The world of news circulation has come a long way since an ambitious young German reporter used carrier pigeons to bridge the gap in the telegraph line between Berlin and Brussels. That was in 1850 and the journalist’s name was Paul Julius Reuter.
The 34-year-old Reuter established a news service one year later that was to become one of the most powerful in the world and that bears his name to this day. “Truth in news” was Reuter’s maxim and the independence of his enterprise has been jealously guarded ever since.
All that changed in April 2008. After more than 150 years of independence, Reuter’s legacy was taken over by the Canadian data giant Thomson Corporation.
The £8.7bn ($17bn at the time) takeover of Reuters Group to form Thomson Reuters was greeted by analysts and end users with approval and scepticism in equal measure. While some praised the potential synergies and cost savings a merger between the two groups would bring, others wondered what kind of impact the deal would have on the competitive landscape, and how long such a mammoth integration would take.
No honeymoon
Early trading in the new stock reflected a distinctly lacklustre market response to the deal. The shares plummeted 8.2% on their first day’s trading from the opening price of £17.00 down to £15.60. Since then, Thomson Reuter’s shares have struggled on the London Stock Exchange, reaching a low point of £12.39 in mid-July. As The Banker went to press, the share price was hovering at just below £15.00.
The non-committal attitude that many investors have had towards Thomson Reuters’ shares lies partly in the timing of the deal. The global credit crisis cannot have helped sentiment, but the weak share performance also reflects market fears of how the integration will take shape.
As for the new competitive landscape, the world of financial data distribution has become an effective duopoly. Thomson Reuters’ share of the financial information market leaped to 34% after the deal, knocking the only other big name in data dissemination, Bloomberg, off its perch. The US news giant now makes up 33% of the market, while the remaining one-third is made up of an abundance of smaller agencies and data feeds.
Thomson Reuters now operates in 155 countries, has 550,000 terminals and 40,000 customers. According to the company, its news reaches up to one billion people daily.
However, there is some disagreement in the market about whether the union between Thomson and Reuters will improve the competitive landscape by providing an effective competitor to Bloomberg – or damage competition by taking a player out of the market.
Bloomberg challenged
For the Investment Management Association (IMA), the trade body for the UK’s £3400bn asset management industry, it is too early to tell. According to the IMA, the combined forces of Reuters and Thomson will benefit the industry once the integration process is complete, but it is also concerned the competitive landscape could shift.
“The question is: with less competition in the market will it lead to better services in the long run?” a spokesperson for the IMA says. “[The merger’s impact] depends on how they carve up and rationalise the services they are providing.”
Thomson Reuters argues that the merger will benefit consumers of financial information. Christopher Perry, president of Americas sales for the markets division of Thomson Reuters, believes the eventual integration of the Thomson and Reuters platforms will solve issues of interoperability for those customers that have in the past tried to use both products.
“These benefits far outweigh the concerns around the powerbase of a global Thomson Reuters… the industry today doesn’t have enough excellence, there are too many lowest common denominator service providers out there,” he told an audience at the Securities Industry and Financial Markets Association in New York recently.
Added to that, the increased scale and product offering of the new group will challenge the dominance of Bloomberg and create for the first time an alternative one-stop shop for customers.
One of the chief criticisms of Reuters in the past had been that it offered a confusing array of products. One broker, who did not wish to be named, says that he was forced eventually to ditch Reuters’ service.
“It became too complicated. There were too many different products and services on offer and the technology was often confusing to use and slow,” he says.
The problem his company faced in replacing Reuters was that he found Bloomberg was more expensive for his particular needs. Instead, the brokerage was forced to use a range of smaller data providers. The Reuters integration with Thomson could change this, but only if the company succeeds in its stated aim to create one all-encompassing technology platform.
Devin Wenig, chief executive of Thomson Reuters’ markets division, is aware of the problem. He plans to overhaul the current set-up by early 2009.
“We will progressively simplify the underlying infrastructure and supporting technology, so we focus on fewer and more resilient platforms that offer lower total cost of ownership,” he says.
Integration costs
The question on everyone’s lips, however, is how the new company will take shape. The integration of two such large and complex organisations will not be a simple task and some in the market are sceptical of Mr Wenig’s ambitions to create “fewer and more resilient” platforms by 2009.
James Walden, an analyst at US research company Morningstar, says that any slip-up in the execution of the merger would likely have an adverse impact on future financial performance. “Management will have its hands full for the foreseeable future integrating Reuters’ operations with Thomson’s businesses,” he says.
Furthermore, a June report from rating agency Standard & Poor’s put Thomson Reuters on a negative outlook, with a threat to downgrade the firm in the near to medium term if it meets difficulties with the integration.
