Dispatch from Reuters (Corporate Dealmaker)

Dispatch from Reuters

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Eric Lint played guitar in a rock 'n' roll band in college, and he keeps a 1965 Epiphone Sheraton handy in his office above Times Square in New York. The executive vice president and global head of business development at Reuters Group plc tends to grab it when he's working late, which he did a lot last month, when Nasdaq Stock Market Inc. and a private equity partner were finalizing their agreement to pay $1.9 billion for Instinet Group Inc., 61% owned by Reuters. So was Lint playing any particular song as the deal moved toward completion? " 'Don't Look Back in Anger,' " he says with a laugh. "It's by Oasis. But it's not a comment on the deal."

Fair enough. Yet the title does seem relevant at this particular moment in Reuters' 154-year history. The Instinet sale is the last big piece of a major makeover for the London-based financial data and information company, which soared in the 1990s and crashed soon afterward. A program of divestitures and restructuring, dubbed "Fast Forward," has stabilized and rationalized Reuters, a company that used to have 1,400 products and now has about 50. A couple of well-integrated acquisitions have brought in new talent and helped position the company to better compete with archrival Bloomberg LP. Sometime this year, Reuters expects that revenue from its core financial services businesses will finally stop shrinking and start growing again. And soon - but not yet - CEO Tom Glocer plans to unveil a new corporate strategy. "It's a growth-oriented strategy," is all Glocer will say until July. "And although we're open to a lot of interesting new markets, the good news is that our existing markets, as we've redefined them, have the ability to support decent growth."

So if it's not quite time to look ahead in detail, it is a good time to pause and consider - dispassionately - the current condition of Reuters, and how the decisions of recent years have shaped it. As with any turnaround, there's plenty to reflect on. "I think the challenge historically has been focus and discipline and execution," says Devin Wenig, president of business divisions and also a board member.

What's striking about Reuters is how often the challenges have involved transactions - some bad, some good, some done to seize opportunities, others done to undo previous deals or adjust to changing circumstances, and nearly all of them complicated. "Reuters is a deal environment," Lint observes, and indeed it became one long before he arrived in 2000. Yet if the dealmaking has been a fact of life for a couple of decades, its nature has changed considerably in the past few years. These days, opportunistic diversification and decentralization are out; strategic deals and integration are in. "I'm not a big believer in the conglomerate effect," Glocer says. "Investors can diversify effectively at the portfolio level. If they're buying a share of Reuters, they should buy it because there's some strategic and ultimately operating coherence to it."

Adding, subtracting and simplifying
Reuters has spent the last few years trying to become an efficient competitor able to serve new categories of customers. The restructuring has featured multiple acquisitions and disposals, and a reorganization along customer-segment lines. Here are some highlights:
Acquisitions	Divestitures
Bridge Information Systems	Tibco Software
In 2001 Reuters wins auction to buy key assets of Bridge out of bankruptcy for $275 million. Deal gives Reuters a much-needed presence serving institutional buyers of U.S. equities. Reuters later on-sells the Bridge Trading brokerage business to Instinet.	Business integration software company specializing in real-time applications. Reuters acquires forerunner Teknekron in 1994, IPOs a minority of Tibco in the frothy market of 1999. Sells remaining Tibco stake in a January 2004 public offering that yields $115 million and reflects retreat from solutions business.
Multex	TowerGroup and Yankee Group
In 2003 Reuters pays $195 million for the provider of research and earnings estimates on companies, increasing its offerings for the buy-side. Transaction is smoothed by the fact that Reuters already had a 6% stake in Multex.	Purchased in 1999, these firms sell research and advice on financial services IT and telecom, respectively; Reuters sells both in 2004. Also in 2004, Reuters sells ORT, a European provider of credit information, for €46.6 million.
Moneyline Telerate	Radianz
In December 2004 Reuters announces purchase from private equity firm One Equity; Telerate was previously owned by Bridge. Deal gives Reuters content in money markets and fixed income, where it lags rival Bloomberg. The total price of $175 million includes $100 million cash, plus Reuters' 14% holding in Savvis Communications.	Financial extranet is formed as a joint venture with France's Equant in June 2000; Reuters contributes its telecom network assets and takes a 51% stake. An anticipated IPO proves impossible, though, and Reuters' support of rival Savvis after the Bridge acquisition leads to further strains. In 2004 Reuters buys out Equant for $110 million and sells Radianz to British Telecom for $175 million in an outsourcing deal.
	Instinet
	Acquired by Reuters in 1987, Instinet is a star performer for Reuters in the 1990s. Partially spun out in a 2001 IPO, its fortunes decline and it is merged with Island ECN. In April Reuters signs off on a deal to sell Instinet to Nasdaq and private equity firm Silver Lake Partners for $1.8 billion.
Sources: Reuters; Corporate Dealmaker

