US: Hurdles Loom in Deal for Reuters

Thomson Corp. and Reuters Group PLC's ambitious plan to create the world's largest supplier of financial data and news could face regulatory hurdles as it would narrow the market to two main competitors from three.

Yesterday, the two companies laid out some details of how a combined company would look if Thomson successfully completes its plans to buy Reuters for about £8.8 billion ($17.54 billion) in cash and shares. Reuters Chief Executive Officer Tom Glocer, 47 years old, would become CEO of the combined company, named Thomson-Reuters. Thomson Chief Executive Richard Harrington, 60, has agreed to retire. Both sides said that the talks could still fall apart, but negotiations are well advanced.

Reuters provides financial information and news to banks, hedge funds and institutional investors, in addition to its general news wire. Thomson, based in Stamford, Connecticut, and majority owned by the Thomson family in Canada, does the same, but is known for having lower prices. Both are up against market leader Bloomberg LP. Dow Jones Newswires, a news service run by Dow Jones & Co., the owner of The Wall Street Journal, sells its news through both Thomson and Reuters.

Reuters's shares were trading below Thomson's offer yesterday indicating investor concern that the deal might fall through. Based on the value of Thomson stock, which fell 3.8% to $41.21 in afternoon trading yesterday, the offer is valued at about £6.84 per Reuters share. Reuters shares closed at £6.30 in London.
While the talks are friendly, the takeover faces a hurdle at Reuters: It will have to be approved by independent trustees who control Reuters Founders Share Co., which was established to maintain the independence and integrity of the Reuters news service.

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The deal would also likely have to be cleared by the European Commission's Competition Directorate, the European Union's antitrust authority, which is often tougher on big mergers than U.S. authorities. It has a track record of asking for extensive information from merging companies and is likely to ask customers and competitors for their views, competition lawyers said. In 2004, the commission fined Microsoft Corp. €497 million for using its Windows operating software to block competition, for example.

Simon Baker, an analyst at Credit Suisse in London, said the merger would face close regulatory scrutiny in the U.S. and Europe. "The difficulty in convincing the Reuters Trust that Reuters's independence can be preserved should not be underestimated," he wrote in a report yesterday.

Antitrust regulators typically examine the perceived impact on customers. They would see if traders, for example, would still have ample sources of information or if having fewer players in the market would give the companies too much power to increase prices.

"On the surface, it eliminates one competitor," said Wassili Papas, a fund manager with the Frankfurt-based Union Investment, which owns about 1% of Reuters as well as a small stake in Thomson. "But in reality the overlap isn't that great. I think the market is signaling it will take 12 months to get approval."
Spokesmen for Reuters and Thomson declined to comment on antitrust issues yesterday.

Any delays in closing the deal would provide an opening for Bloomberg, which is adept at marketing to clients. A Bloomberg spokeswoman declined to comment yesterday.

The companies' market share can be measured in different ways. Reuters recently estimated that it and Bloomberg each had about 27% of the market, with Thomson and other smaller companies well behind. But an independent annual study called Inside Market Data uses a narrower definition and has Bloomberg at 33%, Reuters at 23% and Thomson at 11%. Dow Jones has 3%, according to the report.

If successful, the takeover would be a personal coup for Reuters's Mr. Glocer, who is credited with restoring Reuters to solid financial footing after years of losing clients to Bloomberg. A former mergers-and-acquisition lawyer, Mr. Glocer joined Reuters in 1993 as an assistant general counsel and became CEO in 2001. He has been pushing the company into more lucrative products, including sophisticated computer programs designed for hedge funds.

At Thomson, Mr. Harrington was largely responsible for engineering the company's exit from newspapers in the 1990s and building a business selling legal, scientific and financial information, mostly over computer screens. He has also made succession planning a priority, including for himself. He spends eight days a year talking with executives about their potential replacements, according to a 2005 article in the Harvard Business Review.
Under outlines of a deal, the head of Reuters's news operation, David Schlesinger, would keep his job. The Thomson Financial division, which competes with Reuters and Bloomberg, would be renamed Reuters.
Combining Thomson and Reuters would save the companies $500 million in costs a year in three year's time, the companies estimated. Among the savings: purchasing one set of prices from banks and securities exchanges instead of two.
The Thomson family, descendents of founder Lord Roy Thomson, would retain majority ownership of Thomson-Reuters through their investment company, Woodbridge Co.

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