The Bloomberg Machine
Michael Rubens Bloomberg is floating on his back in the Dead Sea. It's early April, and the 59-year-old billionaire businessman is on his first trip ever to the Middle East, a sojourn that has included meetings with the King of Jordan, the Prime Minister of Israel, and the mayor of Jerusalem. On this afternoon, the sky is clear, the beach is full of young sunbathers, and Bloomberg is feeling pretty good about life. That's when his traveling companion, Bloomberg executive Kevin Sheekey, needles him, saying: "Tell me again why you'd rather be in Gravesend or Bensonhurst than here?"
Those gritty Brooklyn neighborhoods a world away will be the testing ground for Bloomberg's newest ambitions. Within the next two months, it's almost certain that he will declare himself a Republican candidate for New York City mayor, leaving the helm of Bloomberg LP, the privately held media and financial-data empire he has built in the past two decades. Back in 1981, Bloomberg was a recently fired, still-cocky Salomon Brothers partner who came up with a radical idea for providing market information--and whose $10 million buyout got him started. Today his name is synonymous with financial news. The Federal Reserve leases "Bloombergs." So does the Vatican. "A Bloomberg on your desk is more than just a piece of equipment," says Kenneth B. Marlin of media merchant bank Veronis Suhler & Associates. "It's a status symbol. It shows you're serious about making money."
HIS OWN MAN. Bloomberg pretty much created the business in his own image. Some 7,200 employees around the world toil in a demanding, frenetic environment where loyalty is prized (he never rehires employees), titles are nonexistent (not to mention offices), and bravado is encouraged. The company delivers business information in 100 countries, puts out magazines, and runs newswire, radio, and television operations--bringing in annual revenues estimated at $2.5 billion. Of course, owning nearly three-quarters of the company has its advantages. Bloomberg is very much his own man: He pilots a helicopter and, with no shareholders to cross him, says pretty much what he pleases. He counts among his recent dates singer Diana Ross and Broadway dancer Ann Reinking.
Which makes it all the harder to imagine Bloomberg as a public servant. Unless, that is, you subscribe to the theory that Bloomberg is having a post-midlife crisis of sorts. "An oversized ego got him into this business, and an oversized ego is luring him out of it," says one money manager. Bloomberg, of course, explains his motivation a little differently. "Mae West once said too much of a good thing is a good thing," he says. "I don't buy it." Even if he loses the mayor's race in November, which wouldn't be surprising in a city that usually votes Democratic, Bloomberg is ready for a second act. The man who unabashedly used to call himself a mogul now wants to be known as a man of the people.
It's not an overnight conversion: Bloomberg, the son of an accountant and a secretary in Medford, Mass., is a longtime contributor to education programs and museums. Said to be worth $4 billion, he has given away $300 million in four years, about half of it to his alma maters Johns Hopkins and Harvard. Bloomberg isn't one of those quiet do-gooders, though. "I'd love to run a public-health organization, or the World Bank," he declares. "Wouldn't it be great to say you saved more lives than anybody in the history of the world?"
But his plans raise a big question: What happens to Bloomberg the company without Bloomberg the man? He is stepping down at a pivotal time. The economic downturn could force big Wall Street customers (and potential overseas clients) to cut back on their data budgets. And Bloomberg's main rival, British news and data giant Reuters Group PLC, is planning a major new Internet strategy that it's convinced will help cut costs and win market share. Then there's the question of a successor. Near as most people can tell, there isn't one.
FLAT FEE. In one way, the Bloomberg business is about as straightforward as they come. The terminal is supposed to be the only piece of equipment a finance professional needs to trade. Think of it as one-stop shopping for financial information--only in this case, no matter how much you buy, the price is the same: $1,285 a month per terminal if you lease more than one. "It's an all-or-nothing prospect. And most people pay," says Larry Tabb, vice-president of the securities and investment practice at research firm TowerGroup. "That's the beauty of their business model."
The company provides what is regularly regarded as the most comprehensive financial data available, ranging from bond yields to Securities & Exchange Commission filings to CEO biographies to analysts' recommendations. Wire-service reports are there for the reading. There actually used to be Bloomberg "boxes." Now, customers aren't required to buy the hardware--the "terminal" Bloomberg execs talk about is really just a wire through which Bloomberg data flow into any old PC. These days, "terminals" also allow clients to execute trades, and soon the company will provide software to speed up the settlement time. Executives say the business will continue to grow by adding on these kinds of innovative products and by winning new clients in Europe and Asia. But as the global economy slows, that may be a harder sell.
Bloomberg has faced down threats before. Web sites offering free financial data were supposed to lead to the company's early demise. But no Net startup could match Bloomberg's mastery at information-gathering and number-crunching. And after the recent dot-bomb explosions, Bloomberg looks more credible than ever. Now, though, it has to contend with a rival that has a made a name for itself in Europe and is growing fast in the U.S. Bloomberg has captured 36% of the $7 billion global market for real-time data. But since 1998, when Reuters developed a new equities-data tool just for the U.S., it has added more than 25,000 users in the States. And Reuters has a new Net-savvy American chief executive, Tom Glocer, who's spending $725 million in the next four years on technology, in part to shift to an open system. This will be a clear test of Wall Street's preferences: Bloomberg's closed system or Reuters' Web offerings.
