September 13, 2011
Massacre in the Executive Suite of Thomson Reuters Markets: Is TRI's Cash Cow, TR Legal, Next?
Devin Wenig, a 17 year veteran at Reuters and CEO of TR's Markets Divison, was given the boot in July 2011 just ahead of the release of TRI's 2Q 2011 financial report. It came with a "wish you the best" public announcement. He was the principle player at Reuters and in consolidating the Markets Division's product lines into its two-platform strategy (Eikon and Elektron). However, in the past couple of years, TR Markets has been getting its ass kicked by Bloomberg.
Musical chairs in executive suites happens all the time. Not important, right? Wrong, not this time! Guess who has taken direct control of TR's Market Division? None other that TRI CEO Tom Glocer. That sure as hell doesn't usually happen. But when it does, well, in late July Glocer announced that Reuters Media President Chris Ahearn, Investment & Advisory President Eric Frank, Markets Global Sales and Customer Service Managing Director Joerg Floeck, Markets Chief Marketing Officer Lee Ann Daly, and Markets Global Head of Human Resources John Reid-Dodick were also leaving the Company. Can you say "massacre." All this came during the final year of Reuters being integrated into TRI's corporate structure.
TR Legal's 2011 2Q financial results reports that "[w]e continued to make good progress in the final year of our Reuters integration program." However, the Company also reported:
In July 2011, we announced a streamlining of the organizational structure of our Markets division which is designed to accelerate growth by simplifying the business while improving collaboration across the company. A key reason for this change was our disappointment with the division’s recent revenue growth, which resulted in part from a sales reorganization in Markets at the end of last year that did not adequately align the sales force with our business units and customers. Additionally, the recent development and marketing of Thomson Reuters Eikon has not yet adequately leveraged our capabilities across the Markets division.
How about the disappointing results from TRI's cash cow, TR Legal? Profit margins remain in the pre-Thomson acquisition West range, about 25-26%, down from 32-33%. We don't know how many institutional buyers have rejected the WLN pitch but we do know that almost 60% of Westlaw's revenue base comes from Classic Westlaw-only institutional users since WLN's launch in Feburary 2010. Given that the WLN update is a supplemental license attached to existing typically multi-year Westlaw licenses, I'm thinking informed consumers aren't convinced of the alledged benefits of WestSearch based on TR Legal's very questionable marketing claims and remain befuddled about how WestSearch really works. See The WestSearch Straitjacket For Legal Research - Thinking Beyond The Keyword: Part I (Part II will appear on LLB tomorrow.) Then there are some who may not be willing to pay the WLN product development premium for something viewed by institutional buyers as the cost of TR Legal staying competitive in the very expensive online legal search service market.
More than any other major legal publisher, TR Legal exhibits a mindset that because of its 40% share of the legal publishing industry market, its ability to continually raise prices the Company's subscriber base would accept was virtually guaranteed. Remember this "chamber of commerce" like company profile published in City Pages' Westlaw rises to legal publishing fame by selling free information (Apr. 29, 2009):
At the time, people said Thomson paid too much [for West]. They doubted that Thomson would be able to squeeze more profit out of West, which was already posting 25 percent returns. But since its takeover, Thomson has consistently managed to attain 30 percent or higher profit margins. Legal information seems to be the sponge that won't dry.
By January 2010, Outsell's legal publishing industry analyst David Curle observed (quoted here), "The party is over for our industry." TRI continued painting rosy forecasts about the recession in the Company's quarterly and annual reports. TR Legal continued its annual price inflation practices during the on-going Shed West Era while launching WLN with add-on costs because the corporate focus is on the short-term guaranteed revenue stream. Wouldn't have given WLN away for free to its Classic Westlaw base been a better, much longer term strategy instead of thinking that legal information is a sponge that won't dry?
One has to wonder, are TR Professional execs, including sixth floor TR Legal Eagan executive office suite dwellers, breathing a sight of relief because they think Glocer is too busy cleaning house at Markets to give them the boot right now. Or have they been spending a fair amount of time talking with executive placement firms instead of tending to business? One problem with merger mania in the legal publishing industry is that there aren't all that many executive jobs "out there." Oops. Wenig, by the way, was recently appointed President of eBay's Global Marketplaces unit.
I'm thinking TR Professional execs will be even more anxious about quarterly reports from now on. They still have a little time before the books are closed on 3Q 2011. In reviewing TR Legal's 2011 2Q financial results, do pay close attention to the results from existing operations, that's the results excluding recent acquisitions because it is clear that TR's South American acquisitions are paying dividends to the Company. Also note that TRI keeps nudging up its dividend payouts to investors.
Institutional investors pay a PE premium for an industry leader like TRI over and above other publicly held companies in the same industry. When share price appreciation for a "value" holding isn't cutting it with portfolio managers, increasing dividend payouts is the usual tactic to keep big block shareholders happy. "Value" is a technical term in the investment community. It means relatively "safe" but it does not mean "growth," another technical term. For example, Microsoft, once a growth stock is now a value stock holding. Google, on the other hand, continues to surprise stock market mavens who want to recharacterize Google from "growth" to "value" but can't because Google continues to out-perform.
Most investment house reports I've read for the last couple of years in the this mature industry that TRI plays in have been highlighting Wolters Kluwer as the better investment vis-a-vis Thomson Reuters and Reed. In the context of publicly owned companies, that may remain the case because Bloomberg is a private company. But just as Bloomberg has been kicking some ass in "Markets," Bloomberg's pending acquisition of BNA may start kicking WK's ass in the premium legal services marketplace in the next couple of years. After that, TR Legal like Bloomberg has done to TR Markets?
Another metric institutional investors watch is TRI's corporate debt ratings. Good but not great for a market leader like TRI. I don't think any of the rating services are about to downgrade TRI's corporate debt rating any time soon but here is an instance where the folks at rating services and in the investment community will be watching for signs of life closely, for a turn-around, in "Markets" because they have direct experience with using products and services offered. Reorganizing TR Markets is a big deal but TR Legal remains TRI's cash cow.
Of course, one can also speculate about how secure Glocer's job is, too. The move to getting directly involved in TRI's Markets division is a hugh gamble that better produce results sooner rather than later. Was it the result of getting "marching orders" from the guy with the circa 1964 Beatles' haircut? My hunch is "yes".
Quoting from my favorite mega-media CEO's personal blog post, The Good Old Days:
Apologies for not having posted in a while -- it's been a busy summer. -- Tom Glocer