Textbook Case of Good Timing at Time Inc.
Time Inc. bought a publisher of elementary and high school textbooks Tuesday, and the stock market promptly clipped $3.125 a share, or 4% of the total market value, from the price of Time’s stock.
The market knocked Time down another $3 on Wednesday because of a decline in earnings for the company’s magazine business (Time, People, Fortune and Sports Illustrated, among others) and continuing cost problems in its cable programming business (HBO, Cinemax). But it was the $520-million acquisition of the Scott, Foresman textbook company that set off the market’s angry reaction. Has Time made some incredible blunder, a rerun of its fiasco with TV-Cable Week, the magazine it launched three years ago and folded five months later with losses of almost $50 million?
Not at all. The schoolbook acquisition is a smart move. The stock market’s institutional investors and analysts reacted for their own reasons--some rational, some dumb. Many on Wall Street were disappointed because they had regarded Time as a takeover candidate (for no specific reason, other than that takeovers have occurred among media companies) and saw the acquisition, which will slightly reduce Time’s earnings next year, as discouraging a takeover.
Market Sometimes Wrong
Other analysts went further and disliked the acquisition because they saw Dick and Jane readers as a stodgy business compared, as one analyst put it, to cable and video and high-technology communications. Which only goes to show how wrong the market’s judgment can be.
The truth is, textbooks are a new growth business. School enrollments are growing again after a decline that lasted from 1971 to 1984 and now are slated to increase steadily through the late 1990s. And money for education will be there, says analyst J. Kendrick Noble Jr. of Paine Webber--one of the only analysts to praise Time’s acquisition of Scott, Foresman. The number of families with children under 16 is growing, Noble says, “and society puts money where the votes are.” Wall Street is forecasting 12% to 15% annual growth for textbook sales.
Furthermore, it’s a highly profitable business, with pretax margins of 15% to 20% according to Reginald Brack Jr., the head of Time Books. As a comparison, that’s more than GM makes in cars but less than IBM makes in computers, and as good as Time Inc. averages from its other businesses. Others have seen what Brack sees. Book publisher Simon & Schuster, now part of the smart conglomerate Gulf & Western, has acquired its way to No. 1 position in textbook publishing in the last four years.
Back to the Classroom
For Time, the acquisition represents a return to the classroom. In the late 1960s, Time launched a company called General Learning to pioneer new systems in education. The venture was similar to many high-tech, futuristic approaches to the education market at that time, and it failed, as did the others. But the move into schoolbooks, says Brack, is “no pie in the sky, it’s profitable now.” Brack likens Scott, Foresman to Time’s $480-million acquisition in 1985 of Southern Progress, the publisher of Southern Living magazine. And there hangs an insight into the contemporary Time Inc., the company that has grown bigger but not better since its visionary founder, Henry R. Luce, died in 1967.
For before Time, a giant corporation with $3.4 billion in revenue and roughly $500 million in operating income, bought Southern Living, its executives spent a year trying to decide if the company should originate a new magazine of its own. They considered a women’s magazine (Time had test-marketed and dropped a woman’s magazine in 1978), a weekly business magazine (Money is monthly, Fortune biweekly) and a pictorial weekly that it is still testing. But after a year, the executives--fearing, perhaps, to make another mistake like TV-Cable Week--gave up the quest for a new periodical and soon after bought Southern Living, which is reputed to be one of the nation’s most profitable magazines.
The episode revealed how Time Inc. had finally made the passage from entrepreneurial management to modern finance-oriented, risk-averse management. It’s a transition that many U.S. companies have undergone after a visionary founder passes from the scene, and Henry Luce, who started Time in 1923, was a man of extraordinary vision. Driven less by money than by a dream of educating the American people, he practically invented the modern magazine business and built Time Inc. in the process. He was a hard act to follow, and probably it would be unwise for Time’s current executives, who weren’t born with his vision, to try.
What they owe to Time stockholders and bondholders, and to its employees, is sound maintenance of the property rather than imaginative breakthroughs. And within the bounds of their limitations, the Time executives’ decision to move into schoolbooks looks to be on the money.
