Aug
5
In Search of Enduring Value
Filed Under B2B, Big Data, Blog, data protection, Financial services, healthcare, Industry Analysis, internet, online advertising, privacy, Reed Elsevier, Thomson, Uncategorized, Workflow | Leave a Comment
Yes, I remember Dun and Bradstreet. In the old UK headquarters in High Wycombe, the “white elephant” building that was intended to become the global data centre (in the days when you concentrated data instead of distributing it) had a waxwork figure in the foyer depicting a frock-coated Mr Dun (or was it Mr Bradstreet , or Lewis Tappan , the real founder?) collecting together the vital credit rating clues of the 1840s, as well as a discreet reminder that Abraham Lincoln had acted as as a data collector in Illinois in the 1850s. But the company I knew was a large and prosperous portfolio player, the very demonstrator for the theory that markets never go all bad at once, and that change in one can be nurtured from sustained growth in others. Under the portfolio, if I recall correctly, there nestled Nielsen in market research , IMS Health in medical market research, Donnelley in directories and market-leading marketing services, Cognizant in technology, Moodys in global rating services and Hoovers in company profiling. Never, you might say, was there a better example of a company with a portfolio of related interests who could interconnect these data collections to create fresh value in wider marketplaces – and take it all global as D&B itself was already going global. What a huge opportunity that now seems to create value through connecting hitherto unconnected data values and effect the type of transformation that Thomson Reuters are now attempting.
But the voices that D&B listened to were not the voices that said things like this. They were the siren voices of the market, who said that short term values could be increased by selling off all these allied companies, organizing the buyback of shares on a major scale and creating a greater value in the parent than would have been possible if it had remained in the group. So all of these companies went, and mostly to private equity buyers. But this was still not enough in terms of value creation, so the majority of the overseas subsidiaries were franchised to local operators , with valuable operations like China, Russia, Australia, and Germany having their data leased out to previously competing market players, who would then pay fees and royalties and contribute to the global data holding (now around 200 million companies and 53 m details of directors) in return for local re-use.
Markets and managements change, and over time D&B have bought back Hoovers ( revamped and without its research services ), and bought out their local franchise holders in places like China (where they now face a local data privacy infringement case) and Australia. No one adds the loss of value from these buybacks to the long term calculation, but presumably at some point the company became aware that by paring itself to the operational bone in search of value, it was actually losing opportunity. Now we gather (Wall Street Journal, 31 July 2012) that the company has been seeking a buyer for the past year, and has now appointed financial advisors to “explore opportunities” that may or may not lead to a sale.
D&B know all about creating value. In 1963 they created the DUNS number , forcing consistency and their own metadata on a market they meant to dominate globally. In just the same way IMS Health created its proprietory BRICS system for measuring medical activity in a community. Here were the forefathers of dominant metadata systems, whose value creation (think of the recent Thomson Reuters argument with the European Union over its RICS metadata nomenclature) is the bedrock of value add in data driven systems. Given its birthright, D&B might have been the dominant player today in value-added workflow services and systems offering solutions in areas like procurement and customer profiling. Question: has it been competitively outflanked by Experian (compare performances in Brazil, for example, where D&B have been since 1933) and lost touch with a value growth plan beyond buying back the franchises it once leased out?
It seems to me sometimes as if value in the sense that markets use the word is in fact a bell curve. It is clear how the asset sales drove D&B’s valuation up one side of this and how it has peaked through an inability to add fresh value in the narrow front on which it now operates, without the advantages of platform integration and Big Data-style development. It is possible that in places where these factors have come together (insurance risk in the US would be an example, where Lexis Risk use these elements to dominate in a related but consumer-orientated marketplace) it may be very difficult, without very extensive strategic partnerships and joint venturing, for D&B to prevent itself from losing ground.
So does this mean sale at a discount to a private equity player, or are there trade buyers who would offer a premium. Before Sanford Bernstein suggest again that Reed Elsevier should sell Lexis Law and buy this, let me just say that, in my view, the only real potential fit is with Thomson Reuters, and they probably have enough on their plates without trying to absorb a $1.7 bn revenue player, or Bloomberg. Competitors would all face anti-trust issues, but enterprize software and systems players might be interested – and D&B already has good links with Oracle.
A friend reading the last two pieces on this blog – a sort of odd trilogy on valuations – kindly asked how the UBM announcement that it “might” sell its “data services” fitted into all of this. Surely, as with D&B, we do not sell data at the moment: instead we try the alchemy of value add. So I have looked at this too, and am now even more confused than when I started. For example, by “data services” UBM appear to mean the databases from which they once sourced their print directory products. Apparently they have found that advertising online earns such diminished CPMs that it is very difficult to sustain the services. Similarly with Tech Insights, which they acquired and seems to suffer from the same problem. Is this surprizing? Not at all, since unless that data can be recombined with other internal or third party content there is no real hope of getting a subscription value from it. Advertising online is always going to be dodgy territory and at best a subsidiary income source.
