Both
Thomson Corp. and Reuters Group plc have changed a lot in recent years,
following separate if similar restructuring and refocusing paths. When
Thomson agreed to buy Reuters for £8.7 billion ($17.2 billion) in May,
the pair made a good case that their paths had converged, and that the
deal is a logical next step. But in the complex financial information
and data markets that produce most of Reuters' revenue and a good chunk
of Thomson's, logical doesn't mean simple.
That fact comes clear when you consider the two next steps for
Thomson-Reuters, as the new company will be known. The first is gaining
regulatory clearance in Europe and the U.S. Approval is likely, but
selloffs will probably be required, with much depending on how
authorities define a market that's not so easy to define. Then there's
the bigger task of integration. Although both sides have learned plenty
about that discipline in recent years, neither has ever pulled together
disparate platforms, clients and work forces on quite this scale before.
It's easy to see why the companies are attracted to each other. The
merger creates a formidable rival to Bloomberg LP in the financial
information market, where Thomson-Reuters will generate about 60% of
its sales. The companies have complementary geographic positions and
client bases: Reuters is strongest in Europe, and among banks and other
sellside institutions; Thomson's strengths are in North America and on
the buy side, among money managers and corporations.
By some accounts the deal has been in the works for as long as two
years. Geoff Beattie, chairman of Woodbridge Co., the Thomson family
holding company that controls 70% of Thomson (and will hold 53% of
Thomson-Reuters) called it "a very unique transaction that has come
together over a long period of time" in a call with analysts after the
announcement.
Reuters CEO Tom Glocer will become CEO of Thomson-Reuters, while
Thomson COO Jim Smith will be CEO of Thomson-Reuters Professional,
which will house Thomson's information services that serve the legal,
tax and accounting, scientific, and healthcare fields. Robert Daleo,
CFO of Thomson, will keep that role at Thomson-Reuters.
Devin Wenig, chief operating officer of Reuters, will lead the
integration, applying lessons learned in the course of absorbing other
firms -- and their executives -- into Reuters over the past six years.
"We have done a number of deals -- Telerate, Bridge, Multex," Wenig
said on the conference call. "We have been very successful at achieving
our goals. We have been very successful at achieving the best of the
cultures, which I think is very important here, that the combined
organization is not Reuters and it is not Thomson; it is the best of
both companies."
The companies expect synergies of at least $500 million by the end
of the third year, a conservative estimate, analysts say. But the deal
is more about opportunities for keystone news and financial businesses,
which will take the Reuters brand. Will they get where they want to go?
To answer that, it helps to know where Reuters and Thomson are coming
from.
As described in these pages (Corporate Dealmaker, May-June, 2005)
London-based Reuters soared in the 1990s, making acquisitions around
the world, but the bust in financial markets left it with too much
overhead and too few customers. Glocer took over as CEO in 2001, after
running the Americas operations. In 2002 Reuters posted a £255 million
loss, and in June 2003 Glocer launched a program of divestitures and
restructuring that would reduce the company's products to about 50 from
1,400.
| Complementary profiles in financial services |
|
Company |
Reuters |
Thomson |
|
Geographic concentration |
Europe & Asia |
North America |
|
Customers |
Sell side |
Buy side/ corporate |
|
Content |
News/ real time |
Historical/ analytical data |
|
Electronic trading |
Foreign exchange/ cross-asset |
Fixed income |
|
Enterprise platforms |
Trading rooms, risk management |
Portfolio, equity settlement |
|
Source: The companies |
| |
| The financial picture |
| |
Thomson |
Reuters |
Thomson-Reuters pro forma |
|
Revenues ($mill.) |
$6,622 |
$4,721 |
$11,343 |
|
EBITDA ($mill.) |
$1,935 |
$863 |
$2,798 |
|
Margin (%) |
29.2% |
18.3% |
24.7% |
|
Free cash flow ($mill.) |
$1,081 |
$414 |
$1,495 |
As of December 2006
Source: The companies |
It worked. In 2006, Reuters earned pretax profit of £313
million on £2.56 billion in sales. It currently operates through four
divisions: Sales & Trading, which provides desktop information
products, analytics and trading systems for traders and sales people;
Research & Asset Management, which sells analysis to investors;
Enterprise, which offers information and data feeds to help customers
automate; and the Reuters news business. Still, Reuters has struggled
to catch Bloomberg.
Thomson evolved out of the newspaper empire Canadian entrepreneur
Roy Thomson began assembling in the 1930s. When Richard Harrington
became CEO in 1997, the company -- always an active trader of assets --
began a transformation from a diversified holding company into a
focused operator in information and analytics, with an emphasis on
electronic delivery. (See Corporate Dealmaker, May-June, 2006.) The
last newspaper asset was sold in 2003. To help fund the Reuters deal,
Thomson said in May it was selling its education business to Apax
Partners and Omers Capital Partners for $7.75 billion.
Today Stamford, Conn.-based Thomson is organized into five segments:
legal, financial, tax and accounting, healthcare and scientific, with
$3.1 billion of its $6.7 billion in revenue coming from its legal unit.
Harrington, 60, is set to retire when the Reuters deal is complete.
The merging companies are now seeking antitrust approval, which
could take as long as a year. Clearance in Europe should be easier
since Thomson's footprint there is small. "In Europe it might go to an
EU phase 1 review but I don't think it will go to phase 2," says Paul
Gooden, a London-based analyst at ABN Amro Bank NV.
The U.S. will be tougher as both companies have large shares of the
financial data market. Still, the Bush administration has favored a
light touch on competition issues. And even with the merger, Reuters
and Thomson, which, according to Gooden, hold 27% and 14% of the U.S.
financial screens market respectively, wouldn't surpass Bloomberg's 52%
share.
