Fight for the rights

This year, Pearson launched the biggest rights issue the UK has ever seen in order to raise the capital to buy National Computer Systems. Dearbail Jordan notes the effects four months on

WHEN Gary Rincke, former London managing partner of US firm Morrison & Foerster, joined Pearson on 1 July, the company was about to embark on the largest rights issue the UK has ever witnessed.

In a bid to consolidate its position in the education publishing market, where it already owns Simon & Schuster, Pearson launched a 3-for-11 rights issue to raise £1.7bn in order to acquire US educational software company National Computer Systems (NCS).

Explaining this bold move for Pearson, Rincke says: “It was a vehicle that was used quite often until six to eight years ago, and then it seemed to fall into disfavour.”

The issue, underwritten by Cazenove and Co and Goldman Sachs International, was the largest since 1987, when BP raised £1.5bn through a similar vehicle.

Apart from its size, it was also noteworthy by the company’s shares being offered at £10 under the rights issue – a heavily discounted price, considering that at the time Pearson’s shares were fluttering around the £17-£18 mark.

The company was advised by Freshfields Bruckhaus Deringer and, since NCS is a US-based operation, by Morgan Lewis & Bockius.

While Rincke is quick to acknowledge the calibre of the legal and financial advisers working on the issue and the subsequent acquisition of NCS, he says that the in-house team maintained a very hands-on approach to the whole procedure.

“Internally we were very involved. I would say that the core people working on this were from within Pearson,” says Rincke. “The decision to do a discounted rights issue came from Pearson on the strength that it’s a good vehicle for raising capital without costing as much or diluting shareholders’ interests that much.”

This independent attitude is deeply ingrained in the culture of Pearson, especially in its small in-house legal department, which acts as a catalyst for the coordination of the 40 other lawyers who are housed within Pearson’s ever-expanding maze of operating companies.

Rincke says: “Work tends to come up from the operating companies. What we spend our time concentrating on at the plc level is M&A work and substantial [£1m-plus] litigation.

“With the operating companies, we tend to spend a fair bit of time on commercial matters that are important to the business, but we don’t try and replicate the infrastructure of a law firm.”

Rincke adds proudly: “Our people here are as well versed as outside lawyers, and we’ll only get a second opinion if there’s a very large project that is multinational in scope – only then will we go outside.

“Part of what we do is just to coordinate, but often at times what we are able to do is to add value by being lawyers in the process as well.”

On seeking external advice – which has been many times this year considering the amount deals Pearson has been involved in (see box) – Rincke says: “We employ more law firms than you’d care to imagine.”

The usual suspects are firms like Freshfields and Herbert Smith, which acted with Morgan Lewis on the merger of the Financial Times’ asset management division with the Data Broadcasting Corporation in November last year.

Also, since Pearson ope

rates in over 50 countries, there is a significant need for European legal advice.

This year, for example, it launched the Financial Times in Germany, and it has an extensive presence in the Iberian market through Recoletos Publishing.

However, Rincke does not subscribe to the view that because he chooses to use a firm in the UK he will necessarily use its overseas offices.

“We wouldn’t automatically go to it, but we have used the overseas offices of Freshfields, Herbert Smith and Denton Wilde Sapte,” says Rincke. “But then, we’ve used the overseas offices of Simmons & Simmons, but we haven’t used them in London.

“Our choice is based on the strengths and capacities of the individual offices.”

Pearson will also employ the services of smaller, more specialised firms for advice in areas such as libel. For example, the company used Davenport Lyons in the high-profile and ultimately successful libel case against historian David Irving, and it will also look to firms such as Peter Carter-Ruck should the need arise.

The company also has a heavy need for US counsel, since 60 per cent of Pearson’s revenues are generated on the other side of the Atlantic. Morgan Lewis is a much-used firm, while Rincke says his former firm, Morrison & Foerster, is also beginning to pick up work from the company.

Rincke explains: “The US is a big market so we employ a number of law firms. We try to engage people locally where the work arises.

“We have a large presence on the East Coast. Pearson Education is based in New Jersey with the Family Education Network in Boston, but it also has a substantial presence in San Francisco. The demographics of our hiring, then, tends to follow where we have people.”

The tendering process is not a favourite with Rincke, who prefers a more personal approach to choosing external advisers.

He says: “Because we operate in certain areas – media publishing and education – it’s not difficult to find who the specialist practitioners are.

“If we use people we get good work from and have a good relationship with, we tend to go back to those people again and again.”

He adds: “We get the best value out of the people who know us and know our businesses so that we don’t need to have too many people who are in the same position – there are diseconomies of scale in that.”

The US has become an increasingly important market to the company since the arrival of chief executive officer Marjorie Scardino, who formally held the same position at the Pearson-owned Economist Group at the end of 1996.

At that point, the media company had its finger in an odd assortment of pies from Madame Tussaud’s to a stake in investment bank Lazards.

In 1998, a programme of divestment began in earnest, with Pearson selling off non-core businesses to concentrate on what it does best – media and publishing.

The importance of the US market was reflected in the appointment of Rincke, who took over the running of the in-house legal department from group legal director and company secretary Paul Vickers, who left last year (The Lawyer, 12 July 1999).

At the time of Vickers’ departure – he eventually landed at internet incubator company antfactory (The Lawyer, 29 March) – Pearson announced that it would be looking for a US-qualified lawyer, as the company moved to a US-orientated general counsel system.

The eight-member company secretariat department is now separate from the head office legal unit, although the two liaise with each other on a regular basis.

Rincke is now committed to growing the in-house legal department to reflect the consolidation of the company.

He says: “There’s so much more overlap, and therefore legal issues, arising in common between the businesses, so it makes no sense to independently reinvent the wheel. It makes more sense to bring in people centrally.”

At present, Rincke and his small in-house team within the plc look after the US, but he says: “Our next move will be at Pearson Inc to have another central legal player who works with the operating companies in the US.”

Rincke predicts that this plan will come into play within the next three years – it will not be an overnight occurrence.

But with the rate of growth at Pearson, it seems inevitable that the need to increase the legal department will come sooner rather than later.
Gary Rincke
Head of legal and general counsel
Pearson plc

Organisation Pearson plc
Sector Printing and publishing
FTSE 100 ranking 71
Market capitalisation £14,136.96m
Employees 20,000
Legal capability Three lawyers (head office), 40 lawyers (operating companies)
Head of legal Gary Rincke, general counsel
Reporting to Marjorie Scardino, chief executive officer
Main location for lawyers London
Main law firms Denton Wilde Sapte, Freshfields Bruckhaus Deringer, Herbert Smith and Morgan Lewis & Bockius