Edited by Douglas Harbrecht

ENCYCLOPAEDIA BRITANNICA'S TRIP TO THE BRINK -- AND BACK

Throughout its 229-year-history, the Encyclopaedia Britannica has banked on its reputation as an august repository of knowledge, packing everything from art to zoology in 44 million words across 32 volumes. But in recent years, the story of Britannica -- the company -- reads more like a corporate soap opera than dry, hard-bound scholarship.

Under its new owner, wealthy but secretive Swiss investor Jacob Safra, Britannica has been moving rapidly into the digital age (see BW, 10/20/97, "Dusting Off the Britannica"). Safra's management team has been rolling out a stream of new products -- from a new CD-ROM encompassing the famed Britannica and the Merriam-Webster Collegiate Dictionary, to this week's unveiling of a free Internet search engine, in which Britannica editors will select Web sites.

But little known is how close the venerable tome came to extinction before the unlikely Safra rescue in early 1996. The story begins with Sears, Roebuck & Co., which owned Britannica for some two decades earlier this century before ceding it as a gift to the University of Chicago in 1942. Chicago Vice-President William Benton -- an ex-ad industry exec and former U.S. senator from Connecticut -- took an interest in the property and with his own money, bought a controlling stake that passed to a foundation set up in his name after he died.

As far as the university was concerned, Britannica was a lucrative property for 50 years, pumping $125 million in royalties into school coffers. But in the early 1990s, the encyclopedia business started to plummet. In no time, the University of Chicago found itself forced to front a $70 million line of credit just to keep the company afloat.

Angry university officials in 1995 spearheaded a shakeup on the Benton Foundation and the Britannica board that soon led to calls for sale of the encyclopedia company. At first, there were no takers. Enter Safra. His dramatic rescue package included $80 million in cash for the university, according to recently released Benton Foundation documents, and Safra paid down $56 million in loans from the letter of credit.

Conventional wisdom holds that missing out on the digital revolution almost sank Britannica. The stodgy bookmakers were no match for the likes of Microsoft's Encarta CD-ROM encyclopedia, introduced in the early '90s, the theory goes. That's only partly true.

Far from being a warren for electronic Luddites, Britannica was dabbling in educational software for kids as early as 1983. It acquired a number of software companies throughout the '80s. Most significant, Britannica developed one of the earliest multimedia CD-ROM encyclopedias, Compton's MultiMedia. In fact, Compton's made it to market in 1989 -- well ahead of Encarta.

The problem, say former and current executives, was that all of the electronic products were regarded as add-ons that should never be allowed to impinge on the company's core business -- sales of the encyclopedias themselves. When a CD-ROM carrying the Britannica name was finally introduced, in 1994, it carried a price tag of $1,200 -- only $300 less than a full set of books and many times Encarta's price.

Britannica's deep-rooted culture depended on selling ever-more sets of reference books and yearbooks through its direct-to-home sales force. As became clear in the early '90s, the sales force was "our Achilles heel," recalls Patricia A. Weir, fromer head of U.S. operations. "We faced the danger of killing off the sales force without replacing it with a major source of new revenues. It wasn't something I could do." Nor could anyone else. "The lore around the place was the 'Three Ps' -- product, people, profit in that order," says former CEO Joseph Esposito, who joined in late 1990 and left after Safra came in.

The paralysis over moving into digital was crippling. By the early '90s, a structural change had occurred in the sale of hard-bound encyclopedias, affecting not just the Britannica but World Book also. Potential consumers were becoming warier of meeting with strangers in their homes, while far-cheaper CD-ROMs offered adequate information in easy-to-use computer form. Annual unit sales began collapsing -- from a high of 117,000 in 1990 to about 20,000. Just as book sales began falling, financial woes mounted: Britannica's consumer finance business was deteriorating. "We lost our means of experimenting [with new products] just as CD-ROMs were taking off," recalls James Goulka, Britannica's chief operating officer, who joined in 1995.

Britannica hired Lazard Freres in 1993 to search for a partner, but not an outright sale. Preliminary interest was expressed by everyone from Microsoft and Walt Disney to Hearst, sources say, but nothing materialized. Had the foundation and board agreed to a full sale at the time, media experts say, Britannica might have fetched at least $300 million, more than twice what Safra paid. The cash crunch forced Britannica in 1993 to sell off its digital jewel -- Compton's MultiMedia unit -- for $57 million to Tribune Co.

Meantime, the university's board members were growing increasingly agitated. They had agreed to drop their royalty provision in 1993 in return for a preferred dividend to ease Britannica's cash crunch. But, as the financial picture worsened, that investment looked at risk. The denouement came in June, 1995. To keep bank lenders at bay, the university agreed to provide a letter of credit, in return gaining control over the board and foundation, while insisting on a rapid sale. Sources says Allen & Co., which was conducting the sale, couldn't find anyone willing to buy the whole company for cash, as the university wanted. Then, Safra appeared out of the blue -- initially insisting on keeping his identity secret, using well-connected Washginton superlawyer Robert Strauss as his conduit.

Safra still is reclusive, refusing interviews. But, for someone who grew up on the Britannica and bestows them as gifts upon friends, Safra's imprint is unmistakable. Within months of taking control, he axed the sales force and began writing the company's next, and decidely digital, chapter.

By Richard Melcher in Chicago