Reuters Captures Teknekron For $125 Million; Vendors Insist It's A Marriage, Not A Merger

Reuters' acquisition of Teknekron Software Systems Inc. dazzled the trading room technology market late last month. The purchase -- which has yet to be approved by U.S. and U.K. regulatory authorities -- puts the No. 1 and No. 2 digital data distribution system suppliers under the control of the same parent.

While it was no surprise that Teknekron was for sale (TST, May 17, 1993), the fact that Reuters has emerged as the buyer has injected considerable uncertainty into the financial technology community.

For one thing, Reuters' own trading room system sales effort has been doing relatively well lately, with Triarch 2000 recently adopted by such blue-chip clients as Smith Barney Shearson Inc., Chemical Bank, the Chicago Board of Trade and Lehman Brothers Inc. in London. Such users and would-be users now can't help but wonder whether Reuters means to change technology direction.

With the deal, Reuters now indisputably dominates the high-end data distribution system market. (Micrognosis Inc., having lately swallowed FD Consulting Inc., is left a distant second.) Further, as the major supplier of market data to trading rooms, Reuters appears poised to leverage its control of traders' desktops to boost sales of data services -- which, after all, remains its primary source of income.

Reuters announced the deal Dec. 17 in London. Under the agreement, the U.K.-based market data vendor will pay $125.1 million for the entirety of Teknekron Software Systems -- including all assets and clients of its Teknekron Information Bus and Marketsheet software. The two vendors assert that Teknekron will retain its current management and will operate independently -- though Reuters takes two seats on a five-person board and makes no bones about the fact that it has contingency recourse to take the helm.

While that kind of money may not mean much to Reuters, with its billion-dollar cash storehouse and its yen for the tax benefits such a purchase brings, in the real world it is indeed a bundle. The deal prices Teknekron at three times its 1992 revenue of $38.7 million, or roughly 24 times its after-tax profit.

By their own estimates, the two system vendors combined now control some 80 percent of the digital data distribution market. Reuters has now managed to eliminate the middleman en route to some or all of the trader desktops at a self- estimated 400 firms and banks worldwide. And that doesn't even take into account the vendor's still very substantial video-switch and standalone-terminal installed base.

However the industry comes to regard the purchase -- whether as further evidence that Reuters regards trading room systems as a loss-leader business, or as a warning to system vendors that Reuters means to make a serious (albeit oligopolistic) go of the market by absorbing its chief competitor, or as a simple defense against anyone else's buying Teknekron -- one thing is clear: The data distribution market will henceforth be transformed. The much-anticipated industry shake-out has arrived. Only time will tell whether the market is happy having Reuters planted so solidly at the top of the heap.

While Reuters executive director David Ure and Teknekron president Norm Siegler each unequivocally say that the two vendors will continue to compete aggressively against one another, nobody in the marketplace considers that fact to be particularly relevant. Within days of the deal's announcement, it was nearly impossible to find anyone -- even those who are pleased by the purchase -- who hadn't already begun to view the two vendors as one. Some expect the two carve up the market; most expect at least to see their two architectures integrated -- or one deemphasized in favor of the other -- in short order.

Not surprisingly, both Siegler and Ure emphasize (in separate interviews; see sidebars) that nothing is going to happen soon. To send a different message to the market would cause Triarch 2000 users to storm the gates of 85 Fleet St. and 1700 Broadway. Says Ure: "What we are saying to Triarch subscribers is that their investment will be protected.... We are telling them all truthfully that they are not going to be obsoleted."

But other sources, both within the vendors' camps and among users who say they've contacted the vendors, say that at least one collaborative effort will be undertaken immediately: the development of a shared API across which Triarch 2000 and its associated systems will be able to communicate with the TIB and its associated systems. Meanwhile, not too far down the road, these sources predict, Triarch 2000's infrastructure technology will be deemphasized, with Reuters' technologists focusing on data feeds and screen displays going forward.

Certainly Ure sees a role for TIB, or at least Teknekron, in the future development of Triarch 2000. "Triarch may be enhanced at some time by using bits of Tekenekron technology," he says. Siegler takes it step farther: "In addition to the absolute investment, which Teknekron is going to be using for its own internal purposes, Reuters may ... ask us to do some development work and some technology work which we have demonstrated competence in. But if we do that we'll get paid for it."

According to virtually all sources, the two companies are a good fit: Teknekron's infrastructure may be superior to Reuters', but its system requires a lot of support and integration -- services for which Teknekron charges big bucks and has on occasion delivered unreliably. Meanwhile, Reuters -- a rich, publicly held company -- is trying to develop a reputation for customer service.

To most users, the short-term impact of the marriage is as important -- if not more so -- than the overall restructuring effect it will likely have on the TRS market. But even if users believe that Teknekron's independence has been exaggerated, that doesn't mean they necessarily fear the outcome of the deal; on the contrary, a number of them have accepted it with equanimity, even if they do intend to remain vigilant.

At Bear Stearns & Co., sources say, the purchase has completely upended an evaluation that seemed destined to select Reuters Triarch 2000 (see related story). For Bear, sources say Teknekron's submergence under Reuters' umbrella hasn't scared anyone, but rather has allayed concerns about the smaller vendor's ability to deliver.

At Chase Manhattan Bank -- where Teknekron was lately selected to support 1,000 traders worldwide (TST, Nov. 1, 1993) -- a senior trading room technology official says he doesn't think that having Reuters take over as the bank's systems integrator threatens its freedom of choice when it comes to picking and choosing among data vendors. He also believes the honeymoon of independence will be over sooner rather than later. "My expectation is that Reuters over time will merge the products, and the two desktop systems will be integrated to interface to the TIB."

