Citicorp Writedown Sparks Talk Of Quotron Sale, But New Premises System Proceeds

Citicorp's announcement two weeks ago that it had taken a $400 million third-quarter writedown on its investment in Quotron Systems Inc. made speculation on prospective buyers for the unit a favorite industry pastime. But the bank had already cleared funding for Quotron's planned New Premises System, which would revamp the vendor's network infrastructure and delivery platforms.

A Citicorp spokesperson confirms that Quotron is no longer regarded as one of the bank's strategic businesses. The spokesperson emphasizes that Quotron is not currently on the auction block: "Are we actively selling it? No. Would we sell it? Yes."

The $400 million writedown -- which covers "assets, including older technology and software," according to a Quotron spokesperson -- represents a large chunk of the approximately $680 million Citicorp paid to acquire Quotron in 1986.

Although the writedown doubled Citicorp's third-quarter loss, it was designed to put the data vendor on "better operating footing to enable it to contribute" to Citicorp's bottom line, according to the Citicorp spokesperson. Observers have not failed to notice that since Quotron has yet to earn a profit under Citicorp's ownership, the most direct contribution Quotron could make would be its sales price.

Citicorp's plan is to first get Quotron on a "sound operating footing," and then explore a number of options, according to the Citicorp spokesperson. Quotron might remain under the bank's umbrella, the spokesperson says, or "various parts might be subject to other arrangements, like joint ventures." But, this spokesperson says, "if someone made us an offer that was interesting," the bank might sell.

In a five-year business plan presented last February by Quotron executives to Citicorp's Richard Braddock, the vendor documented its need for funding of a development effort. Quotron has since begun implementing the plan, which involves shifting to a non-proprietary quote server and delivery platform. Processing would be done at user sites, eliminating the current tiered network architecture and its regional concentrators.

Meanwhile, Quotron began shifting its corporate headquarters from Los Angeles to New York following the appointment of Tom Cirillo as Quotron president and chief operating officer last spring. Although some 50 jobs are currently being transferred to New York from the West Coast office, far fewer personnel will be shifted, and the necessary layoffs are already in progress.

The New Premises System plan calls for a 56 kilobit/second feed to broadcast all of Quotron's data to user sites, where an IBM RS/6000 or PS/2 server would process the system software for all of Quotron's services. Workstations would be IBM PS/2s or lower cost 386-based Dell Computer Corp. and Compaq Computer Corp. PC-compatibles.

From one main data center at Silver Spring, Md., and backup facilities in New York, Quotron would consolidate its currently disparate CARS, BIDS, and financial information services networks into a single network, which it would hand over to a third party to maintain.

Following a request for proposal issued earlier this year, the data vendor has been evaluating a number of network carriers. Among those bidding were TRW Corp., Infonet, IBM's IIN, and a number of Baby Bells and long-distance carriers, according to Quotron sources.

IBM is also close to a deal with Quotron to provide field service for the new platforms' IBM and non-IBM hardware, these sources say. While some sources close to the deal have suggested Quotron has been stalling talks pending a more certain ownership future, Quotron sources say the field service decision should be made by the end of this week.

Pending the development and equally costly migration of Quotron's current 65,000 or so users to the New Premises System, a so-called accelerator board or "turbo" has been added to the Q800 central processing units. These co- processors have boosted processing power and speeded network throughput to the point that Quotron has been able to add to its existing network its Equity Time and Sales and Dow Jones & Co. news services. Each was previously delivered via a separate communications line.

Previous plans for an Intel Corp. 386-based Q5300 platform were scrapped earlier this year ending an 18-month development effort. Quotron has since been porting its system software to IBM's AIX version of UNIX, enabling it to run on RS/6000 servers. Currently, Quotron uses a proprietary UNIX- based operating system. It has also been working on an IBM PS/2 server.

The RS/6000 server, running an interim version of software that lacks local area network (LAN) support, is currently in alpha test at a number of locations, including Salomon Brothers Inc.'s investment banking area, according to sources at Quotron. The RS/6000 has been tested supporting up to 40 workstations, but is expected to be able to handle more.

Version 8.0 of Quotron's systems software will provide LAN connectivity to support the various servers and workstations. Support for the non-IBM workstations should be complete by Jan. of next year, sources say.

But LAN connectivity for the IBM platforms will be longer in coming, according to sources at Quotron. That's because the IBM PS/2 provides 3270 terminal emulation using bisynchronous communications protocol but not SNA, while the RS/6000 supports SNA but not bisynchronous. To accommodate the two, Quotron will rely on a communications card from Franklin Telecommunications Corp. When confronted by the same incompatibility, Automatic Data Processing Inc. turned to ARTIC communications cards.

A spokesperson for Quotron says that the vendor is seeking a joint venture or strategic alliance, rather than a sale. One Quotron executive explains that a joint venture is more appropriate now, while Quotron implements the New Premises System plans that would make it a more attractive buy.

The New Premises System is a restructuring of Quotron's offering to the base customer, the retail broker. Meanwhile, the FX/Trader foreign exchange transactional system, and Trading Support System, the data distribution platform aimed at fixed-income traders, have continued their own separate development efforts. These products could attract separate joint-venture partners or buyers.

Despite spokesperson statements to the contrary, one technology executive at Citicorp says Quotron will be sold within six months. In contract talks with key customer Dean Witter Reynolds Inc., Cirillo has refused to give the same guarantees protecting the firm against a possible buyout that were secured by PaineWebber Inc. earlier this year (IMD, March 4). PaineWebber's contract includes a clause stipulating that in the event of a sale of Quotron Citicorp will indemnify the firm and cover any cost of converting to an alternative data vendor.

According to a source close to both companies, Citicorp chairman John Reed recently approached Automatic Data Processing Inc. about a possible sale of Quotron. The price discussed was $200 million, this source says, which is one to one and a half times Quotron's annual revenue. ADP chairman and chief executive officer Josh Weston declined the offer citing antitrust considerations, this source says. Following its purchase of Bunker Ramo in 1986, ADP countered charges of anticompetitive behavior by collecting letters from customers content with the arrangement.

The Citicorp technology executive named General Motors Corp.'s Electronic Data Systems Corp. unit as a strong candidate to take Quotron off Citicorp's hands. EDS had placed a bid for the Pipe (a.k.a. Euroquote) project to develop a pan-European quotation system.

A number of other potential buyers have been identified by sources up and down the Street. EDS as well as such candidates as IBM and the Baby Bell operating companies are considered logical suitors because they come equipped with the network capabilities that form a core part of Quotron's future development efforts.

Rival market data vendors, including Dow Jones & Co.'s Telerate Systems Inc., Reuters Holdings PLC and Quick Corp., have also been cited as possible interested parties. Quick executive vice president Hirotaka Watanabe denies that Quick has held talks. A spokesman for Reuters says the company doesn't comment on possible acquisitions or joint ventures. A source at Telerate confirms it has been contacted by Citicorp. A Dow Jones spokesperson says it's company policy not to comment.