What an Activist Can Teach an Education Behemoth

(Bloomberg Opinion) -- When new chief executive officers take over, they often face a stark choice: Praise their predecessors and continue in the same vein, or throw them under the bus and pursue a new tack.

Even if they’d prefer to start afresh, they usually at least make a show of adopting their forerunner’s strategy. In the case of Pearson Plc, the activist investor Cevian Capital AB might have given the successor to outgoing CEO John Fallon cover to do away with the theatrics and forge their own vision for the education company.

Cevian announced on Thursday that it has built a 5% stake in Pearson, becoming the London-based firm’s fifth-biggest shareholder. The Swedish activist is pouncing while Pearson is vulnerable. The stock has been trading near its lowest levels since 2003, and the search for a replacement for Fallon, who plans to step down this year, has been delayed by the Covid-19 pandemic. A successor has yet to be found. The activist is seizing the opportunity to push for a CEO appointment with a “clear track record of shareholder value creation” — read: an external appointee.

It’s hard to argue with the company’s share performance: The stock has lost half its value since Fallon took over in 2013, massively underperforming the benchmark FTSE 100 Index. That’s even as Fallon sold the Financial Times newspaper, along with stakes in the Economist and publisher Penguin Random House, to focus Pearson on education. And that’s despite his pushing through three rounds of restructuring and investing significantly in new technologies. Capital expenditure in North America has totaled 762 million pounds ($960 million) over the past five years, yet revenue there has continued to decline.

It has sometimes seemed unclear what Pearson’s assortment of businesses — including textbooks, examination centers and online coursework — have in common operationally. Fallon’s response has been to centralize more corporate functions like sales, finance and administration, knitting the disparate units more tightly together. But that might have made it harder to react quickly to new online learning rivals. Having to request resources from HQ is inevitably slower than finding them within one’s own business unit. Compare this to RELX Plc, the educational publisher formerly known as Reed-Elsevier, which has managed to navigate the digital tides by delegating responsibility to its operating units and keeping central operations lean. Its stock has almost doubled since 2013.

Pearson’s central costs of 449 million pounds now represent 12% of sales. It's unclear whether that overhead has become more bloated than it would be if distributed among the operating units, but it seems a likely vector of attack for Cevian. If the activist succeeds in getting the units more autonomy, that could also make the company more vulnerable to attempts to force a breakup — a strategy that Cevian has deployed in the past.

After years of underperformance, investors could be forgiven for getting impatient with Chairman Sidney Taurel and his board. The directors need to find a successor to Fallon quickly and give her or him all the tools to get the company's hodgepodge of businesses to work well together. If they don't, Cevian might convince shareholders that a breakup is the best way to realize value from their investment.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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