Reed's Push Into Data Collection
By DAVID PRINGLE
Staff Reporter of THE WALL STREET JOURNAL
June 3, 2005; Page C1
LONDON -- News of security breaches at LexisNexis has thrust the Internet-based data company's parent, publishing titan Reed Elsevier PLC, into the spotlight and tossed around Reed's share price in the past few months. Investors might want to prepare themselves for more of the same.
Far from backing off, Reed plans to push deeper into the business of collecting personal data on individuals for sale to employers, banks, lawyers and other clients -- the source of the problems at LexisNexis.
Reed's chief executive, Sir Crispin Davis, says he expects "significant" opportunities to further expand the business in the U.S. in the next few years. "It's a highly attractive, long-term growth opportunity," he says. "This is a new, emerging industry, and it isn't, perhaps, too surprising that we are facing these kinds of troubles."
Reed could soon be in the headlines again once investigators in the U.S. determine how data brokers now owned by the London-based company allowed 59 security breaches, lifting such personal data as Social Security numbers, addresses and driver's license records of 310,000 Americans over two years.
The Secret Service and the Federal Bureau of Investigation have searched dozens of homes and computers as part of an investigation into the data theft. Reed faces a suit seeking class-action status in federal court for the Southern District of California that claims the company "trampled the privacy interests and expectations of consumers."
But investors expect Reed to ride out this furor largely unscathed. Its share price is up 11% in London this year, compared with a 6% rise in the Dow Jones Stoxx 600 Media index for Europe. In 4 p.m. New York Stock Exchange composite trading yesterday, Reed's American depositary receipts were up 51 cents to $39.18, giving Reed a market capitalization of about $23 billion.
Sir Crispin's push into the data-brokering market is part of his wider strategy to turn the 125-year-old company into a high-tech business offering database products covering everything from scientific papers to industrial widgets to the academic performance of American schoolchildren. Today, about 30% of the company's revenue comes from products that didn't exist five years ago, almost all of them Internet-based. Sir Crispin wants Internet operations to account for as much as 70% of revenue within five years.
For investors in Reed, whose core business has long been publishing thousands of scientific and business journals, this strategy means Reed is becoming increasingly exposed to the risk of security breaches, technology failures and regulatory intervention. It is telling that Reed hasn't launched a data-brokering business in Europe, where the regulations governing such activities are much tougher than in the U.S.
"It's a bit more risky," says Micha Zwaaf, an analyst with ABN Asset Management in Amsterdam. Mr. Zwaaf, who recommends that ABN's funds buy Reed stock, adds, "Those scientific journals have been around for 200 years, so the risk of something happening there is much smaller, but there is no growth."
Mr. Zwaaf says he expects the investigation by U.S. law-enforcement agencies to implicate weak security at some of Reed's customers rather than problems at the company itself. At the same time, he argues that any move by regulators to tighten restrictions on the sale of personal data would give the industry more credibility and could actually be a boon to Reed.
Indeed, members of Congress are calling for laws mandating new security measures in the wake of the LexisNexis thefts, as well as other recent online security gaffes. Still, Chuck Richard, a New York-based analyst with research firm Outsell Inc., says the people affected by these security breaches aren't likely to have enough political clout to impose tough new restrictions on Reed and others. "Controversial? Yes. Likely to be severely curtailed? No," he says. Neither Outsell nor Mr. Richard owns Reed stock. Mr. Richard doesn't rate the stock.
Investors' willingness to stick by the company will depend to a large degree on their trust in Sir Crispin, a former Procter & Gamble Co. executive who had no online experience before joining Reed. But in his six years at the helm, he has transformed the company from an old-fashioned publisher of magazines, such as the Lancet medical journal, into an Internet powerhouse.
Nick Baker, Reed's chief strategy officer, acknowledges that Reed's expansion into new markets is testing the company's resources. "We are pretty stretched doing what we are doing. It isn't like we have got hundreds of people sitting around saying: 'What is the next big opportunity?' We are driving this organization pretty hard," he says.
In 2004, Reed's revenue rose 3%, after stripping out the impact of acquisitions and adverse currency movements, to £4.81 billion ($8.71 billion). Sir Crispin is promising to deliver 5% growth each year for the next three years. Reed's data-brokering business is growing at 20% a year, thanks mainly to the $775 million acquisition last year of Seisint Inc., a Boca Raton, Fla., company. However, most of the 59 security breaches were intrusions into Seisint's databases.