How Scardino pledge on growth went sour

IT is time for Marjorie Scardino to eat her own words. In the summer of 1997, Pearson's chief executive pledged to double the media group's share price over five years. Now the five years are up. But instead of doubling, the shares have actually fallen.

Scardino's record is also rotten on the other target she set in 1997: producing high double-digit growth in adjusted earnings per share. In 2001, they were 28% below those of 1997 - an annual growth rate of minus 8%. Five years ago, she told shareholders that she would be 'disappointed if it was in low double digits'.

Of course, things have looked far better at other times during the last five years. By 1999, for example, the stock had doubled from its level at the time of Scardino's pledge. By the following-year, it had nearly doubled again. Earnings powered ahead at the start of her reign.

But that early success doesn't make Scardino's words less edible. It just highlights the genuine problem behind her rhetorical target-setting. People who want to keep their promises align their deeds with their words. But Scardino's changes at Pearson increased the proportion of its earnings exposed to cyclical markets such as advertising. That was simply inconsistent with a pledge to produce 'consistent, stable growth year after year, no matter what the weather'.

Scardino's pledges made Pearson a bubble stock. The rollercoaster price chart was a natural result. A final Scardino quotation from 1997: 'We've already begun this 1332p-or-bust chant.' With the share closing last week at 568p, bust it is.

Summer breather in the Exchanges affair

THE London Stock Exchange has not abandoned every hope of merging with Nasdaq. The two are merely taking a breather. The prolonged flirtation is a source of irritation to Deutsche Börse, which tried to merge with the LSE and is still keen as mustard.

Börse chairman Werner Siefert thinks he is the best partner for the LSE's Clara Furse. And on the face of it, he looks right. London does more than five times as much business in European stocks as it it does in US shares. But it isn't as simple as it looks.

Most cost savings from a merger come from rationalising information technology spending, available whether the partners are divided by an ocean or just the North Sea.

Nasdaq, at an early stage in its transition to shareholder company, is inefficient. Over the past four years, the demutualising LSE grew turnover by 46% and margins from 14% to 33%. Nasdaq's margins were 7% last year. Nasdaq's reported demand for more than half the company is problematic, given it should only get 40% based on over-the-counter market value.

If Furse overpays, it will be an invitation to Siefert to blow her deal out of the water. But the industrial merits of a Nasdaq deal are no less strong than those of a merger with Frankfurt.

Is it time for shopping?

TWO weeks ago, we argued it wasn't yet time to buy the FTSE 100, on the grounds that fair value was somewhere between 3200 and 4100. The bluechip index then stood above 4200.

With the Footsie closing last week at just above 4000, is it yet time to go bottom-fishing? Not quite. For a start, the index is still in the top half of the fair value range. Then there is the likelihood that momentum investing will drive an overshoot on the downside - just as it did on the way up.

What's more, any rally will probably be capped by a flood of new equity issuance, as companies seek to repair tattered balance sheets and unquoted companies rush to market. All in all, the risks are still greater than the opportunities.