Monthly closing prices of Reuters shares on the LSE (in pence)
c. Dec. 28, 1999 - May 2, 2005
	Jan.	Feb.	Mar.	Apr.	May	Jun.	Jul.	Aug.	Sep.	Oct.	Nov.	Dec.
2005	377.5	399.25	422.25	408.75	383	NA	NA	NA	NA	NA	NA	NA
2004	235	320	393.5	400	373	359	355.5	325.5	320.75	326.5	375.5	386
2003	177.5	174	119	103.5	130	181.5	170.25	249	252.5	218.5	256.75	252.5
2002	680	600	538	541.5	473.5	466.5	352	254.5	283.5	225	184.5	235
2001	1133	1080	1033	855	1019	980	923	870	777	582	671.5	681
2000	849.5	930.5	1492.5	1272	1149	1025	1127	1300	1452	1282	1330	1079
NA = Not Available Sources: Reuters; Corporate Dealmaker

Reuters revenue and profit/loss attributable to ordinary shareholders
Year	Revenue (£mill.)	Profit/loss (£mill.)
2000	£3,592	£521
2001	3,885	46
2002	3,593	-255
2003	3,235	50
2004	2,885	351
Sources: Reuters; Corporate Dealmaker

Reuters 2004 revenue by customer segment
Segment	2004 revenue (£mill.)	Percentage
Sales & trading	£1,180	50%
Enterprise	481	20
Recoveries	321*	14
Research & asset management	235	10
Media	144	6
includes exchange fees and some customer communications costs Sources: Reuters; Corporate Dealmaker*

The emphasis on integration comes partly out of necessity. "We didn't have any choice but to get better the last couple of years," Wenig says. "We were restructuring, and we were measuring everything, and people were holding us accountable for the plans that we put up, as they should have." Another factor, no doubt, is all the dealmaking experience now resident at the top of the company, which for most of its history has been run by former journalists. Glocer, who got the top job in 2001 and is the first American and the first nonjournalist to run Reuters, was a deal lawyer with Davis Polk & Wardwell before joining the company in 1993. Wenig is also a former deal lawyer (Cravath, Swaine & Moore LLP) and an American; he also joined in 1993. Lint, yet another American, spent 12 years doing deals for Zurich-based engineering giant Asea Brown Boveri before joining Reuters.

Finally there's the effect (or is it a cause?) of a changing corporate culture. Bridge Information Systems Inc., acquired out of bankruptcy for $275 million in 2001, and Multex.com Inc., which distributes equity research and was acquired for $195 million in 2003, did more than expand Reuters' customer base among investment managers, known as the buy side; they've also contributed key executives to the company and made it easier to recruit other outsiders. Of the top 70 managers in the organization, 30 have joined in the past three and a half years, something that would have been hard to imagine in the old days. "It was always difficult to bring people into Reuters, because we had such an insular culture," Glocer says. Adds David Grigson, the British-born CFO who arrived from publisher Emap plc in 2000, "We started with a culture that said, 'We do everything best.' "

The roots of that culture go deep. For most of its history, Reuters' only business was its global news operation - famous, but as a business neither large nor very profitable. It was a genteel place, its leaders prominent figures in Britain. A clever decision by the company to use its communication lines to launch a currency-market quotation system in 1973, soon after the world's big economies shifted from fixed to floating exchange rates, dramatically changed the business mix. Financial data and information businesses soon accounted for most of the company's revenue, but executives still tended to move up from the news operation. The career path of Sir Peter Job, Glocer's predecessor, was typical: Oxford, a stint as a journalist and then up through the management ranks.

