No Miracle Yet at Reuters

CEO Glocer keeps slicing, but investors are starting to panic

When Tom Glocer's appointment as chief executive of Reuters Group PLC (RTRSY ) was announced in December, 2000, he seemed to be getting a dream job at the top of an organization that was not only admired for its journalism but also churned out a never-ending stream of cash. Dream job? Dream on. Since taking over from Peter Job last summer, Glocer has had to rush from one crisis to another, while coping with a deepening global reversal in the financial-services industry--the core consumers of Reuters data. "It's certainly a bigger challenge than I would have thought 12 months ago," Glocer says.

That's an understatement. Glocer seems extraordinarily cool when he discusses the company's woes. But there is no doubt that with Reuters' stock hitting a nine-year low in late June, he is under the gun. In part, that's because his appointment created huge expectations. Glocer, 42, a tech-savvy American lawyer, had won rave reviews running Reuters' U.S. business. So he seemed the perfect choice to squeeze fat profits out of a company that analysts thought had been too lightly managed by a succession of ex-journalists. For instance, pretax profit grew only slightly in the boom years of 1997-2000.

Now that Glocer has shown signs that he is not a miracle worker, investors are in a panic. On June 20, Glocer announced 650 job cuts on top of the 1,800 that Reuters had already promised. Investors, fearing that revenue was falling faster than expected, pounded the stock. "It has been such a poorly managed company for decades, we were surprised that more cost savings weren't coming through," says Michael Nathanson, European media analyst at Sanford C. Bernstein & Co. in New York. Analysts also worry that development costs for new generations of products and services based on Internet technologies are getting out of hand. Nathanson, for instance, estimates that Reuters will be spending about $680 million on this over four years. He forecasts that operating income will fall 11% this year, to $403 million on revenues of $5.56 billion.

The nearly 80% fall in the stock price since early 2000 inevitably leads to speculation about Reuters being taken over or going private. But the company has considerable control over its fate because its bylaws bar any shareholder from accumulating more than 15% of the shares. And if Reuters' independence is deemed threatened, a single "founders share," controlled by a separate company, prevails. So major deals don't seem to be on the menu at the moment, though share buybacks could be.

Roaring markets through early 2000 covered a multitude of sins at many companies, and Reuters was no exception. Instinet Group PLC, the company's 83%-owned electronic-brokerage subsidiary, contributed handsome profits. And investors thought Reuters had potentially huge businesses in its Greenhouse Fund venture-capital subsidiary and TIBCO

Software Inc., a 42%-owned business-software provider. Moreover, the core business of providing trading screens to the financial-services industry was bubbling along despite its outdated products.

But how quickly the world changed. Last year, operating profits fell by 27%, to $453 million, on revenues of $5.8 billion. The Greenhouse Fund lost $217 million as its once hot technology investments soured. In recent months, Instinet has come under severe pressure as competitors chew away at its once dominant market share, and as Nasdaq trading shrank. Instinet revenues fell 39% in the first quarter of 2002, to $217 million. All of this puts more pressure on the core screen business, which is being harried by the downturn in the global securities industry. Investment banks are slashing staff worldwide, and they're not putting screens on empty desks. Reuters managed to increase subscription sales in the first quarter by a slight 4%, to $1.05 billion. But excluding last year's acquisition of parts of defunct Bridge Information Systems, sales were down 1%.

Glocer is not banking on any quick upturn. In fact, he thinks that, not counting the business from Bridge, subscription revenues will decline by up to 3% in the first half, with the drop accelerating in the second to 5% to 6%. He doesn't see a turnaround until the end of the year or early 2003--and isn't even betting on that. That's why he continues to trim costs. "I don't want to be hostage to fortune," he says. "I want to take the right budget decisions so I can deliver on next year."

Glocer's style as a manager has been easy to pinpoint as he focused on Reuters' declining market share and bloated cost structure. He quickly dealt with the problems at Instinet. The unit had been slipping for years but "had only been a gnat on Job's windscreen," according to one former insider. Not so under Glocer. In April, Instinet CEO Douglas M. Atkin resigned under pressure. Then, in June, Glocer, a former mergers and acquisitions lawyer, helped orchestrate the purchase of Instinet's most formidable competitor, Island ECN Inc., for $508 million.

The merger also brings Instinet a proven manager in Island's chairman, Ed Nicoll, who will become CEO of the combined company when the deal closes. Even before the deal, Instinet's share of Nasdaq trading had risen from below 10% to 15% in recent weeks, Glocer says, but mainly because of a 60% cut in trading charges that will hurt the bottom line. "We've come a long way," he says. "My honest view is that the market has not given us credit for it."

Now, Glocer is focusing on the core business. Over the last 10 years, Reuters' share of the $6.5 billion terminal market has fallen from about 55% to 39%, while its most formidable competitor, Bloomberg Financial Markets, has rocketed from 5% to 38%, according to Goldman Sachs & Co. Bloomberg pulls in roughly twice as much revenue per screen per year--about $16,000--as Reuters. Jack McConville, editor of Market Data Industry, a New York-based newsletter, forecasts that Reuters will have a flat-to-slightly down year in 2002, while Bloomberg has already increased its screen numbers by 2.5% to 167,000.

To compete with Bloomberg, Glocer is pushing a new top-line product. The 3000 Xtra will come with instant messaging, although Bloomberg machines have included this feature since 1998. Vighnesh Padiachy, media analyst at Goldman Sachs in London, says Reuters' forthcoming product is "good and getting better," but it faces two high hurdles: strong customer loyalty to Bloomberg and the high cost of the systems upgrades needed to support the 3000 Xtra.

Glocer has lots of other ideas. He wants to boost Reuters' software-sales-and-consulting business, which now accounts for about 7% of revenues. He also wants to reduce Reuters' dependence on the financial-services industry, which accounts for 89% of its revenues, by selling more products to nonfinancial companies and the media. But diversification moves like these will take years to pan out. For now, Glocer will be hostage to the markets. If they don't behave, he'll be forced to keep slashing. It's a role that could get on the nerves of the calmest of CEOs.

By Stanley Reed in London

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