Thomson-Reuters merger is bad news for rivals

Shahnaz Mahmud is a freelance journalist based in the US.

This summer has proven to be an exciting time with the creation of a major media powerhouse. The $17 billion merger between family-owned Thomson Financial and Reuters is set to shake up the financial news sector, as Shahnaz Mahmud explains …

The more things change, the more they stay the same. Perhaps this sentiment finds meaning in a merger that will create the world's largest financial data provider. As technology advances and media continues to be an attractive space, family dynasties are looking for ways to expand. On 15 May, UK-based Reuters, the 156-year-old independent news service known for its global coverage of world events and foreign exchange markets, agreed to be acquired by Thomson Corp, 70%-owned by the Thomson family. The $17.2 billion deal sees Canada-based Thomson swap 0.16 shares of its own stock and $7 in cash for each Reuters share. It was transacted as 50% cash and 50% equity. The new company (barring no antitrust issues from regulators), to be called Thomson-Reuters Corp, will have around a third of the financial news and information market by some calculations, a similar size to Bloomberg. Tom Glocer, Reuters' CEO, will lead the combined company. David Thomson, chairman of Thomson Corp, will preside in the same capacity for the new entity.

The transaction is a big indicator of consolidation within the media industry, which has been categorised as experiencing a period of turmoil and rapid change due to the ever-evolving face of technology. Says Laura Martin, analyst at Soleil Media Metrics: "We are at the beginning of this new wave of media mergers, not the end." As a result, there will be a lack of competition in the marketplace with just a handful of players in the game.

David Anderson, editor of Inside Market Data Reference and a market data industry commentator, takes it a bit further. "As a result of the proposed merger there is a real concern that competition will be diminished, which has a historical tendency to push up prices – something the US Department of Justice and the European Union competition authorities will be very keen to prevent. Management at the two companies are at pains to point out that significant competition exists in the market in the form of Bloomberg and a plethora of other smaller and in some cases newer players. They also point out that Reuters and Thomson do not have significant overlap and hence the merger is more about synergies rather than the removal of competition."

Expansionist standpoint
But, just what does this mean for the parties involved? The deal is perceived to be a highly disciplined, strategic move by the Thomson family. Its holding company, Woodbridge, will have a 53% majority stake in the new entity (other Thomson shareholders will hold 23%). The family, the wealthiest in Canada, has taken an expansionist standpoint, seizing an opportunity to significantly gain a foothold in Europe, outside of its predominantly North American presence. The Thomson family was originally based in the UK, but moved to Canada in the 1920s. Roy Thomson, 1st Baron of Fleet, founded the Thomson Corp. The company was formerly known as a newspaper chain, owning such titles as The Globe and Mail in Toronto, The Times and The Sunday Times in the UK and The Jerusalem Post in Israel, but between 1999-2000, divested all of its newspaper holdings, opting for electronic information services and products.
 
It is fair to say that the Thomson family is acquisitive in nature. "Thomson Financial is a company almost entirely based on acquisitions as opposed to organic growth," says Anderson. But it is clear that the family has good judgment in what to buy, keep, sell and when. This is represented by its recent sale of its Learning division, which provides textbooks and online courses to government, companies and schools, for $7.75 billion, which helped finance its bid for Reuters.

"The Thomson family has a great sense of where the media business is headed, but they also know what area they want to be in. Part of that foresight is characterised by their interest in moving Thomson Corp from a traditional newspaper chain to an electronic subscription-based business model over the past decade," says Chris Diceman, senior vice president, communications and media for Toronto-based bond rating firm DBRS. Grant Dawson, DBRS' vice president, communications and media, adds that this acquisition will also improve Thomson's product lineup. "The family has moved towards specific niches in the marketplace, such as financial services, serving tax and accounting needs and their scientific services segment serving pharmaceutical and health services. The merger will further allow the company to cater offerings to specific sub-segments, such as the buy side and the sell side of the financial services sector – this trend will continue," he says.

The transaction is perceived to be perfectly suited, with both businesses complementing each other's. Some have placed a question mark over why Reuters, which has fiercely maintained its independence since 1851, agreed to the takeover, despite the fact that Reuters shareholders will own approximately 24% of the combined entity. The company was founded by Paul Julius Reuter who began by using pigeons to deliver news but quickly progressed to using the cross-channel cable between Dover to Calais to send closing stock market prices between London and Paris. Early coverage also included dispatches on the Crimean War and the first news in Europe of President Lincoln's assassination in the US.

In 1984, Reuters created a special Founders share, managed by the Reuters Founders Share Company, after the company's stock market flotation. This is controlled by the Reuters Founders Share Company, an independent board that can vote the share to block a takeover if deemed harmful to Reuters' commitment to independence and freedom from bias.

In fact, while discussions were ensuing between the two parties, unions representing journalists at Reuters wrote a letter to the Founders Share Company expressing concerns that the Thomson family might eventually sell their stake in the company, alluding to its sale of The Times of London to Rupert Murdoch in 1981.

Trust principles
But, says Dawson, the binding agreement confirms that Thomson-Reuters will adopt the Reuter Trust Principles, which prevents that from happening. Dawson is referring to the original covenant formed by the Founders Share Company that stipulates the board can halt anyone who owns more than 15% of Reuters stock from divesting to preserve editorial integrity. Anderson comments: "This notion of selling does not seem very likely at all. News is at the heart of Reuters' reputation and hence its brand. Also, the joint strategy announcement indicates that they plan to leverage Reuters News muscle across all of their divisions not just the financial sector where it currently resides." According to the agreed terms, the Founders Share Company voted unanimously to support the takeover after the Thomson family trust agreed that Thomson-Reuters would fully subscribe to the Reuters trust principles and support the Founders share company structure.