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THE SECRET LIFE OF STM PUBLISHING René Olivieri – CEO THE SECRET LIFE OF STM PUBLISHING René Olivieri – CEO

ANALYST ONE Morgan Stanley Equity Research September 30, 2002 • • Scientific journals have ANALYST ONE Morgan Stanley Equity Research September 30, 2002 • • Scientific journals have been fastest growing media sub-sector of past 15 years Recent OFT ruling is good for journal publishers Journal publishers are unlikely to push a good thing too far We forecast moderate cyclical slowdown due to funding pressure Weaker players to bear the brunt of budget cuts Margins to expand for journal publishers as users move to online access Reed is a key beneficiary of this trend Presentation to UKSG Conference 2004 29 March 2004 2

ANALYST TWO BNP Paribas Equities October 2003 • Electronic publishing is unlikely to have ANALYST TWO BNP Paribas Equities October 2003 • Electronic publishing is unlikely to have a • • • significant positive impact on margins We believe the existing subscription based model of STM journal publishing may be challenged by alternative publishing initiatives Reed Elsevier and Taylor & Francis are the most exposed to a potential shift to Open Access In the event that open access becomes a successful rival to the subscription model, current publishers would react in a way that would see them establish control over this market. We are not so sure however that they would be able to maintain their pricing power Presentation to UKSG Conference 2004 29 March 2004 3

THE THEORY OF MERGERS AND ACQUISITIONS Chapter 1: The Rationale Size Diversification Reducing competition THE THEORY OF MERGERS AND ACQUISITIONS Chapter 1: The Rationale Size Diversification Reducing competition Presentation to UKSG Conference 2004 29 March 2004 4

THE ‘BIG DEALS’ SCORECARD ELSEVIER TAYLOR & FRANCIS CINVEN/CANDOVER (number of titles – 1, THE ‘BIG DEALS’ SCORECARD ELSEVIER TAYLOR & FRANCIS CINVEN/CANDOVER (number of titles – 1, 200) (number of titles - 768) (number of titles - nil) Harcourt General Gordon & Breach 2000 2001 2002 Kluwer Academic 2003 Frank Cass CRC Press Swets & Zeitlinger Pblshrs – 2004 CURRENT SCORE Springer Marcel Dekker Ca 2, 033 Ca 1, 020 Presentation to UKSG Conference 2004 29 March 2004 Ca 1, 400 5

ENTER: THE PRIVATE EQUITY INVESTOR • Time frame = 3 -5 years • Hoped- ENTER: THE PRIVATE EQUITY INVESTOR • Time frame = 3 -5 years • Hoped- for Return On Investment: 25% per annum • Exit Plan = ‘Roll-up’ and/or flotation • Principal source of finance = Debt Presentation to UKSG Conference 2004 29 March 2004 6

THE THEORY OF MERGERS AND ACQUISITIONS Chapter 2 : Leveraged buy-outs STEP 1 Buy THE THEORY OF MERGERS AND ACQUISITIONS Chapter 2 : Leveraged buy-outs STEP 1 Buy Company X for £ 100 million Borrow: £ 80 million bank STEP 2 Buy Company Y for £ 100 million Borrow: £ 80 million TOTAL EQUITY INVESTMENT: £ 40 million TOTAL BANK DEBT: £ 160 million STEP 3 Put in pressure cooker for 3 years and service debt from trading cash flows Presentation to UKSG Conference 2004 29 March 2004 7

Chapter 2: Leveraged buy-outs continued Remove from cooker three years later and serve… Step Chapter 2: Leveraged buy-outs continued Remove from cooker three years later and serve… Step 4 Sell or float new company for £ 400 million Step 5 Pay off bank debt of £ 160 million Step 6 Equity gain of £ 200 m or 45% per annum Presentation to UKSG Conference 2004 29 March 2004 8

Chapter 2: Leveraged buy-outs (The Epilogue) Step 7 • Retire to the country. Or… Chapter 2: Leveraged buy-outs (The Epilogue) Step 7 • Retire to the country. Or… • Start the roll-up all over again… Presentation to UKSG Conference 2004 29 March 2004 9

THE THEORY OF ACQUISITIONS ECONOMIC VALUE ADDED > Variable cost savings > Fixed cost THE THEORY OF ACQUISITIONS ECONOMIC VALUE ADDED > Variable cost savings > Fixed cost savings > Market share > Merger Credit Company X Company Y Combined X&Y Presentation to UKSG Conference 2004 29 March 2004 Company Z 10

THE THEORY OF MERGERS AND ACQUISITIONS. Chapter 3: THE MORNING AFTER… 1. Often the THE THEORY OF MERGERS AND ACQUISITIONS. Chapter 3: THE MORNING AFTER… 1. Often the price to the seller has already risen to include the potential synergies 2. Management is given little time to demonstrate a return on the purchase price 3. One strategy is to ‘keep moving’ i. e. buy something else 4. Another strategy is to ‘keep moving’ i. e. change your strategy Presentation to UKSG Conference 2004 29 March 2004 11

WHAT IS TO BE DONE? Presentation to UKSG Conference 2004 29 March 2004 12 WHAT IS TO BE DONE? Presentation to UKSG Conference 2004 29 March 2004 12

IT’S A BIG WIDE WORLD… AND THE UK IS A RELATIVELY SMALL PLACE Fact IT’S A BIG WIDE WORLD… AND THE UK IS A RELATIVELY SMALL PLACE Fact One: total UK university spending on all journals is £ 82 million per annum (2001 -02). The global STM/academic journals market is worth ca. £ 3 billion. Fact Two: UK based journals have global subscription revenue of £ 750 million. Presentation to UKSG Conference 2004 29 March 2004 13