The financial businesses throw off copious cash and have made numerous deals possible over the years. Reuters' ownership of Instinet, for example, dates to 1987, when it bought the granddaddy of the so-called electronic communications networks that revolutionized securities trading. Never really integrated into Reuters, Instinet proved a money spinner (and compensation conundrum) in the 1990s, an against-the-odds success as an initial public offering in 2001 and a money loser soon thereafter, necessitating a merger with rival Island ECN Inc. Instinet is now poised to join up with Nasdaq amid the final consolidation of the ECNs, which also includes the New York Stock Exchange Inc.-Archipelago Holdings Inc. merger announced in April. Instinet's institutional brokerage operation, meanwhile, will go to private equity firm Silver Lake Partners.

The shifting fortunes of Instinet offer a glimpse of the fast-changing, highly interconnected world in which Reuters operates. At the end of the past decade, this was still a world where Reuters seemed a master, not least in its own eyes. True, there was the challenge posed by New York-based Bloomberg. The one-time upstart used superior service and products to build on its bond business and ultimately overtake Reuters, which was hampered by a ponderous development process and a sales force focused on the information technology department, rather than the end user. But there were still the myriad acquisition and revenue opportunities created by the opening and connection of the world's financial markets. "In essence, you'd go in all over the globe and mop up the local competition," says Lint.

The revenue flowed in, and if global expansion had produced a sprawling company, nobody seemed too concerned. Investors were also inclined to reward Reuters for being in information technology, more or less, in an age when talk of a new economy filled the air. Reuters' 1994 acquisition of a small Silicon Valley software company called Teknekron Software Systems Inc. turned into a jackpot via the 1997 IPO of a spinoff called Tibco Software Inc. When corporate venture capital was most lucrative, the Reuters Greenhouse Fund, with its stakes in the likes of Yahoo! Inc. and VeriSign Inc., had one of the hottest hands. In early 2000, after CEO Job unveiled a new Internet strategy, Reuters shares hit an all-time high. "Reuters was a company that appeared to get the Internet, in a way that a lot of other people didn't," CFO Grigson recalls. But that appearance would quickly fade. "Not only was the financial services world, which is 93% of our revenue, about to go into a period of deep retrenchment, but we, as a company, were about to be found out."

When Glocer took over as CEO in early 2001, moving up from a position running the Americas operations, Reuters was thought to need a revamp, not a rescue. But soon banks were cutting back drastically on their use of market data products, not to mention their use of bankers and traders, and when the survivors were made to choose between Reuters and Bloomberg, they were choosing Bloomberg. Investor enthusiasm for IPOs, key to reaping the benefits of the Greenhouse Fund (whose holdings had never had much strategic impact on the company), had evaporated; the VC arm became independent in 2001, and in 2004 its partners and chairman bought the fund from Reuters. Reuters' structure, meanwhile, started to look bureaucratic and bloated. How bloated? Grigson says that when the full effects of Fast Forward cuts are felt at the end of 2006, they will have reduced Reuters' cost base by £440 million.

The elements of a Reuters turnaround didn't become clear right away. Fast Forward, for example, wasn't launched until June 2003, following the loss of £255 million ($276 million) in 2002, the company's worst year. And while a decision on what to do with a given property can seem obvious in retrospect, it often isn't so clear at the time it must be made. Such was the case, for example, with Lipper Analytical Services Inc., the mutual fund tracker Reuters had acquired in 1998. "When I came in 2000," Lint recalls, "we were still trying to figure out what to do with it." Some research companies bought in that period (including TowerGroup and Yankee Group Research Inc.) would be sold at a loss in 2004. But Lipper instead became a platform for acquisitions (see box) and an important part of Reuters' plan to sell more products to asset managers. "It could as easily have been a divestiture candidate," he says.