Speaking to analysts about antitrust, Glocer pointed to changes over
the last five years that create more competition, including exchanges
getting into the information business and customers forming trading
consortia. Thomson, for its part, said at the time of the deal that it
would "take whatever steps are necessary to procure [antitrust]
clearances."
The more narrowly a market is defined, of course, the bigger
Thomson-Reuters' combined share would be -- and the greater the
pressure to divest. Gooden offers three potential market definitions.
In its narrowest form, it could be defined as the £3.9 billion desktop
terminal market, with Bloomberg LP and Reuters each claiming a 43%
share and Thompson trailing with a 6% share.
A second definition encompasses what Reuters calls its core market,
which includes traditional trading operations, Reuters Market Data
System software and infrastructure revenue, among other businesses.
This is a £6 billion market where both Reuters and Bloomberg have a 27%
share and Thomson has 8%. Finally, there's the broadest definition,
which includes newer electronic trading systems and editorial and data
content, a £11 billion market where Reuters and Bloomberg each claim
shares of around 14% and Thomson has less than 5%.
As concessions go, Robert Doyle, an antitrust lawyer at
Washington-based Doyle, Barlow & Mazard PLLC, sees an overlap
between Reuters Trader and Thomson One. Reuters Trader provides
international market data, including stock quotes, news, fundamentals,
pricing tools and analytics for front-end applications. Thomson One
offers financials, annual reports, company research and other services
for asset managers and other clients. Of the two, Doyle bets Thomson
One will be sold.
Larry Tabb, CEO of financial technology advisory firm Tabb Group,
offers a different view. "I don't think Thomson One or Reuters Trader
will need to be divested," he said. "But portions of the businesses may
have to be."
Tabb points to a specific overlap between Thomson One's
First Call, which provides research and earnings estimates, and Reuters
Trader's Multex, which distributes analyst estimates along with other
information. "Multex and First Call are the only products focusing on
research distribution," Tabb says. "There's not really another major
platform like the two of them."
Craig Columbus, president of Scottsdale, Ariz.-based Advanced
Equities Asset Management, and a former Thomson employee, agrees that
one platform will have to go. "First Call has a much deeper footprint
in the space than Multex," he said. "It's definitely the place where
there's the most overlap." But Doyle argues Thomson One should stay
intact. "If Thomson One is divested, it cannot be piecemeal," he said.
"It's got to stay together as one product, and you have to divest
supporting assets around it, [including] employees, intellectual
property and customers."
While Tabb and Doyle differ on which assets may be sold, they agree
on a couple of potential buyers: Both name SunGard Data Systems Inc.,
backed by a private equity consortium led by Silver Lake, and also
financial data provider Interactive Data Corp., owned by Pearson plc.
Doyle suggests that other strategic players such as FactSet
Mergerstat LLC, Capital IQ, Telekurs Holding Ltd., Morningstar Inc.,
TradeStation Group Inc. and Yield Book Inc. might be interested in
divestments. Tabb also sees IT company Misys plc as a possible buyer.
Gooden suggests that news wire AFX News Ltd., acquired by Thomson last
year, could be sold or folded into the new company's news offering. AFX
has the rights to distribute announcements from the London Stock
Exchange.
Regulatory clearance, of course, is just a prelude to integration,
which could last five years. The companies will operate separately in
the short term and some products may stay independent. Analysts say
Thomson Reuters will likely focus early efforts at the back end to
harmonize its distribution platforms, while slowly moving customers to
the new platform. "If I were the swami behind the green curtain, I
would start with scrapping the Thomson platform and replace it with the
Reuters platform," says Jack McConville of Shore Communications Inc.
More than a simple scrapping is necessary. The platforms are
complementary, with Reuters focusing on the sell side and Thomson on
the buy side, so the latter can't be shut down without incurring
customer wrath. Merrill Lynch & Co. has spent significant money
implementing Thomson One on the retail side and integrating it with its
brokerage platforms; removal would be irritating, to say the least.
"You aren't going to be able to convince customers all of a sudden day
one, to rip out their platforms just because the company merges," Tabb
said. "So, I don't think you'll see a single platform anytime in the
near future, [maybe] three to five years."
When Reuters bought Telerate for $100 million in May 2005, the
company forced the target's users to its platform. A similar move by
the combined company could push some clients toward rivals. "If you're
a Thomson user, and you're forcibly moved to a new platform, you may
want to move to a lower priced competitor," Gooden says. "It could also
be a catalyst to a more expensive product like Bloomberg."
Whatever plan the company implements, lots of client communication
-- and probably some handholding -- will be vital. One option, says
ABN's Gooden, is to freeze prices. Tabb and McConville, however, say
Thomson Reuters could actually boost prices. "If history stands
[company] A takes over B, A says to B customers, my platform is better
than theirs," McConville said. "We're going to integrate it and if you
want one outstanding platform, by the way, it's going to cost you $350
per month more."
Also to be considered is the effect on new clients, who may be
unlikely to sign up in the midst of a complex integration. Then there's
the challenge of maintaining worker morale. Gooden says a minimum of 5%
of the combined Thomson Financial and Reuters work force could be let
go. Thomson workers in Europe are probably most vulnerable, because of
the company's small footprint there compared with Reuters. In North
America, a former Thomson employee would likely keep his job over his
Reuters counterpart.
"Where I would be concerned is in the operations and billing
services, management and sales and eventually technology," says Tabb.
Best practices in integration -- moving quickly, fairly and
communicating clearly -- could smooth the process.
Turning Thomson-Reuters into the company the two sides envision is
no small task. But then, neither was bringing the two to the point
where they were ready to merge. Say this for Glocer, Daleo, Wenig and
the rest of the team charged with delivering on the deal's promise:
they bring some credentials to the job. - Phineas Lambert
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