IT’S A BIG WIDE WORLD… FULL OF PUBLISHERS Fact Three: There are 21, 000 IT’S A BIG WIDE WORLD… FULL OF PUBLISHERS Fact Three: There are 21, 000 current and forthcoming peer-reviewed journals in Ulrich’s. Ca. 4453 of these (21%) are published by the largest 3 publishers Presentation to UKSG Conference 2004 29 March 2004 14

THE REST OF THE ICEBERG – SMALL TO MEDIUM PUBLISHERS Fact One • Swets THE REST OF THE ICEBERG – SMALL TO MEDIUM PUBLISHERS Fact One • Swets Information Services deal with 65, 000 publishers Fact Two • Excluding the top players, average number of titles/publisher is between 1 and 2 Presentation to UKSG Conference 2004 29 March 2004 15

HOW DO THE MINNOWS SURVIVE IN THESE SHARK-INFESTED WATERS? • Some players do get HOW DO THE MINNOWS SURVIVE IN THESE SHARK-INFESTED WATERS? • Some players do get swallowed by the big fish • Others swim in a shoal: - High. Wire – 350 journals - ALPSP Learned Journals Collection – 250 journals - Project Muse – 250 journals - Bio. One – 200 journals Presentation to UKSG Conference 2004 29 March 2004 16

THE BIG SECRET: NOT-FOR-PROFIT PUBLISHING • 21, 000 current/forthcoming peer-reviewed journals in Ulrich’s • THE BIG SECRET: NOT-FOR-PROFIT PUBLISHING • 21, 000 current/forthcoming peer-reviewed journals in Ulrich’s • One-third of these have a word like ‘society’ in the publisher • • field If you include the word ‘university’ it’s about 50% Foreign equivalent spellings were not included in the search, so this is a minimum figure Presentation to UKSG Conference 2004 29 March 2004 17

NOT-FOR-PROFIT PUBLISHING: contracting out • Many smaller societies opt for contract • • publishing NOT-FOR-PROFIT PUBLISHING: contracting out • Many smaller societies opt for contract • • publishing by a larger publisher (commercial or NFP), getting a royalty or profit share in return 1650 Society journals published under contract by the leading UK commercial publishers alone Societies usually retain control over editorial and, to varying degrees, other aspects of publishing policy (e. g. pricing) Presentation to UKSG Conference 2004 29 March 2004 18

BLACKWELL PUBLISHING THE WORLD’S LEADING PUBLISHER FOR SOCIETIES • • 700 journals worldwide 500 BLACKWELL PUBLISHING THE WORLD’S LEADING PUBLISHER FOR SOCIETIES • • 700 journals worldwide 500 society titles 30 new societies join each year Blackwell aims to achieve a 15% net profit Presentation to UKSG Conference 2004 29 March 2004 19

“In the UK Blackwell has a major stake in contract publishing and is reported “In the UK Blackwell has a major stake in contract publishing and is reported to provide good customer care. It is able to retain most of its journals from one year to another because of the customer care which arises from its specialist interest in contract publishing and it is viewed by some as an honorary not-for-profit publisher” Economic analysis of scientific research publishing – a report commissioned by the Wellcome Trust 2003 Presentation to UKSG Conference 2004 29 March 2004 20

WHAT DIFFERENCE DOES IT MAKE? (1) Value for money • Pricing and citation studies WHAT DIFFERENCE DOES IT MAKE? (1) Value for money • Pricing and citation studies – Three-quarters of top 200 and twothirds of top 500 ISI ranked titles are owned by Societies or othre nonprofits. Presentation to UKSG Conference 2004 29 March 2004 21

WHAT DIFFERENCE DOES IT MAKE? (2) Publishing policies • Are NFP publishers more scholarship WHAT DIFFERENCE DOES IT MAKE? (2) Publishing policies • Are NFP publishers more scholarship • • friendly? ALPSP survey (2003): very little difference in general between commercial & non-commercial publishers ALPSP Principles of Scholarship-Friendly Journal Publishing (see www. alpsp. org) Presentation to UKSG Conference 2004 29 March 2004 22

WHAT DIFFERENCE DOES IT MAKE? (3) What happens to the money? • Commercial publishers WHAT DIFFERENCE DOES IT MAKE? (3) What happens to the money? • Commercial publishers have to pay dividends to • • • shareholders They also have to pay taxes Not-for-profit publishers are usually charities Therefore no dividends or taxes, but they do have to plough ‘surplus’ (polite word for profits) back into the organisation’s core mission Surpluses typically lower than largest publishers’ profits Not all are profit-making; in some cases, publishing is supported by other activities Presentation to UKSG Conference 2004 29 March 2004 23

WHAT SOCIETIES SPEND THEIR PUBLISHING SURPLUSES ON • • • Subsidising members’ copies Supporting WHAT SOCIETIES SPEND THEIR PUBLISHING SURPLUSES ON • • • Subsidising members’ copies Supporting general expenses of society Reinvestment in publishing business Subsidy of conference fees Public education Subsidy of membership subs Bursaries Other Reserves & endowment Research grants Presentation to UKSG Conference 2004 29 March 2004 24

CONCLUSIONS • NUMBER ONE: • • The STM food chain is a paradox; sharks CONCLUSIONS • NUMBER ONE: • • The STM food chain is a paradox; sharks grow by eating other sharks and big fish, the minnows swim free NUMBER TWO: UK legislative action is likely to be ineffective given small size of UK market NUMBER THREE: The vast majority of publishers are tiny and most of these are non profits NUMBER FOUR: Many non-profit organisations publish through commercial organisations, but continue to exercise considerable control over publishing decisions NUMBER FIVE As a rule, society journals are very good value for money and put their surpluses back into the academic and scientific community Presentation to UKSG Conference 2004 29 March 2004 25