
justify another rate rise.
Investors had to be counter-intuitive to make money in the first six years
of our healthier, high-tech century. ABN Amro’s Global Investment Returns
Yearbook shows returns on the best world sector were 17 times that of the
worst. The worst was IT hardware, down 63 per cent after the burst bubble.
The best was tobacco, which returned 511 per cent. In the UK, returns on
tobacco were 137 times better. Where there’s smoke . . .
james.harding@thetimes.co.uk