The costs of merging two such companies are another concern. According to analysts at US bank Citigroup, Thomson Reuters will need to spend an estimated $1.8bn in order to achieve the projected annual cost savings of $1.2bn by 2011.
It also highlights that the company will need to spend a further $200m over the next two years on staff severance, merger bonuses and other one-off costs. “This spending will hurt margins over the next one to three years at a time when a softening economy could hurt new product sales and damp down profitability,” Citigroup’s analysts say.
Tighter margins
This was reflected in the Thomson Reuters second quarter 2008 results, which showed slower revenue growth in its markets division. The markets division revenue rose 12% to $2.1bn, but the organic growth rate – which excludes the impact of currency exchange fluctuations and acquisitions – was7%. That figure is slower than the 9% growth rate it achieved in the first quarter of 2008.
Thomson Reuters’ integration represents the biggest opportunity and the biggest challenge for the firm. Alongside the obvious cost savings, there are also strategic benefits such as reduced competition, better product depth and in particular on the technology side.
“Having a single platform for all the group’s products will not only significantly reduce operational and support costs, but also greatly enhance interoperability and speed to market for new products,” says Citigroup.
On the negative side, integrating the two corporate cultures may prove to be tough, and there is the potential for staff disruption when the inevitable round of job cuts materialises. Building the new technology will also be a huge task, as will rolling it out to the firm’s client bases. “The integration process is not only going to cost money, but also take a long time to execute,” says Citigroup.
Choppy markets
Perhaps the biggest challenge for the new entity is the state of the markets more generally. The fallout from the global liquidity crisis will hit all data vendors hard in the wallet, including the firm’s biggest competitor, Bloomberg. As banks and brokers cut back on staff, so there will be fewer traders and bankers in need of Thomson Reuters’ services. With Thomson Reuters still soaking up the costs of merging, the global slowdown in financial markets will be particularly painful.
However, the union of Thomson Corporation and Reuters leaves the new entity with enough diversification to mitigate the fall-off in sales of financial services related products. Even though the markets division of the firm – which will take the biggest hit from the global slowdown – makes up 60% of Thomson Reuters’ revenues, it only makes up 40% of the profits. The rest of the income and profit is driven by the firm’s professional division. This division, which provides data to lawyers, accountants, scientists and healthcare professionals, makes up 60% of the firm’s profits and will help to ameliorate shortfalls elsewhere.
Added to this, the merger gives the new firm a wider geographic spread. Whereas Thomson Corporation had more exposure to US markets, Reuters had a bigger presence in Europe and Asia.
Looking ahead, the integration of Thomson Reuters will be studied forensically by shareholders and end-users alike. A successful integration of the two companies will change the competitive landscape for data forever, whether or not this will be for the good of customers or not only time will tell.
At the time of the merger the chairman of Thomson Reuters, David Thomson, said the deal was about “passion, courage and integrity”. The firm will need all three of these virtues if it is to flourish in the future and provide a genuine alternative to Bloomberg.
HOW THEY MERGED
On 17 April 2008, Thomson Corporation merged with Reuters in a deal valued at £8.7bn ($17bn). Woodbridge, the Thomson family holding company, owns 53% of the combined company. Other Thomson shareholders own about 23% and Reuters’ shareholders own about 24%.
The new chief executive of Thomson Reuters is Tom Glocer, the former chief executive of Reuters. He replaced Thomson Corporation’s CEO Richard Harrington, who retired after the deal. The merger will lead to job cuts across the combined workforce of nearly 50,000, with the two companies predicting annual cost savings of more than £500m within three years.
The earlier rule that stated no single party could own more than 15% of Reuters was waived so that the deal could go ahead. Pehr Gyllenhammar, chairman of the Reuters Founders Share Company, said: “The future of Reuters takes precedence over the principles. If Reuters were not strong enough to continue on its own, the principles would have no meaning.”
The new company is made up of two business divisions. The professional division, which includes non-financial markets-driven software aimed at the legal and healthcare markets, is expected to account for 40% of group revenues. The other 60% of revenues is driven by the financial markets division.
While London-based Reuters is focused on Europe, Thomson is stronger in North America. The new company is dual listed in London and Toronto.
The deal faced scrutiny by regulators in Europe, the US and Canada, and Thomson Reuters’ was forced to sell off parts of the business. Reuters sold Reuters Estimates, Reuters Aftermarket Research and Reuters Economics databases. Thomson sold Thomson Fundamentals (Worldscope).Graph: Thomson Reuters share price since merger (April 2008)
