Scenes from a marriage
Wednesday 12 December 2012
Most mergers fail. Just ask any M&A lawyer. Or, if you are disinclined to think their opinion wholly objective, examine any of the studies conducted in business schools and by M&A intermediaries, the lawyers, bankers and accountants who profit most from takeovers. They show a common trend: between 50 and 80 per cent of all mergers and acquisitions fail to deliver shareholder value. Cracks usually appear in the first year and within five years the breakdown is irrevocable. Like many marriages in Western societies, most of them will separate in disaffection, recrimination and, at worst, mutual loathing. It would have been better if they never had met.
The Thomson family’s third generation business empire, majority owners of Thomson Reuters, might well be pondering that unsettling statistic as the fifth anniversary of their acquisition of Reuters approaches.
The engagement was announced in 2007 and the nuptials took place in 2008. It looked like a natural match - Thomson’s strength in the financial, legal, education and healthcare information business; Reuters’ dominance in foreign exchange trading, equities and news. Together, a news and information giant powerful enough to bestride the world and put rivals like Bloomberg in their place.
That hasn’t happened. Bloomberg’s share of markets in which they compete has risen; Thomson Reuters’ has fallen.
What went wrong?
First, the dowry. Reuters turned out not to have been worth $17 billion, the sum the Thomsons paid to get their hands on Reuters’ easily measurable physical assets and hard to value intangible ones, as they discovered too late. That much was proved by the $3 billion write-down - “a non-cash charge for goodwill impairment”, in reality the declining value of the Reuters financial services business - that the combined company took as an accounting adjustment on its 2011 figures published earlier this year. It made Reuters worth 38 per cent less than Bloomberg at the time of the purchase.
Second, the timing of the matrimony could scarcely have been worse. It was finalised as markets for many of the partners’ financial products and services were in crisis. Those markets have yet to recover from a downturn whose chilling effect on the global financial services industry continues to be felt.
Third, the reason for most divorces, incompatibility. They came from such different backgrounds they just couldn’t get along and settle down. Reuters and Thomson seemed culturally incapable of living together happily ever after, the gap between them too wide to bridge, too great to nurture the tolerance, compromise and trust essential for the success of any marriage.
It can't go on like this. Can the marriage be brought back from the brink or is it fated to founder on the rocks? Can they make a go of it or must it all end in tears?
Finally, to extend the analogy, there was a mis-match of expectations over who wore the trousers. With the chief executive of Reuters, Tom Glocer, becoming CEO of the combined business and another Reuters man, Devin Wenig, tipped as heir apparent in the succession plan, some old Thomson hands resented what they felt was a reverse takeover. Who was on top, who beneath? The question is not frivolous. It was irksome enough for some on the Thomson side of the group for the family to feel the need to settle it once and for all. Glocer departed, preceded by a raft of ex-Reuters people, Wenig included, who were abruptly cut adrift. As replacement for Glocer they chose a tried and trusted Thomson veteran, James Smith. Senior Thomson executives are now dominant, legacy Reuters ones in the minority. As if to emphasise that what occurred in 2008 was a takeover not a combination, there is no ex-Reuters executive on the board. Perhaps that should come as no surprise. All mergers are takeovers in fact, even if it is sometimes deemed politic not to say so at the time.
It can’t go on like this. Can the marriage be brought back from the brink or is it fated to founder on the rocks? Can they make a go of it or must it all end in tears? What are the options? There appear to be only two:
- Stick it out. Cut costs until profitability improves. There will be pain, and most of it is likely to be felt on the Reuters side.
- Re-package Reuters, dress it up and burnish the brand to attract another suitor. Some Thomson Reuters watchers believe a compelling case can be made for selling off rump Reuters. There is precedent for disposing of any part of the business deemed no longer fit: the legacy Thomson healthcare information division was sold in June for $1.25 billion in cash.
The alternative - do nothing - is not an option. It’s not the Thomsons’ style. The dynasty didn’t amass a $20 billion fortune and become far and away Canada’s wealthiest family by not keeping a close eye, through Woodbridge, on the performance of their investments. Although their management methodology is hands-off they have a rigorous, not to say ruthless, attitude to preserving family treasure by keeping careful watch on the value of their holdings.
Although speculation about a possible Thomson Reuters bid in competition with mooted Bloomberg interest has surfaced recently, buying the Financial Times is also ruled out by many observers of the news and financial information sector. It would be a distraction.
Thomson Reuters is the family’s largest investment “and of fundamental importance to us”, said David Thomson, third Baron Thomson of Fleet, head of the family and chairman of the group as well as its investment instrument. Which brings us back to shareholder value. The Thomsons’ 55 per cent equity interest in the combined group has lost a significant portion of its worth since the takeover. The company’s shares listed in New York and Toronto seem unable to break out of the $27-$30 range. The family - David Thomson, his siblings and other relatives - is said to be dissatisfied with performance.
The top executive at Woodbridge, Geoffrey Beattie who masterminded the Reuters acquisition, moves aside at the turn of the year to concentrate on improving Thomson Reuters’ performance from his place as vice chairman of the group’s board. Thomson said the change in leadership at Woodbridge - Beattie’s replacement David Binet is currently its chief operating officer - comes as the company enters “an important new era”.
Expect action. ■