As Bloomberg adjusts to this changing environment, a new, unseasoned executive will take charge. Whenever a founder leaves a company, the successor needs time to make the office his own. Bloomberg's replacement may need more than most. That's not just because of Bloomberg's outsize personality, considerable as that is. It's also because no one has been groomed to take over. "This was always going to be a critical problem when Mike decided to leave," says John H. Gutfreund, former managing partner of Salomon Brothers, who fired Bloomberg but whom Bloomberg still considers a mentor. "I guess he just didn't have his succession in mind."
BIG SHOES. But lately, Bloomberg has been pondering his departure more seriously. In March, he appointed a longtime friend, investment banker Peter T. Grauer, to replace him as chairman, though he remains CEO. He also invited former SEC Chairman Arthur Levitt, Alliance Capital Management Holding CEO Frank Savage, personal-finance writer Jane Bryant Quinn, and co-founder Tom Secunda to join the board. And earlier this year, he gave nine top managers a glimpse of what it might like to be CEO, shuffling them through each department for two-week stints. "The bad news is, he's not replaceable," says Bloomberg friend Steven Rattner, a managing director of Quadrangle Group, a media and communications investment firm. "The good news is that after 20 years of building up his business, he might not have to be replaced. A mere mortal might be able to run this company."
Indeed, Bloomberg will be leaving his successor a well-oiled machine. Bloomberg is a limited partnership: Merrill Lynch & Co. has a 20% stake, six longtime employees hold 8%, and Bloomberg owns the rest. The company doesn't report earnings, but profit margins are estimated to be 20%, and revenues have grown at 25% a year. But Bloomberg says this year may be a little soft. Certainly, though, the company has had the luxury of coming of age in the longest bull market in history. Fueled by the rush of new money into stocks, Wall Street firms fattened their data budgets and pushed investment products (such as derivatives and options) that required new analytics. Bloomberg could churn them out faster than any rival. Credit goes to Secunda, 46, a PhD mathematician and head of research and development who met Bloomberg at Salomon. Secunda and his team created sophisticated data models that enabled clients to slice and dice detailed information before deciding which stocks and bonds to buy or sell. "We figured out early on that the computer can be used as more than just a clerical back-office tool," says Secunda. Today, even though Bloomberg has a huge media presence, fully 95% of revenues still come from its terminals.
What's more, Bloomberg's service has rarely been faulted; clients can call a 24-hour help line--or e-mail Bloomberg directly. Tech and salespeople regularly visit, and products are frequently upgraded. "One of his people is on our trading floor at least once a month asking us what we need," says Michael W. Clark, head of global equity trading at Credit Suisse First Boston. "They are constantly building and expanding." In the past six years, Bloomberg has tripled the number of terminals it leases, to more than 156,000.
That kind of growth has probably gone the way of the bull market, $10,000 dinners, and casual Fridays. Bloomberg himself likes to say that "the information business is exactly the opposite of sex--when it is good, it is still lousy." But consider that false modesty. Bloomberg execs, brash even in troubled times, don't see any reason why the company can't keep enticing new customers with more services and products. After all, the market won't become less complicated just because it's more volatile.
One growing business is providing "order management" software. It is designed to help big money-management firms track and speed up transactions. The software is, of course, available through the Bloomberg wire. Execs expect the service to be in great demand as SEC regulators push firms to shorten the time it takes to settle a trade from about four days to one. Bloomberg also developed an electronic-trading-platform, Tradebook, which allows clients to trade globally and remain linked to the Bloomberg wire. "You've got to get your product to your customer on any medium and on any hardware they want," says Lou Eccleston, head of transactional products.
Growth could also come from overseas, where Bloomberg terminals are not yet commonplace and Reuters screens are ubiquitous--in Europe, anyway. Less than 40% of Bloomberg's leases are in Europe, and only 13% are in Asia. Lex Fenwick, based in London, heads the 800-person sales force for Europe and the U.S. He figures there's room to grow in Europe, though less since the downturn. "My biggest worry is motivating a sales force that has had it relatively easy selling Bloombergs," he says. In Asia, the sales pitch could be even harder to make. Financial institutions haven't completely recovered from the crisis of 1997. Now they have to contend with the consequences of a U.S. slowdown, too. "The first 156,000 terminals were easy. It will be the next 156,000 that will be the challenge," says John A. McConville, editor of newsletter Inside Market Data.
Indeed, more austere times could work against Bloomberg. It's not hard to imagine the day when some U.S. money managers and traders can no longer afford more than one financial-data service on their desk. And some analysts say it could be the Bloomberg box that gets nixed. That's in part because its competitors--Reuters, Bridge Information Systems, and Thomson's ILX Systems--all offer more flexible pricing. And cost could trump quality. "His one-size-fits-all makes him vulnerable at that high price," says Bernie Weinstein, CEO of ILX Systems, which has about 160,000 users, some of whom pay just $50 a month for a basic service.