The mood is only slightly different at J.P. Morgan & Co. -- another trading outfit that has recently picked Teknekron for worldwide support of 2,000 traders (TST, May 3, 1993). A number of technology sources both within Morgan and outside it say that the firm welcomes the increased influence the deal gives them over a system integrator out of which it has been less than easy to pry development work. But these sources also testify to a certain amount of concern on Morgan's part. They say that Morgan's senior management approved the bank's decision to use Teknekron in large part because Teknekron was not Reuters.

But these are users whose data distribution fates have been settled for the time being. Others see a much darker side. According to a senior technology official at a bulge- bracket firm that employs systems from several vendors -- including Reuters, Teknekron and Micrognosis -- the deal "puts a scary concentration of distribution and information power in one party's hands."

Another source echoes the official's fears, wondering whether, with the passage of a few years' time, Wall Street might wake up to find Reuters with another billion dollars in its pocket and wonder how it all got there.

At Citibank -- the only major Wall Street trading operation to select Micrognosis in the past two years (TST, Sept. 8, 1992) -- trading room technology vice president Elven Riley thinks the arrival of a data distribution system Sasquatch was inevitable. "The market is a niche market for what is basically a commodity solution," says Riley. "It's about time we had some consolidation so the suppliers can get back to trying to provide some value-added solutions."

Third-party application vendors represent another key corps of participants in this market. Should Reuters become the seller of a single, dominant trading room infrastructure product, these vendors want to be sure that that system is a truly open one -- one for which the APIs and specification upgrades are made available in a timely and democratic fashion. "It depends whether you believe the press release," says one, referring to the promise of an independent Teknekron. Says another: "This is a test of Reuters' honesty and intention of fair play."

Everybody's got a theory as to what the more distant future will bring.

The Party Line Scenario: Independent Teknekron remains on the same trajectory it followed before the sale. Having received Reuters' seal of approval, it renews its efforts to propagate the TIB outside the trading room, selling itself as middleware to other parts of Wall Street firms and to other industries altogether. Teknekron and Reuters collaborate at arm's length, riding gloriously off into the sunset on the "enterprise-wide information highway" (as Teknekron's press release puts it). Teknekron becomes a kind of technology unit of Reuters, with Reuters hiring it for specific projects as needs arise.

The Rich Redux Scenario: Somewhat less glorious. In this vision, Reuters bought Teknekron simply because it stood between the data vendor and some very valuable data-consumer desktops. Teknekron soon enough disappears into Reuters -- which in the process kills off one or the other platform. Some killjoys like to bolster this theory with grim anecdotes about poor performance of other Teknekron Corp. spin-offs. Says Ure: "What, destroy them deliberately? Certainly not." He adds: "Rich had great difficulty making the transfer from hardware-based to software-based, and it coincided with a market downturn. I don't think we look back on that as our most glorious episode. Also, I think at that time Reuters was relatively unsophisticated about taking new people into the group.... We've now got so much bigger that we can take a more imaginative approach to these things." Jerry Rich didn't return a call seeking comment.

The A La Carte Scenario: In this one, Reuters and Teknekron cozy up gradually and inexorably, mingling technologies. In time, all pretense of independent bidding for trading rooms passes away, and experts from both sides of the fence visit customers a deux, offering the opportunity to pick one from column A or two from column B. Marketsheet, Effix, enterprisewide TIB, local Triarch, TCS, ATW, PTW, networked RT. Whatever. If Procter & Gamble can sell Luvs and Pampers, why not Reuters? Says Ure: "The answer to that is we'll see.... The menu is, of course, not just coming from Reuters and Teknekron. It'll come from all the third-party applications and other developers who we hope will follow our interfaces.... We want that number between us and Teknekron to go up a lot."

The Microsoft Scenario: A little more visionary. A whole lot more Machiavellian. This hypothesis picks up where Rich Redux leaves off. As they're phasing out Triarch 2000, Reuters and Teknekron collaborate on cleaning up the TIB -- or remaking it -- rendering it as close to a plug-and-play data distribution platform as possible. Then they license it to everybody practically free in a bid to make buying Reuters' data the path of least resistance for just about everybody. Says Ure: "That's just a speculative idea. It's not our speculative idea; it's your speculative idea.... The TIB is certainly pretty special." He adds that Teknekron would likely not take kindly to giving the TIB away for free.

The Virtual Bloomberg Scenario: Same as above, but with Reuters devising a TIB that is necessary to any user that wants to get the full functionality out of Reuters' increasingly intelligent data feeds, such as its new Selectfeed Plus -- whose functionality nobody's up to fully exploiting yet. Less a monopolistic strategy than one that changes the rules of the game, it might also finally force Bloomberg L.P. to open up. Says Ure: "I think that's an irrelevant concept.... One has to always remember the client. The reason the client is buying anything in the first place is to support everything he might want to do, which is a much broader universe than just Reuters, Telerate, Knight-Ridder, et cetera."

And speaking of Bloomberg, many in the industry attribute Reuters' decision to buy Teknekron at this point in time to its desire to thwart Bloomberg, which had been growing increasingly cozy with Teknekron (TST, Nov. 29, 1993). While some are skeptical that Bloomberg ever really intended to open up with Teknekron -- or anybody -- given the determined lack of cooperation between Reuters and Bloomberg in the past, it looks like the Bloomberg/Teknekron relationship has been nipped in the bud.

Meanwhile, whether regulatory authorities will decide to view the purchase as a combination in restraint of trade remains to be seen. But most observers consider that unlikely for a number of reasons: The universe of market information screens is far from limited to those supported by digital data distribution systems; Reuters and Teknekron are international companies headquartered on different continents; and a number of more or less healthy competitors remain active in the digital data distribution field.