Indeed, whatever its past management shortcomings, Reuters is an inherently complicated company in a complicated market - one reason why focus can be so hard. Is Reuters an information company or a technology company? Today the answer is that it is an information company that uses technology to deliver its services and products. But acting on that vision still poses unusual challenges, especially for a dealmaker. "It's not like you can sort of do something in isolation," Lint says. "It has an effect on almost every other piece of the organism."

The best way to look at these issues is the same way Lint did: transaction by transaction. Start with the Bridge deal in 2001. The St. Louis-based company, a one-time regional broker that with some backing from private equity investors had acquired its way into a bundle of businesses spanning news and information, trading and technology, was in bankruptcy, with various competitors, including SunGard Data Systems Inc., interested in its assets. Lint recalls Wenig coming into his office and saying, somewhat apologetically, that even though Reuters probably wouldn't be a buyer, it needed to look at the assets if only to make sure that a competitor didn't get them cheaply. What the Reuters team found amid the rubble was a solid equities information business serving U.S. institutional investors, which would give Reuters a much-needed presence on the buy side to augment its traditional position among bankers and brokers. "That has turned out to be one of those fundamental building blocks of Reuters - one of those defining transactions of the last four years," Lint says.

Along with customers and products, the deal brought Bridge's development talent. (Except for Harry Temkin. As it happened, Bridge's product guruhad been hired by Reuters just before the deal.) Later on, the Bridge acquisition would also enable Reuters to move its U.S. service center from high-priced New York to affordable St. Louis, which has become the company's administrative and technical hub in the Americas. It did, however, pose a few challenges. One was the matter of customer retention in the face of a severe market downturn; that actually went pretty well. There was also the matter of supporting Bridge's distribution system.

This second task was more a political than a technical challenge. Just about a year earlier, Reuters had moved to take advantage of the fact that it owned one of the world's largest communications networks, at a time when network companies were worth an awful lot of money to investors. Reuters folded its network assets into a joint venture it formed with Equant, a France Télécom SA affiliate, retaining 51% and anticipating an IPO down the road. Called Radianz, the venture was billed as a financial extranet, a neutral Internet protocol platform for delivering content and trading capabilities in 120 countries; Reuters remained its largest customer. Bridge, meanwhile, had made a similar move, forming a competing financial network company called Savvis Communications Corp. - which by 2001 was hurting almost as badly as Bridge. Reuters invested $48 million in Savvis to keep Bridge's customer screens from going dark, and Lint joined the Savvis board.

None of this sat well with Equant. It was a classic case of joint venture partners with diverging interests, and with the telecom bust making an IPO exit impossible, the tensions continued. The solution finally came in October 2004, when Reuters announced it would buy out Equant for $110 million and then sell Radianz to BT Group plc for $175 million. This was essentially an outsourcing transaction, with the two sides also signing a long-term service contract valued at $3 billion. And as for that 14% stake in Savvis - well, that would come into play down the road when Reuters got around to buying Telerate, another Bridge property available during the 2001 bankruptcy auction.

Prior connections can also smooth deals. That was the case with the 2003 acquisition of Multex, a distributor of equity research and earnings estimates for investors large and small. Like the Bridge purchase, the $195 million Multex transaction gave Reuters more to offer buy-side institutions. Reuters came into the deal already holding a Multex board seat (occupied by Wenig) and a 6% stake in the 1993 startup. As with the Bridge deal, new talent and an entrepreneurial approach to development were important parts of the package. "If you look at how these guys prosecute product development," Lint says, "you see they call somebody and get it done in about six hours."

