Monday, December 5, 2011

A Thomson Reuters/Wolters Kluwer Merger: Coming Around Again?

It's not just the logos  that suggest an interesting symmetry! 

Today Exane BNP Paribas released an equity research report suggesting that the time may once again, be ripe for a Thomson Reuters/Wolters  Kluwer merger. While the US legal publishing units Westlaw and CCH are not the main focus of this speculation, it is clear that the professional publishing units in the US would be ”in play,” in any such combination. The primary driver for Thomson is to reduce it’s exposure to the troubled financial services industry and to generate $450M in cost savings.

Exane BNP Paribas has been speculating on a TR+WK deal for the past 10 years. They retreated from this position in May 2011 based on TR’s announcement that they would dispose of their Healthcare business. TR’s disposal of legal publishing assets in northern European markets also ran counter to such a deal.

Factors Favoring Such a Merger

1. Thomson Reuters Leadership Changes.Exane BNP suggests that TR appears to be “in restructuring
and crisis mode” since they failed to achieve top line growth through some new products including Westlaw Next.. The new CEO Jim Smith with his track record in legal, tax and scientific professional publishing may be better positioned to create new value from asset consolidation than top line growth.

2. Wolters Kluwer May be Ready to be Acquired. Former WK executives suggest that a merger has always been viewed as a good exit strategy if top line growth could not be achieved. CEO and Chairperson Nancy McKinstry has been in the Netherlands for 8 years and has not delivered expected revenue growth.

3. TR’s new IT  Platform Designed for Mergers. Since both companies generate over 80% of their revenue from electronic software and services, TR has the infrastructure to allow both companies to consolidate and reduce their IT costs. Apparently TR’s new IT platform was specifically designed to be able to integrate content from acquired companies. I have also heard this comment  from insiders at TR. (I whole heartedly agree that at least in the US, WK's technical infrastructure as demonstrated by their "new " Intelliconnect platform would benefit from an IT overhaul). Both companies have been trying to go global and have expanded their sale forces in some new and similar markets. The proposed merger would allow them to reduce duplicative effort in expanding their global footprint.

4. TR’s Balance sheet is Ready. TR's balance sheet has absorbed the Reuters acquisition and the company  now has the financial capacity to launch such an acquisition over the next 12 months.

Insights From the Report:

Mergers are a Value Drivers in Professional Publishing. OK we all knew that. Cost savings can be derived by combining IT, marketing as sales costs. The report cited several successful mergers in the past 5 years which lead to cost benefits, Reed Elsevier-Choicepoint, Wolters Kluwer-LexisNexis German, Wiley-Blackwell. Recent cost savings have resulted in 15% savings from the target cost base. We are all waiting to see how the Bloomberg/BNA  merger fares - but we may never know since Bloomberg is a private company. But given the firm's pedigree in the financial arena - we will stipulate that they were aware of these benefits and will some day let us know how financially successful the merger was.

Minimum Regulatory Hurdles. In North America, the merged ThomsonReuters-WolterKluwer would have a dominant market position of about 60% share. The tax segment would be particularly vulnerable to regulator scrutiny. The report suggests that at worst 13% of WK’s revenue’s would need to be disposed of.

Enter Bloomberg. The report also suggests that Bloomberg might be standing in the wings to take any divested WK assets since Bloomberg, as we know, is increasing their portfolio of legal, tax and regulatory content.While the newly acquired BNA has some significant editorial content in the tax area, including the Tax Management Portfolios and the Daily Tax Report, they don't have anything comparable to the fully integrated federal and state tax  libraries which are the core of the CCH Tax products.

The Thomson Family Track Record. Since the 1930’s the Thomson Family has track record of making opportunistic asset shifts away from troubled markets into more promising segments. In this case, they would be shifting away from financial services and into growing segments of the knowledge economy. Wolters Kluwer would expand Thomson’s global markets.

Post Script
Lexis: The company that was not there. As a veteran observer of  decades-long legal publishing rivalries, the most striking "take away" from this report was the absence of name LexisNexis from the discussion. In law library community, there has long been speculation that CCH might be acquired by Reed Elsevier to strengthen and globalize it’s legal and regulatory products. But the Exane PNP report doesn’t even acknowledge LexisNexis as a contender if Wolters Kluwer is "in play."  Bloomberg Law, a relative new comer to legal and regulatory publishing and “upstart extraordinare” waltzes into the discussion and drops comfortably in the back up position (for now). One has to wonder if there isn’t a coded message when you play with Bloomberg Law's new marketing slogan and  Westlaw's newest product name: “Bloomberg First, WestlawNext.”

1 comment:

  1. Since thirteen or fourteen years is an eternity in the world of business cycles, here is a bit of history for the young 'uns about an earlier merger/purchase. In 1998, at about the time of the Frankfurt Book Fair (early-mid October), Wolters Kluwer and Reed Elsevier announced a merger. This was pretty shocking news to our profession, and tons of ink were spilled on the subject. The merger eventually fell apart. The official story was that competition law considerations, particularly in Europe (Mario Monti was just taking charge of that particular EU bureaucracy, and as any of you who may be Microsoft shareholders know, he was toughtoughtough), scuttled the merger. The informal chat was that the finances, especially given the volatility of the respective stock prices, could not be made to work. Your correspondent is unable to say with any authority how much truth there may have been to that.

    The major impact that the merger announcement had on the U.S. legal publishing industry is that it sent Times Mirror, owner of Matthew Bender (where I worked at the time), into deliberations. Times Mirror was a publicly-held company largely controlled by the Chandler family, and the thinking went, "Even if this particular merger does not work, there will be others, and we shall sit here with one little legal publishing company, Matthew Bender, facing huge combines, and it will not survive." Thus it was that five months later the entire, and I mean entire, NY-based Matthew Bender workforce gathered in a movie theater on East 34th Street at 3:00 P.M. to hear the announcement that Times Mirror was seeking a buyer for Matthew Bender. We were held in the movie theater (closest to cops-and-robbers, or SEC enforcement, most of us ever got) until the stock market had closed for the day and the announcement had been made to the public.

    The following months were a period of uncertainty but not much mystery. A year earlier, Times Mirror and Reed Elsevier had jointly acquired the Shepherd’s citation service from McGraw Hill through a product swap and partnership agreement, and had assigned operational responsibility to, respectively, Matthew Bender and Lexis-Nexis. The “conventional wisdom” had it that Reed Elsevier would be the only suitor for Matthew Bender, which would be folded into Lexis-Nexis. In this case, the conventional wisdom was just right, and it happened as predicted.

    In the subsequent decade plus, the pace of consolidation has been frantic, especially compared to that pre-1998 era of tranquility. New providers and platforms are swallowed up as quickly as they show either profit or potential, and even established and very successful (e.g. BNA) entities are not immune. Thus as momentous as the Bender sale to Reed Elsevier was in 1999, it is by today’s measure pretty small potatoes. It also gives those of us who experienced it a new insight on the famous “you think it’s tough now, just wait” sentiment of Aeneas (Aeneid I.203):

    Forsan et haec olim meminisse iuvabit.
    Perhaps someday it will be pleasant to look back even on these times.

    And as always, speaking only for myself and not my employer.