Federal Trade Commission Canvasses Reuters' Competitors In Investigation Of Teknekron Buy

The Federal Trade Commission has opted to investigate Reuters' planned acquisition of Teknekron Software Systems Inc. (TST, Jan. 10). The FTC's confidential inquiry has led its investigators to interview top and mid-level executives at a number of Reuters' competitors, including, but not limited to, Market Vision Corp. and Micrognosis Inc.

An FTC spokesperson declines to comment, explaining that the Hart Scott Rodino Pre-Merger Notification Act prohibits the commission from making any announcement until it establishes that a violation of fair trade laws has occurred. Speaking in general terms, however, the spokesperson says that the act requires that companies worth more than $100 million in revenues acquiring a company having at least $10 million in assets must submit a filing to the FTC. The FTC then evaluates each filing, deciding whether and to what degree it should investigate further. In the case of Reuters and Teknekron, the FTC has evidently seen fit to investigate -- and has gone so far as to extend its investigation beyond the time period the statute allows.

According to sources, the FTC's questioning has thus far led it to be most concerned with competitors' fears that Reuters would bundle its market data feed pricing in with its data distribution system pricing. Despite Reuters' competitors' widespread belief that such cross-selling goes on, they haven't kicked up much of a fuss -- until, that is, Reuters agreed to buy Teknekron and thereby positioned itself to control a huge chunk of the digital data distribution market. The potential for cross-selling of data and platforms to be construed as a combination in restraint of trade is now much greater, market data industry sources say.

Similar investigations into the Teknekron buy have been undertaken in Europe, including by the U.K.'s Office of Fair Trade, sources say. They say that the OFT has contacted, among others, ACT Financial Systems Inc. and Digital Equipment Corp. -- whose digital data distribution system sales efforts have for some time done better in Europe and the U.K. than in the U.S. (see related story, this issue).

Reuters announced its intention to purchase Teknekron for $125.1 million late last year. The larger vendor earlier this month reported 1993 revenues of $2.8 billion, up 20 percent over the previous year (Inside Market Data, Feb. 14). Teknekron logged revenues of $38.7 million in 1992.

By their own estimates, the two vendors combined would control some 80 percent of the digital data distribution market; they claim their digital systems are installed at some 400 trading firms and banks worldwide. Reuters also maintains a considerable chunk of the world's video-switch installed base and a significant population of standalone Reuter Terminals.

The next-closest data distribution system competitor is Micrognosis, which maintains a video-switch installed base on a par with the one Reuters picked up when it bought Rich Inc. But Micrognosis has been struggling with its next- generation record-based digital data distribution system for some time. Most recently, Micrognosis bought the nearly bankrupt digital platform vendor FD Consulting Inc. (TST, July 26, 1993). But it will take some time for Micro to get its marketing effort on behalf of FD's products geared up to give Reuters and Teknekron a run for their money.

According to an FTC spokesperson, under the Hart Scott Rodino act, an acquiring company must file with the FTC at the time it formally decides to make an acquisition. The commission then has 15 days to investigate the filings. The spokesperson says that the FTC can, however, extend that period or -- typically at the request of the acquiring company -- terminate it early. While early terminations are announced publicly (no such announcement has been made in Reuters' case), extensions of the statutory investigation period are not, the spokesperson says.

In Reuters' case, the FTC most likely received the vendor's filing for approval to buy Teknekron no later than Dec. 17, when the two vendors publicly announced their plans. This indicates that the commission has indeed extended the statutory period -- which may run either 15 or 30 days -- to accommodate its investigation of the Reuters/Teknekron deal.

Should the FTC determine that there has been a violation, it may take any of several courses of action. Ideally, the FTC spokesperson says, the commission moves to negotiate a settlement -- one which usually involves some degree of divestiture on the part of the would-be acquirer. The spokesperson says the FTC may also seek, through federal district court, either an injunction to stop the deal or a consent decree requiring the acquirer to adhere to certain restrictions regarding its behavior in the market. Finally, the FTC may take the matter to trial under an administrative law judge.

According to one market data industry source, if the FTC determines that there is a violation in Reuters' case, a conceivable solution would be one that lets Reuters keep Teknekron, but prohibits the two from offering package deals involving data and platforms -- and which requires Reuters to keep its data-feed specs fully available to the open market.

The reaction to the FTC's efforts among Reuters' competitors is mixed. A surprising number of data distribution system vendors say they don't feel threatened by the merger of the two vendors -- so long as Reuters plays fair.

Abby Freeman, the director of marketing for ACT Financial Systems Inc. -- who says ACT was not contacted by the FTC -- says that Reuters' acquisition of Teknekron may open up the digital data distribution system market to smaller vendors. "Because it makes them [Reuters] such a large player, it means they may not be interested in supporting smaller or mid-sized floors," she says. "Overall, we could stand to benefit."

Others go so far as to say they don't have the time to get involved in a legal battle against Reuters. By implication, these vendors suggest that the potential damage the merger might do to their businesses is not worth a full-scale war -- even if the FTC proves willing to lead the charge.

Still others remain primed for the chase and say they have eagerly conveyed their concerns to representatives of the FTC.

As for Reuters, at a press conference in London early this month to announce the vendor's 1993 earnings, managing director Peter Job responded to the monopoly question.

"The serious issue... is would Reuters or does Reuters take any unfair advantage from tying together its data and its systems sales. And the answer is... we're an open company. If you want hardware, you get it. If you want hardware and software, you get it. If you want hardware and software and data, you get it. These things are not used to propel forward another part of the product line. If a client wants only the data feed from us and wants to buy the system from Micrognosis or some other rival, then we supply the data to that client at the same price as we would if we supplied our own system.... We don't tolerate, as a matter of policy, any linkage across the two product lines because it would expose us to the risk of being labeled unfair."

Speaking for Job, and for executive director David Ure, a Reuters spokesperson declines to provide further details.