With Bridge and Multex purchased and integrated, Reuters last year felt ready to go after Telerate, which by this time had become Moneyline Telerate Inc., majority owned by J.P. Morgan Chase & Co.'s One Equity Partners LLC. Telerate's main business is providing real-time data to the fixed-income markets, and when Reuters agreed to buy the company in December 2004, it gained a useful weapon for taking on Bloomberg in its bond market stronghold. Three years earlier, Lint says, the global integration of Telerate would have been too much to take on. The scale of that effort is indicated by the fact that Reuters now expects to spend $82 million on it. This is on top of a purchase price of $175 million, consisting of $100 million in cash and - here it comes again - that 14% stake in Savvis, now valued at $75 million.

The Moneyline Telerate deal is expected to close this summer (when the last of 13 antitrust reviews around the world is complete), so the integration planning is well advanced. "The whole company is organizing for the day this thing closes," Wenig says. "What's the brand, what's the product strategy, what do we say to customers. That's a good sign, of a company that's matured in its ability to do deals."

It's also a sign of a company with a more rational structure, one designed to promote accountability and make it easier to discern the profitability of products.The old geographic organization has been replaced by four divisions, organized by customer segment: sales and trading, which mainly serves Reuters' classic sell-side customers; research and asset management, focusing on investment management firms and hedge funds; enterprise, which mainly provides data feeds for applications that customers own; and media, the news business that started it all but is now the smallest piece of the pie. "Now you've got people at the top of those thinking strategically about their part of the business," CFO Grigson says.

The structural changes extend to the corporate development setup, which has evolved considerably since Lint's arrival in June 2000 as head of business development for what was then the company's largest unit. In the course of a restructuring in 2002, Lint says, the company counted 57 people around the world involved in M&A. That became a group of 18 divided between New York and London and run from London; today it's a group of nine, run by Lint from New York. Lint works closely with Wenig, whose office is next to his in Reuters' Times Square tower, but reports to Grigson, who is based, like Glocer, in London.

Well, why would corporate development be exempt from the efficiency campaign? Worldwide, Reuters' head count was reduced from 16,000 to 13,000, and currently stands at 14,500. The locations where various things get done have shifted as well. Some 500 jobs that used to be done in places such as Edinburgh, Scotland, London and New York are now done in Bangalore, India. Glocer even sold the historic Reuters headquarters on Fleet Street and moved to cheaper quarters in Canary Wharf.

All of this makes Reuters a tougher competitor - but then it will need to be. With its core sell-side markets declining through ongoing consolidation, it needs to capture share elsewhere from a tenacious Bloomberg. Telerate should help in fixed income, but that deal hasn't even closed yet. And there's still plenty of work to do on the buy side as well. "The Bridge acquisition helped them there," says Larry Tabb, CEO of Tabb Group, a financial technology advisory firm. "But they still don't have nearly the penetration that Bloomberg has on the buy side or in the hedge fund world."

Research and asset management should be a bright spot; the Reuters Knowledge product (created with Multex talent) is doing well in a realm where nobody really dominates at present. And Glocer also sees an opportunity to build the media business beyond its historical position as a wholesale news provider, leveraging the company's brand and global reach. The goal is to reach a much bigger audience online and through ventures such as the cable business channel Reuters just announced with The Times of India.

Still, the real action will have to come in Reuters' core financial services business. This arcane, hard-to-predict world continues to be transformed by trends such as algorithmic trading and direct market feeds and to offer evidence to support a range of opinions. Jack McConville, a senior analyst at Shore Communications Inc., for example, believes in the power of incumbency, citing Reuters' position in foreign exchange, and Bloomberg's in bonds. "If you're first, you're forever first," he says. Wenig naturally takes a different view. "There's an absolute revolution in the way firms use technology to trade securities," he says. "And that game we haven't even started. We're in the first minute of the first quarter."

Just what Reuters' game plan will be remains for Glocer to say. But for Eric Lint, it is likely to involve some nights at the office, picking up his guitar when it's time for a break. More dealmaking is surely in the offing. Says Lint, "It's in the DNA of this company." - Kenneth Klee

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