Reuters is left at the mercy of the markets

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The Independent Online
THE CITY breathed a sigh of relief this week after Reuters, the information services group, reported better than expected growth, but the question mark that has been hanging over the company in the wake of the current financial turmoil has not disappeared.

The downturn in the world's financial markets has already hit the company's share price, which has fallen from pounds 7 in July to pounds 5.23 at Friday's close. Ironically, the market turmoil generates more business for the company's trading screens, used in banks and investment houses around the world.

However, the fear is that the motor of Reuters' growth during the last decade, the long American bull market, is running out of gas and that cuts in the financial services industry will reduce the number of Reuters screens used.

"The company's performance has become an index of the markets," said Lorna Tilbian, an analyst with Panmure Gordon. Another analyst warned: "We like the company, like the product, but are negative about the stock. Our resources manager went round the office yesterday and halved our Reuters' bill just by seeing who used what information."

Last week's figures from Reuters did not show the negative effects of the turmoil, which has seen banks withdraw from emerging markets and investment houses such as Merrill Lynch and ING Baring cutting staff. In the event, the third quarter to September proved vibrant, with a 10 per cent increase in underlying revenues. This was due to increased earnings from its American on-screen trading system, Instinet, which benefited from market turbulence.

There were, however, clear signs of the downturn in Asia where the markets in Indonesia, Thailand, Korea and Malaysia have virtually closed down. Peter Job, Reuters chief executive, indicated that costs are being cut as demand slows. He said: "We are taking a cautious view of the future."

The scale of the downturn in financial services around the world remains the big unknown. Aside from the headline-grabbing cuts, many City firms are now quietly shedding staff. Significantly, two analysts covering Reuters have recently left their jobs.

Meanwhile, Reuters continues to roll out new services. Last week, it presented its latest technological wheeze, a multi-media news-on-demand service called News Direct.

Despite the whizzy technology, Reuters remains essentially the same company that opened as Reuters Telegram Company in a telegraph office near the London Stock Exchange in 1851.

Today, while the Reuters news business literally creates the headlines, the core of the company is its financial information business. With 450,000 installed screens, Reuters has around a third of the world market.

Its performance over the last decade has been spectacular. As the world's markets have expanded and liberalised, Reuters has grown, simply by investing in its core business. Profits trebled and earnings per share quadrupled between 1987 and 1997; shareholders have twice received a cash bonus.

Yet Reuters is now unloved in the City, where the perception is that the company has not made the most of its historical strengths in a world dominated by electronic information. For this, the management is blamed.

"They have been complacent," one analyst said. "Sluggish and conservative," commented another.

Despite its worldwide dominance in financial information, Reuters has allowed its upstart rival Bloomberg to develop a powerful position in the key American finance markets. While there are other US providers such as Bridge and Dow Jones, there is no doubt Bloomberg is the major threat to Reuters' business, gaining $1bn (pounds 600m) of the $6bn financial information market. Crucial to Reuters' future is the Series 3000 screen which is widely seen as an attempt to create a "Bloomberg killer".

But a timid launch meant Reuters' directors missed their bonuses because they only managed to sell 28,000 of the upgraded screens compared with a target of 30,000. Given a potential of 450,000 screens that might be updated, the numbers are not impressive.

To add to its woes, Reuters is also facing an investigation from a US federal grand jury examining claims that Reuters Analytics, its US subsidiary, improperly obtained and distributed information from Bloomberg.

But perhaps the biggest threat to Reuters of all is the phenomenal growth of the internet. Information is becoming ever cheaper and ever more swiftly available on the internet. This implies that Reuters will find it impossible to sustain a premium price for its premium products.

"At the moment, the internet is neither fast enough nor secure enough to be used in the professional market," said Reuters spokesman Geoff Wicks.

But that will change. After a remarkable decade, Reuters' future is decidedly uncertain.