The Rise of a Financial Data Powerhouse

Watch out, Bloomberg. Thomson's acquisition of Reuters adds a new behemoth to the news-and-numbers world

Thomson Corp.'s $17.4 billion agreed acquisition of Reuters, the venerable London-based news and financial-services firm, is the culmination of a long dialogue between competitors who saw a lot that was attractive in each others' businesses. For several years, Geoff Beattie, the CEO of Toronto-based Thomson family investment vehicle the Woodbridge Co., has had his eye on Reuters (RTRSY) and has made friendly approaches to various Reuters executives.

Beattie thought Reuters' global spread in financial information would be a powerful addition to Thomson (TOC), which over the last decade has been transformed from a conglomerate with media interests into a company largely focused on electronically delivered financial and professional information. Beattie also had developed a good relationship with Reuters' 47-year-old CEO, Tom Glocer, whom he first met on the recommendation of his brother, Scott Beattie, the chairman and CEO of Elizabeth Arden (RDEN). Geoff Beattie recalls that his brother, a friend of Glocer's, once called him and said, "You have to meet this cool guy."

As CEO of Woodbridge, Beattie plays the role of dealmaker and strategic thinker for the Thomson empire, which has more than $25 billion in net worth. By far the largest investment is Woodbridge's 70% stake in Thomson Corp. This controlling position will drop to 53% if the deal goes through. Woodbridge also has a private equity firm and a 40% stake in Toronto's Globe and Mail newspaper.

More Buys to Come?

For Beattie, a Canadian, the proposed Reuters purchase—half in stock, half in cash—scores two goals with one shot. It creates a global leader in electronic information, news, and trading services, with the financial firepower and talent base to make the investments needed to remain competitive. For 2006, pro forma revenues for the two companies combined would have been $11.3 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) would have been $2.8 billion, according to the merger documents. About 40% of revenues would have come from professional services and 60% from financial.

The two companies say their combined share in the financial-screens markets will be 34%, comparable to that of Bloomberg. While integrating the two companies will undoubtedly present significant challenges, with a $35 billion market cap they will have the size and scale to compete with just about anyone in this business. Further acquisitions in a consolidating industry can't be ruled out.

The merger also solves the problem of finding a successor to Richard Harrington, who has been CEO of Thomson since 1997 and at 60 is nearing retirement age. "We all talk about how you should have seamless succession," Beattie said in an exclusive interview with Harrington, Glocer, and BusinessWeek at Reuters' London headquarters. But rarely do "succession and opportunity coincide."

Combined Strengths

It isn't hard to see why Beattie would be excited about being able to hire Glocer. The Yale Law School-educated New York native is one of the more cerebral executives in the media business. Glocer is comfortable with technology and its media applications. He once designed a computer game to illustrate a law course.

As part of the deal, he will have options vest worth about $54 million, but he says that the attraction of the merger for him was not so much the money but that "I get to run a really cool company." The merger also allows him to move back to New York, where the new company will be headquartered. That's a welcome change for Glocer, who has winced at the harsh, ad hominem treatment meted out to corporate executives by the British press.

While the two companies seem to be at very preliminary stages in creating new their product offerings, Glocer has big ideas about what they can do together that they can't on their own. For instance, he muses about building on Thomson's leading position in legal information by hiring 100 legal-beat journalists. "You would instantly have a far deeper legal service," he says.

Glocer also says that Reuters' and Thomson's financial information services will fill each others' holes. For instance, he says, Reuters is relatively weak in fixed income, a Thomson strength, while Reuters is the major player in foreign exchange. "Now you will be able to go from spot foreign exchange prices all the way to the long bond," Glocer says. "This allows us to get organically where we want to go much faster." He also notes that Thomson's current mainstays—supplying information to the legal, accounting, health-care, and scientific communities—would help offset the cyclicality of Reuters' financial-institution customers.

Premium Price

For Thomson, being able to acquire a blue chip company such as Reuters is testimony to sharp, proactive dealmaking. Harrington, who became CEO in 1997, and Beattie, who got the Woodbridge job in 1998, have done about $21 billion worth of deals since the late 1970s, they say. According to Harrington, only 25% of the assets he inherited when he took over are left.

The latest sale occurred on May 11, when Thomson agreed to sell its education business to private equity firms Apax Partners and Omers Capital Partners for $7.75 billion, well above market expectations. "We put ourselves in a position over 10 years that when the opportunity [to acquire Reuters] came up, we had the wherewithal to do it," Harrington says.

Of course, the price Thomson is paying is far from cheap. It represents a 40% premium over the Reuters share price before news of the deal leaked to the markets and forced Reuters to make an announcement on May 4 (see, 5/4/07, "Reuters in Play as Media Deals Heat Up").

Safeguarding Integrity

The companies say they will be able to take out $500 million in annual costs in three years, but all parties say that such cuts weren't an important reason for the deal. The potential gains from combining the two companies' product areas and talents are far more important they say, though they aren't yet providing much in the way of specifics. The combined companies will have close to 50,000 employees.

Glocer expressed optimism that the deal will eventually clear regulatory hurdles, saying that his financial customers are telling him they welcome the creation of a strong competitor to Bloomberg. Thomson and Reuters have already cleared another big hurdle: persuading the trustees of the Reuters Founders Share Company, which controls a special share in Reuters, to support the deal.

The trustees can block a takeover of Reuters that they think would threaten its journalistic integrity. But Woodbridge has signed up to a set of principles designed to uphold Reuters standards, and thus has been granted a waiver. David Schlesinger, Reuters editor-in-chief, will remain in the same position at the new company, which will be listed as Thomson-Reuters Corp. on the Toronto and New York stock exchanges and Thomson-Reuters PLC on the London Stock Exchange. David Thomson of the family will be the new company's chairman. Beattie will be deputy chairman, along with current Reuters chair Niall FitzGerald, well known in European business.