Pearson cuts its losses and dumps Mindscape

Pearson, the Financial Times to Madame Tussaud's media conglomerate, yesterday drew a line under one of the most disastrous deals in its history by selling Mindscape, its troubled software group. Mindscape has cost Pearson a total of nearly pounds 260m, including around pounds 48m of operating losses and a pounds 212m loss on disposal of the business.

The acquisition of Mindscape is widely recognised in the City as being one of the worst corporate acquisitions this decade. It has been a severe embarrassment to Pearson almost from the first day it was purchased in April 1994. It made a small profit that year but plunged into the red in 1995 and made a loss of pounds 45.5m in the following 12 months.

Analysts believe the dire performance of Mindscape contributed to the downfall of Frank Barlow and Michael Blakenham, Pearson's former managing director and chairman respectively.

The sale is the most significant corporate move so far by Marjorie Scardino, Pearson's new chief executive, who has been handed the daunting task of radically reshaping a group which has been criticised as being a sprawling empire of disparate media interests. She has now raised pounds 500m from disposals since her arrival in January last year.

Mindscape is being sold for $150m (pounds 91m) to The Learning Company, a US software publisher. News of the sale helped Pearson shares rise 24p to hit an all-time high of 943p as investors sighed with relief that the business had finally been sold.

Analysts pointed out that Frank Barlow was instrumental in buying Mindscape and its spectacular failure was a severe dent to his credibility in the City. "It was Barlow that forced through this deal and it probably contributed to the rug being pulled from his feet at Pearson," said on analyst.

Pearson bought Mindscape to give it a foothold in the CD-Rom market. It paid $462m for the original business, but made a number of subsequent acquisitions which brought the total cost to $503m (pounds 305m). The idea was to exploit Mindscape's technology and Pearson's existing publishing strengths to develop new titles and video games But the experiment quickly turned sour. Despite optimistic predictions of huge growth, the CD-Rom market flopped. Consumer demand was lack lustre and a flood of new titles onto the market lead to prices being slashed, with competitors launching a ferocious battle for shelf space. Mindscape also suffered from having more than its fair share of out of date technology. A large amount of its business was based on supplying software for cartridge based games and it was slow to embrace the shift in consumer demand for personal computers.

However, since clocking up a huge loss in 1996, Mindscape's management have managed to turn the business around. It actually made a small profit of pounds 1.6m in 1998, despite having made a loss of pounds 15m in the first half of the year.

Pearson is understood to have been keen to sell the business for some time but with losses mounting it was difficult to find anybody remotely interested in the business. However, the return to profit gave it the group a chance to recoup at least some of its purchase price.

Mindscape currently produces titles such as Mavis Beacon Teaches Typing, The Complete National Geographic and Chessmaster.

Ms Scardino has enthusiastically set about reforming the media empire since her arrival in January last year, launching a pounds 100m expansion of the FT and selling off some of the worst performing businesses.

And in her biggest acquisition to date Pearson purchased All American Communications, producer of the Baywatch series, last October for $373m and disposals will give Pearson more financial clout to make further substantial acquisitions. Ms Scardino pledged last year to double the share price of the group by the year 2002.

Ms Scardino said: "The team at Mindscape have done a fine job in turning around its performance over the last year. But Mindscape is always going to be worth significantly more to a company like The Learning Company than it ever will be to Pearson.

"Its disposal enables us to concentrate our resources on the media businesses where we can build market-leading positions."