IHT : Thomson Reuters Synergies

Wednesday, May 16, 2007

…..Both Thomson and Reuters Group, which agreed Tuesday to be acquired by the Canadian company for about $17.2 billion, are commonly viewed as sellers of news and information.  But a closer look shows that the two companies are less publishers than software businesses that create services from their overwhelming streams of digital data.  A combination with Reuters is Thomson’s next step in expanding its far more lucrative service business.  Harrington, 60, who will retire when the Reuters deal closes, detailed at recent investor meetings how he turned Thomson from an information retailer into a service provider based on a vast collection of financial, medical, legal, scientific and health care data.  Speaking of the company’s legal information business, its largest before the Reuters deal, Harrington said at an RBC Capital Markets conference in February: “We go in and ask the attorneys what do they do three minutes before and three minutes after they use our information.  We know what their pain points are, and you then create a value proposition from that because you’re improving their profitability and performance.”  Thomson’s proposition is that software, generally Internet-based, eases its customers’ pain often by automating activities related to data they already purchase from the company.  “We help you do your job quicker, better, faster,” said Harrington, who is based at Thomson’s executive headquarters in Stamford, Connecticut.  David Worlock, the chief research fellow in London for Outsell, a company that tracks electronic publishers, said that Thomson and its competitors, particularly Bloomberg, have shown that services are the crucial to profitability in a age when easy Internet distribution has made raw information a commodity.  “If you come to this from the service angle, pricing is all about what value you can deliver customers,” he said.  Some services Thomson offers customers are not drastic departures from the distant past of paper-based reports.  The legal division, for example, offers software for lawyers to track their cases and organize materials and decisions related to them.  Many large accounting firms prepare corporate tax returns with software from Thomson’s taxation and accounting unit.  Its selling point: The software can grab tax change information from Thomson’s information service and apply it to returns to highlight potential impacts on the accounting firms’ clients.  But other Thomson services go beyond what software companies usually call “work-flow solutions.”  Thomson now also takes care of remitting collected sales taxes to individual states on behalf of retailers that once simply subscribed to information.  Harrington estimates that about $1 billion a month briefly passes through Thomson’s hands on its way to state treasuries.  The tax group also sells systems that allow accountants to handle payroll processing, including the handling of employee withholding taxes.  Naturally, that system also links into Thomson’s broader accounting software and information databases.  “Thank God for taxes and thank God for tax changes,” Harrington, the president and chief executive, told an investors conference held by Bear Stearns in March.  “That’s why that’s our fastest growing and most profitable business.”  Unlike customers who simply buy data, companies that add Thomson’s services to their shopping list are unlikely to shop around for another vendor.  Harrington estimates that in several of its sectors, Thomson now has a 95% renewal rate, a measure that it is able to maintain with relatively few marketing expenses.  Thomson’s greatest success has come in its legal services group, despite strong competition from Reed Elsevier’s LexisNexis.  “Paradoxically, because we all know that lawyers are very conservative people, the law has been a leader in using these work-flow solutions,” Worlock said.  “For them, the content alone has little intrinsic value.” 

The ideal that information is more valuable as a service than a commodity is, of course, not exclusive to Thomson.  During the 1980s, Michael Bloomberg used the idea, along with proprietary computer technology, to create what would become the dominant provider of financial services information.  Bloomberg’s initial breakthrough was a system that integrated news with trading systems.  Bloomberg’s success at identifying services that customers will value because they bolster earnings is reflected in the premium prices its services command and its ability to require customers to use its customized software in an age when generic personal computers and the Internet have otherwise taken over.  More recently, Bloomberg has challenged Thomson and LexisNexis with its own legal information service.  Among other things, it links relevant securities regulations changes to its financial market trading systems.  Despite considerable effort, Thomson is a distant No. 3 after Bloomberg and Reuters in the financial services and data market, making it the only segment in which it participates without being the market leader.  Combining with Reuters will give Thomson about the same one-third market share currently enjoyed by Bloomberg. But sheer size may ultimately prove to be one of the less significant impacts of the merger.  “Thomson’s frustration was that they found it quite easy in the ’80s and ’90s to collect companies that were providers of financial information,” Worlock said. “But they found it very difficult to build that into solutions.”  With Reuters, however, Thomson instantly acquires one of the world’s most comprehensive news services, which also comes with the baggage of a general news service for newspapers, broadcasters and Web publishers.  Reuters’ data strengths also fill Thomson’s voids.  While Thomson is strong in highly specialized information, like tracking analysts’ estimates, it has lacked Reuters’s enormous offering of current and historical market trading data.  As well, Reuters’s new electronic trading system is generally viewed as superior to Thomson’s and at least on par with Bloomberg’s data system.  No doubt a combination of the two companies would quickly generate a series of new services that, while arcane, could generate additional profits for subscribers and additional revenue for Thomson-Reuters, as the new company would be known.  A merger would also make it easier for the two companies to advance toward the ultimate service, a concept that is variously known as intelligent agent environment, algorithmic, black box or robo trading – in short, systems that gather all the data and information used by traders, analyze it and make trades without human intervention.  “All of the market players are acutely aware that time is leaking away from the deal making environment,” Worlock said.  “You can’t finger the button fast enough, the trader is not fast enough.”  Both Bloomberg and Reuters currently offer black box products, although they are mostly used by hedge funds and large institutional investors looking to cut trading costs.  On April 30, Reuters acquired ClearForest, an artificial intelligence company based in Waltham, Massachusetts.  Its software can sniff through a vast range of corporate data and news to find factors that might affect investments.  In the end, it may be traders who rely on Thomson and Reuters to do their jobs today – rather than employees within the two companies – who have the most to fear from a merger when it comes to keeping their jobs.

Thomson Reuters

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