And what does all this demonstrate ? Is the portfolio model broken for good and cannot ever be mended ? Or maybe D&B were right fifteen years ago , as Thomson Reuters are now : you can build portfolio if the players you buy are data-related and if you have platform and distributed search going for you . When D&B lost faith in their original model they did not have the technologies to do the job . So they followed the equity market view of value , and the chronic short term thinking that results from that has brought them to this . Now comes a more interesting question : what is credit rating and how do you reconstruct the service future of this marketplace ?
Jul
28
Thomson Reuters on the Front Foot
Filed Under B2B, Big Data, Blog, Financial services, Industry Analysis, internet, news media, Publishing, Reed Elsevier, Thomson, Workflow | Leave a Comment
It has been a month of contrasts. Good solid results at Reed Elsevier have the market analysts demanding the sale of Lexis Legal: the chief break-up irritant at Bernstein can forecast a 20% increase in value as soon as it is done. Reed Elsevier now trades at a discount to last year’s valuation as well as to the wider quoted marketplace. And how does this come about? Simply by representing the company to analysts as a diversified investment portfolio, and then disappointing them with the results, which always prompts a demand for the sale of the weakest bit and the purchase of something stronger.
Meanwhile, over at Thomson Reuters, it has been a dynamic July in terms of forward progress. You can measure that in terms of acquisitions if you like, but to me the key element is the strategic positioning of these purchases and what they do to pursue the goal of market leadership in services and solutions for corporate finance, tax and regulatory, from banking and equity trading, law and tax/accountancy in practitioner terms right across to the desktop of the corporate finance, tax and legal department at the other. If the Thomson Reuters vision works out, it will connect up all of these functions and activities into a series of solutions which will compel big and then medium and small corporates into easier methods of information handling, and methods that get easier the more reliant they become on inter-related services and solutions from Thomson Reuters. This is about integration in the face of user need, about recognizing the primacy of the network, and about bringing one huge company with many specializations into focus on the issues of service and solution. This is not a diverse portfolio of disparate elements: it buys the bits it needs and sells the bits that do not fit, but the definition of acquisition has to do with whether these global aims are satisfied as well as whether the purchase makes financial sense and the required return.
Lets take a few July examples. The headline purchase was the acquisition of FX Alliance for $625 m. Here, then, are Thomson Reuters, a leading player in the sell-side interbank foreign exchange market, one of its traditional strengths, pulling in a major player from the bank-focused currency trading business for corporates, asset managers and hedge funds. Foreign exchange is a huge diversified marketplace, involving some $5 trillions of transactions per day, and this deal gives Thomson Reuters the ability to work in both the internal institutional markets and the corporate-facing external market, using electronic platforms and high speed trading techniques all the while.
By comparison, my next two examples are smaller in scale, but demonstrate other aspects of the process that is going on . Having written extensively about the launch of the Thomson Reuters GRC division – bringing legal and tax into focus with financial services in the areas of Governance, Regulation and Compliance, I want to mark the arrival of “Eikon for Compliance Management” with a special commendation. It seems to me that this now closes a huge loop, and provides a service environment which was never more urgently needed. It is said that there are now 60 new regulatory announcements a day from some 230 regulators and exchanges in financial markets, yet less than a third of traders report having any compliance training or update in the last 3 months. But to join up solutions for your customers you need to start with a joined-up company yourself.
My last example dates back to the experience of some 25 years as an external director on the international side of the Bureau of National Affairs, which has now disappeared into Bloomberg. An issue that intrigued me there, which attracted a great deal of attention and was crying out for a service solution, was Transfer Pricing. Boring? More likely stupifying! Here was an area that always demanded a software-based solution, since most tax lawyers and finance specialists were deeply reluctant to get entrapped in its intricacies, and access to someone who knew what they were talking about was rare and expensive. BNA produced great books on the subject, and so did WK and others. But Thomson Reuters has produced ONESOURCE Transfer Pricing, with an Analyser to get update on the compliance requirement for corporates who trade across borders and a Documenter and Benchmarking solution, ensuring that users have the right forms, and, vitally, ensuring that they are benchmarking against corporations whose solutions have already been accepted by the authorities. Here then is a vital but expensively neglected field of corporate activity, which reflects on much that Thomson Reuters is now about.
The final reflection is upon “platform”. At all levels Thomson Reuters is on a multiplicity of platforms, and while content integration and re-use has led to access being eased and common metadata standards evolved, this still clearly has a good way to go. And there is strength in this multiplicity – no one wants to interrupt the steady absorption of Eikon, now beginning to fulfill expectations, or damage the market primacy of WestlawNext. I expect, however, in the age of data, to see the continuing back-end integration of this very large player’s systems to be a continuing theme. At the moment its greatest rival is a company, Bloomberg, who is swaddled in the limitations of a Victorian corset – the Terminal. That too will have to go, as Bloomberg limit their own future through an inability to get its new plays in law and government to sell to end users who do not want even a flat-priced, all you can eat deal on a box originally built for traders. There is a midpoint, and Thomson Reuters’ migration looks like getting them there first.
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