PULL THE PLUG? Rival Reuters charges $200 to $1,100 a month, depending on the data delivered. Reuter's data can be intermingled with a client's own data and programs. Analysts say that to disentangle it would be more expensive than to just give up the Bloomberg. Plus, Reuters offers discounted rates for bulk orders, so there's incentive not to cut the number of screens. But Bloomberg won't budge on pricing: "It has worked for 20 years," he says.
More important, though, Reuters is challenging the very technological premise of the Bloomberg box. The London company is betting that the Internet is the best and cheapest way to deliver data to customers. Under 41-year-old Glocer, a former lawyer who can write software code, Reuters is moving from a proprietary system similar to Bloomberg's toward an all-Internet model. That will allow clients access to all of Reuters' services anywhere they can get on the Net; Bloomberg users will still need that wire hookup. Glocer predicts the switch will save $150 million a year starting in 2003 and will give the company even more flexibility in pricing, thus allowing Reuters to reach more customers.
By contrast, Bloomberg still insists that the Net is too "unreliable" a way to deliver his product. Servers go down, security is dicey, and he has faith in a closed system. There's a Bloomberg Web site with data and news for free. But the CEO was an early skeptic of the Internet gold rush, and these days he figures that he has been proved more right than wrong.
Reuters also may have the edge in taking customers from troubled Bridge Information Systems Inc., the equity-data provider with 185,000 screens. Bridge filed for bankruptcy in mid-February and is looking for a buyer. Reuters may be interested in a piece of Bridge, but Bloomberg isn't likely to bid for any of it. Bridge's customers are not typically the big investment banks that Bloomberg goes after.
SECRET SUCCESSOR. Even as Reuters gains momentum and the markets dip to new lows, Bloomberg is uncannily calm; there's no doubt that he is backing away from the business. In most companies, this would be the time for the heir apparent to begin easing into the job. At Bloomberg, there is no such transition going on. "That's not unusual for an entrepreneurial company," says Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware. "But for a multibillion-dollar company, it's highly unusual. If I were an outside director on his board, I'd be very concerned."
Bloomberg simply says he has taken care of things. Years ago, he named a successor in his will and instructed that person--whose identity is secret--to sell the company within two years of his death. And if he decides to run for mayor, he'll appoint one of his top executives to fill in until the November election. When he might do that is anyone's guess. Levitt, for one, isn't worried about the talent pool. "This is a company with a soul," he says. "I've never seen a more focused management." But executives at Merrill Lynch would like Bloomberg to include outsiders in his search. Says Jerome P. Kenney, Merrill's senior vice-president for research and strategy: "He's determined his group of executives can succeed. We're going to find out soon."
Whatever happens, Bloomberg's replacement probably won't be as overbearing as he is. And it's unlikely he'll have the high social profile Bloomberg does, either. Bloomberg, who divorced Susan Brown seven years ago, is a regular at the Metropolitan Museum's annual ball; he invites New York's glitterati to dinner parties at his townhouse on Manhattan's Upper East Side and has dined with TV personality Barbara Walters. He also owns two properties in New York's Westchester County, north of the city, and is building a vacation house in Bermuda. Bloomberg, it turns out, likes to compare himself to the famed fast-food entrepreneur Colonel Sanders: "By Colonel Sanders, I mean being the big personality. [My employees] are going to miss that," he says.
Bloomberg takes pride in his candor--in being something of a maverick. From the start, he rejected corporate protocol, such as titles and offices, in hopes of creating a freer environment. He calls the maze of cubicles in the cramped company headquarters on Park Avenue in Manhattan an "open plant." Others say it's more like a trading floor, right down to the machismo. "The expectations were ridiculous," says a former Bloomberg reporter. "Ten-hour days without a break were routine. A journalistic sweatshop could be an accurate description."
The company's aggressive culture has tainted Bloomberg's personal reputation. In the late 1990s, he was accused of sexually harassing female employees. One lawsuit was dismissed, another was withdrawn, and a third was settled in 2000 for an undisclosed amount. Bloomberg, who denies it all, says: "When your name is on the door, you're a target of this kind of stuff." The claims have come up again with his foray into politics. Hoping to finally shake them, Bloomberg took a lie-detector test, which he says proves his innocence--but which he hasn't released.
Sipping coffee one afternoon, Bloomberg, tanned from his trip to the Middle East, sits in a cubicle watching the whirl of his newsroom. For all intents and purposes, he has already let go. "Will it be painful for me to leave this company? Sure it will. But if you want go out on top, you've got to go out when it's painful." Minutes later, he picks up his briefcase and heads out into the city that's likely to be his toughest sell yet.
|Corrections and Clarifications In "The Bloomberg Machine" (Cover Story, Apr. 23), a table of financial data service providers should have said that ILX Systems has 160,000 screens leased.|
By Tom Lowry