Media Fortune Fame & Folly

What Thomson can tell you about culture and cash

S&P Global last month agreed to buy IHS Markit in a $44bn all-share deal that will be the largest acquisition of 2020. The deal will create “a heavyweight in the increasingly competitive market in financial information”.

Meanwhile, the regulators in the EU and US who will pick through the competition issues, are preparing to approve Refinitiv’s merger with the London Stock Exchange which aims to create “a leading global financial markets provider… well positioned for future growth in a fast evolving landscape”.

Both deals brings back memories of 13 years ago when Thomson Corporation acquired Reuters for $17bn.

Thomson was buying, arguably, the world’s most famous general news service. But its main business had become the provision of financial data, which had (sort of) started back in the 1850s when it was ferrying stock exchange prices across the English Channel. Thomson itself was strong in specialized information like tracking analysts’ estimates and products for institutional investors. But Reuters had current and historic market trading data.

The new Thomson Reuters (TR) would have revenue of almost $12bn, 60% of which would be financial services where it would have a 34% market share, creating a direct competitor to Bloomberg especially in selling data services, analytical and trading tools to financial traders worldwide. Bloomberg’s initial breakthrough in the 1980s had been a system that integrated news with trading systems. TR seemed like a perfect challenger.

It was almost a reverse takeover led by Reuters CEO Tom Glocer but funded by Thomson. He claimed that the deal, bringing together the second and third largest financial data companies (respectively, Reuters and Thomson), would create a serious challenge for the imperious Bloomberg and much else: “The media company of the 21st century is going to be technology- supported and controlled. I still view these as information companies, but ones that are technologically agile.”

But Thomson got it all wrong, for three reasons:

  1. The two companies had completely dissimilar cultures. For all its news traditions, Reuters financial operations were the wild west compared with Thomson’s steady role as a pure-play subscriptions publisher of fact-based information online and in print. Reuters salaries were much higher, bonuses uncapped, and the ‘merger’ itself had enriched many of the Reuters people who were tasked with bringing the teams together, including Glocer himself. Even Thomson’s matrix management of its worldwide operations contrasted with Reuters map of national fiefdoms. The two companies could not have been more different and Thomson insiders say that the cultural challenges had been completely under-estimated.
  2. Thomson also under-estimated the strength of the Bloomberg terminal and brand, which had revolutionised financial trading. Bloomberg’s neatly unified platform (and indispensable messaging system) contrasted with Reuters’ multi-platform approach.
  3. The deal was completed in 2008, right in the middle of the global financial crisis with widespread layoffs, cutbacks and closures.

Glocer who, as CEO of Reuters, had negotiated the sale to Thomson, achieved better than expected cost savings from the deal but struggled to unify the portfolio of financial products. In 2019, he quit as CEO of TR after two years of write-offs, boardroom disputes, poor trading, and a financial market share that some say had fallen from 37% to 31% in just five years.

Although the Financial & Risk division – with revenue of $6bn in 2017 and 11,000 employees – was TR’s largest business, its EBITDA margins of 29% were the company’s lowest.

Ten years after buying Reuters, TR sold Financial & Risk to Blackstone in a deal which produced Refinitiv, 55% owned by the investment company. In addition to getting a 45% share of the new business, TR would retain Reuters News, and receive $17bn in cash – the price it had paid for the whole Reuters group in 2008.

In 2019, Blackstone conjured up the merger deal with the London Stock Exchange which will give Refinitiv 37% of the enlarged company (ie 15% for TR).

Meanwhile, TR has, perversely, enjoyed the rise and rise of IHS Markit. In 2007 it had sold its Jane’s defence information business to the then IHS for $183m in shares. Their value has multiplied many times as IHS Markit has soared. Some compensation for the TR billions lost on Reuters.

But the 12 years of wild times in the global financial markets have taken their toll on the Thomson family whose business had grown from a single Canadian regional newspaper, acquired in 1934 by Roy Thomson, into a global media group which once owned the Times of London, B2B and B2C magazines, textbooks, information services and television stations. He made hundreds of millions of dollars from 1970s investments in North Sea oil exploration, travel firms, department stores and daily newspapers across the UK and North America.

On Thomson’s death in 1976, his company was worth some $500m. Thirty years later, on the death of his son Kenneth, its value had soared to almost $30bn. Which is what the family’s 62% of Thomson Reuters (TR) is worth today.

The legendary Reuters had been founded in 1851 by Paul Julius Reuter, who had negotiated a contract with the London Stock Exchange to provide stock prices from European exchanges in return for access to London prices, which he then supplied to brokers in France. But – more than a century later – the pioneering financial services company was bested by Bloomberg’s new generation electronics. It’s been playing catch-up ever since.

TR itself is now almost back to where it was as before it made the plunge for Reuters. It’s primarily a provider of information to legal and tax professionals. But it also operates the Reuters News services, mainly serving media organisations.

In 2019, TR made $1.5bn of EBITDA from $5.9bn of revenue (25% margin). It employs 24,000 people, two-third in the Americas. Some 88% of the revenue is digital but that means almost 12% of revenue still comes from the textbooks for lawyers and accountants that have been a core Thomson business for decades. Most of its revenue comes from subscriptions.

The legal information division Westlaw accounts for 40% of revenue but 60% of EBITDA. By contrast, Reuters News is 10% of TR revenue and only 2% of EBITDA.

Shorn of its once-golden financial business, the still substantial Reuters news agency may now be much more about prestige and charity to TR than profit. Its ownership is also subject to strict trust-protected conditions which would complicate any re-sale. And, although Refinitiv is committed to paying more than $300m annually to Reuters for 30 years (an indispensable revenue stream for the news service), the separation might actually become an impediment to Refinitiv in its competition with Bloomberg’s growing business media across TV, radio and online.

But it seems less likely that Reuters’ news and financial businesses will ever be re-united than that a merger will eventually be negotiated with another news agency, perhaps even with the UK’s expansive Press Association which once owned it.

Thomson Reuters itself has often seemed to be more of a portfolio investor than operator. It has regularly bought and sold its media assets, like its 2016 sale of the Clarivate scientific and IP business to private equity for $3.6bn. But it can also demonstrate substantial organic success, notably with Westlaw which was acquired for $3.4bn in 1996 and expanded to the UK and then to more than 60 countries.

That has certainly been the high spot of the recent history of TR, whose performance has consistently lagged those of its closest rivals.

During 2010-17, Thomson Reuters’ average revenue growth was just 1%, compared with 4% for RELX and 3% for Wolters Kluwer. Perhaps that is why TR did what it did with the $17bn proceeds from the sale to Blackstone: most of it went either to shareholders or to pay down debt, with only a small slice allocated for further acquisitions.

It was, perhaps, the sign of a family-controlled business feeling defensive and hunkering down. Maybe their Toronto-based Woodbridge holding company has even decided to spread investments beyond their traditional roots. The Thomson family’s passion for media may have become somewhat diluted in the three generations since it began. And, of course, they may well have had enough of transformational acquisitions.

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