Reuters' Teknekron Buy Probed For Fair Trade Issues

The Federal Trade Commission has opted to investigate Reuters' planned acquisition of Teknekron Software Systems Inc. According to sources, the confidential inquiry by the FTC 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. As part of the probe, FTC investigators have interviewed top and mid-level executives at a number of Reuters' competitors, including, but not limited to, Market Vision Corp. and Micrognosis Inc.

Despite Reuters' competitors' widespread belief that such cross-selling of data and platforms 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 (IMD, Dec. 20, 1993.) The potential for cross-selling of data and platforms to be construed as anti-competitive is now much greater, market data industry sources say.

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.

Similar investigations into the Teknekron buy have been undertaken in Europe, including by the U.K.'s Office of Fair Trade (OFT), sources say. They say that the OFT has contacted, among others, ACT Financial Systems Ltd. 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.

Though ACT officials in the U.K. decline to comment, sources say that ACT managing director Paul Newton took a set of specific gripes to Reuters' chief executive Peter Job in January. The list included bundling of data and platform pricing, the use of a throttling mechanism on Reuters' Selectfeed and making free feeds available to pilot users of its Triarch 2000 digital data distribution system.

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 companies worth more than $100 million in revenues acquiring companies having at least $10 million in assets to submit a filing with 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.

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 (IMD, 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 platform 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. (Trading Systems Technology, July 26, 1993). But it will take some time for Micrognosis 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 either 15 or 30 days to investigate the filings, depending upon certain specific circumstances of the purchase. The spokesperson says that the FTC can, however, extend the statutory period or -- typically at the request of the acquiring company -- terminate it early. While early terminations are announced publicly (at press time, 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 -- whether it was 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.

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 Friedman, the director of marketing for ACT Financial's New York unit ACT Financial Systems Inc. -- who says that 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 whatever damage the merger might do to their ability to compete 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.

Meanwhile, in the U.K., sources say that ACT Financial has put some direct pressure on Reuters to confront the monopoly issue. It could not be determined what information ACT supplied to the OFT.

According to sources, ACT's managing director Newton presented Reuters with many of the same complaints that have turned up here -- and then went on to add a few of his own. These include Reuters' requirement of a throttling mechanism on Selectfeed -- which sources say Newton identified as an instance of Reuters, qua data vendor, interfering in an area that is properly the turf of data distribution system vendors.

In addition, Newton raised questions, sources say, about Reuters' behavior during pilot implementations of its data distribution platforms. Sources say that Newton told Reuters it ought to abandon the practice of making its feeds available to such users free-of-charge. Sources say Newton also cited Reuters' custom of letting pilot Triarch 2000 users test feeds and services that haven't yet been released to the rest of the market.

As for Reuters, at a press conference in London early this month to announce the vendor's 1993 earnings, chief executive and 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.