Thomson and Reuters: In Search of the "Smart Pipe"

Rupert Murdoch and News Corporation on a quest for Dow Jones. Rumors placing Thomson as a potential acquiror of Reuters. What is going on here? On first blush, Murdoch's move is a quest for more, high quality content which can be pumped through his global distribution platform. He also has the marketing savvy, development budget and willingness to invest unlike the Bancroft family and Dow Jones. Thomson and Reuters, however, seems like a push for scale and a reach for share, assembling a market data behemoth of a magnitude similar to that of the market leader, Bloomberg. These are seemingly rational and straight-forward reasons for why these deals are in the offing. However, I posit that a much more powerful motivator is at play, and one which can turbocharge the vision and rationale behind these transactions:

Creation of a "smart pipe," a pipe this is full of high value, deftly targeted content, that is timely, relevant and insightful for its consumers, be they individuals, corporations or investors.

With this vision, it isn't simply the creation of ever-fatter pipes that further reinforce the signal/noise problem that is so prevalent in both online and offline media, but the leveraging of sophisticated models to extract valauble metadata, matching this metadata to customer-generated search queries and applying these models across an ever broader array of high-value content. This can also take in consumer-generated data like historical search queries, preferences, tags and consumer-identified relationships among entities and sources. Now this creates value beyond the commodity provision of market data, which is in an inexorable race-to-the-bottom on the basis of latency. This is a hardware and software arms race for which there will be winners and losers, but where there are already well-entrenched players and where the competitive advantage is in better execution models and technology. This is a tough game to play, and certainly not one for which Thomson or Reuters is especially well-positioned.

However, these firms have loads of valuable content just begging to be monetized. Begging to be indexed, organized, and accessible in an efficient, time-sensitive and targeted manner. This, to me, is the magic of a Thomson/Reuters link-up. Not that they will have 34% share in market data versus Bloomberg's 33%, but that their valuable archive of content will be sharply expanded and, hopefully, made available to their terminal subscribers in a smart way, ergo, my "smart pipe" metaphor. This is no mean feat either technologically or culturally, let me tell you. These are two siloed, old-line organizations that are trying to move forward quickly in an era of lightining-fast change. And this is hard. But if they get it right, the payoff could be handsome indeed for their investors and customers alike.

But the key to unlocking the ultimate value of this deal is in execution, a significant barrier to success that will require vision, breaking down traditional organizational barriers and taking the long view. If this deal gets done, hopefully they will be able to make it happen. Otherwise, they may go the way of Sony and Howard Stringer. In that case, buyer beware!

Comments

[Ben]

Breakingviews from WSJ has an interesting article entitled "'Bloomberg Killer' Lurks" dated 5/10. If Thomson and Reuters successfully merge, will be interesting to follow how Glocer determines which products and people come and go.

[Furqan]

Roger, you hit the nail on the head! This deal looks great on paper, but the "problem" is execution (as you pointed out). Thomson buying Reuters is like two 400 pound people having sex (can I say that on a blog?). It's technically possible, but someone is likely to get hurt and no one wants to watch! I'm bearish on the deal.

[Yaser Anwar]

While anti-trust issues may not seem much of a problem, I think investors have to factor in the 2008 election.

A democratic party in the White House is not a plus as we all know they like to act tough and less business friendly than the Repubs.

While synergies do exist amongst Thom/Reuters, one also has to think about competitive issues. Right now the market is structured as: Bloomberg, 33%, Reuters 23% and Thomson 11%. A merger will make it 34-33 Thomson.

Then again, if one looks at the Windows/Apple OS situation, it is clearly a two player market (like that famous marketing rule- the best two survive, i.e. Coke & Pepsi, P&G & Unilever etc).

Either way, traders should look for some pin action in FDS, which has clearly been HOT! FDS has no long-term debt, 3$ in cash, growing at a clip of 30%+ and sells at just 34x earnings and Fwd. multiple of 26x. Not too bad considering the growth of FDS and Reuters is trading at a multiple of 27x (would be bought around that much or 30x).

If FDS gets bought out in the future, this could tempt McGraw Hill companies to spin-off/sell S&P.

The S&P would compliment Reuters' strength in fixed-income, given its ratings business.

Then we will really have a powerhouse. Thomson (FX core), Reuters (Fixed Income) & S&P (Ratings)- just thinking out loud.