For years, Reuters was shrinking. Having recently stopped the rot, the information provider was meant to become a predator, rather than prey. But now that Reuters has received a punchy £8.8 billion (Rs36,080 crore) from Thomson, its shareholders shouldn’t mind. Its Canadian rival is offering 352 pence in cash plus 24% of the combined firm’s shares, or just under 700p a share. This is equivalent to a 43% premium on Reuters’ pre-bid price. The last time its shares hit that level was in the summer of 2001, when Tom Glocer became chief executive.
Reuters isn’t just getting a fat premium. Glocer will run the combined company. Thomson has also promised to uphold the Reuters Trust principles—designed to preserve its editorial independence—and adopt its peculiar trust structure. Reuters also gets extensive use of its brand: It would be used in the combined financial division; the media arm; and as an appendage to the name of the entire group, which will be called Thomson-Reuters.
So, is Thomson overpaying? On cost savings alone, yes. The pair reckon they can crunch at least $500 million of annual cost savings a year before tax. That’s worth about £1.8 billion in today’s money—less than the £2.7 billion premium Thomson is paying, based on the Reuters pre-bid price. The Canadians have effectively paid away all the cost savings to Reuters, and then some.
But gaining market leadership in financial information has its value. The pair would command 34% of the market, one percentage point ahead of rival Bloomberg. Thomson is strong in North America, while Reuters dominates Europe and Asia. The larger group would probably have greater financial power to make investments in new products.
Reuters’ shares traded up to 632p on news of the bid in mid-day trade—still below the offer price. The perceived value destruction by Thomson might explain some of this. After all, half of the bid is in the Canadian group’s shares. But that should only account for about 15p of the 65p gap.
Another worry is that the Reuters Trust could still in theory block the deal. But with the Trust’s own principles being upheld and Glocer getting the top job, this doesn’t look very likely. The bigger worry is probably that the deal could get embroiled in a lengthy antitrust review in both the US and Europe. Thomson-Reuters will argue that together they will be a strong competitor to Bloomberg. But investment banks are already grumbling that the creation of a duopoly in financial terminals will jack up their costs. Even though the deal will probably get through, the delay and the uncertainty justify at least some of the discount.