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Higher learning

With a global education guy at the top, Pearson’s sending a message about its future

Marjorie Scardino, the chief executive of education giant Pearson Plc, announced today that she’ll be retiring at the end of the year. That’s kicked up a fresh round of speculation about the future of the Financial Times and Penguin Books. Together, the two divisions brought in about a quarter of the company’s revenues and under a third of its operating profits last year. Selling them off seems like an increasingly smart bet.

Those rumors have been around for years. But Scardino, a publishing lifer who once said the FT would be sold “over my dead body,” hasn’t actually ever needed to sell them. During her tenure as CEO, Pearson’s sales nearly tripled to nearly £5.9bn and operating profits grew by more than three times, to £942m in 2011. The company’s share price, meanwhile, has increased by more than 80% while the FTSE 100 index gained only 40%. That’s kept shareholders – the CEO’s most critical constituency – pretty happy.

Ms. Scardino’s replacement, John Fallon, who has spent the last decade heading up Pearson’s fast-growing international education division, is taking over in a very different world. For the first half of this fiscal year, the company just reported a 7% drop in adjusted earnings per share. And it’s hard to be too optimistic about the upside in either newspapers or consumer book publishing these days, despite solid profits and promising growth in digital formats at both businesses.

Education, meanwhile, is a huge opportunity – nearly $4.5 trillion globally by one estimate. That’s why it’s not just at the core of Pearson’s strategy, but also the company’s biggest and strongest business. Of course, education is going through some major transformations too, from kindergarten to higher education through to continuing and professional education.

For starters, there’s a funding crisis in traditional education throughout North America and Europe. From local school districts to universities, money is tight. And students, already buried under more than $1 trillion of debt, can’t afford to pay much more for tuition, books or supplies.

The rise and increasing legitimacy of online distance learning has created some big new customers. But growth in the for-profit education market has slowed down dramatically with increased public scrutiny and government regulations.

Technology, meanwhile, is paving the way for disruptive new competitors, including innovative start-ups, non-profit organizations and traditional media businesses, including News Corp. and Discovery Communications. It’s also leading to the creation of entirely new ways of teaching and learning.

Then there’s the promise – and perils – of fast-growing developing markets such as China, India, and Brazil, where Pearson still has a relatively small presence. Not to mention direct competitors bulking up, fueled by private equity.

Pearson has already done a lot to shift its product mix towards digital products and services and to increase its exposure to fast-growing economies. However, there’s still a lot to be done. And finding opportunities among all these challenges and threats will demand focus and flexibility.

Wall Street and City analysts say that selling the FT Group, which accounts for just 7% of the group’s total revenues, could raise anywhere from £600m to £1bn. And Penguin, which is brings in nearly 18% of Pearson’s sales but generates margins well below the rest of the group, could be worth another £650m.

The company doesn’t need the money. It’s got a healthy balance sheet and good cash flow. But that kind of firepower will be useful as the company looks to continue or accelerate its investments in education. So arguments for keeping these non-core businesses are looking harder and harder to make.

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