Reuters pays dollars 125m for rival Teknekron: Takeover of software firm expected to provide customers with more choice

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REUTERS has reinforced its position in a key area of its business by clinching a deal to buy Teknekron Software Systems, a niche software company based in California, for dollars 125.1m in cash.

Teknekron specialises in the software technology that enables data feeds from various sources - news-wires or currency dealing information, for example - to be distributed around the computer network belonging to the end-user.

Teknekron's leading rivalis Reuters, with a similar product called Triarch. The deal is therefore conditional on regulatory approval in the UK and in the US.

The news and information agency stressed that Teknekron would remain independent, with its own sales and marketing teams.

But David Ure, director responsible for Reuters' marketing and development policy, said the combination of the two companies' expertise would help them to develop 'the ever more sophisticated applications requested by our clients'.

The two companies will work on developing interfaces. Reuters said that this would make it easier for applications suppliers to deliver products across both systems, increasing choice for the customer.

Most of the purchase price consists of goodwill and intangible assets. Teknekron's net assets - mostly cash - totalled dollars 3.6m at the end of 1992. By completion there is expected to be about dollars 5m of cash in the company.

Philip Wood, Reuters' deputy finance director, said the large amount of goodwill involved would give rise to tax benefits.

Under US tax law, Reuters will be able to write off in full the goodwill and intangibles over a period up to 15 years. Analysts said this could be used to keep Teknekron's tax rate low, or possibly set off against other North American income earned by Reuters.

This should reduce the cost of the acquisition, currently around 15 times earnings, which Reuters is expected to meet from its pounds 450m cash pile.

As well as keeping operational control of the business, Teknekron's management - about 100 out of 200 employees - will receive substantial stock appreciation rights.

These are, in effect, notional share options that enable a value to be placed on the company's performance.

When exercised they generate cash, rather than shares, however.

Two Reuters directors will join Teknekron's five board members as non-executive directors.

The market represents only a small segment of Reuters' overall business.

Teknekron, which employs about 200 staff, earned pre-tax profits of dollars 8.2m in 1992 on sales of dollars 38.7m, while Reuters - which employs about 10,000 - had revenues of pounds 1.57bn, with pre-tax profits of pounds 383.2m.

But analysts said it was an important sector to be in for strategic reasons. 'It's important because it is a key part of what you can offer the client,' said Richard Sanderson, of the brokers Panmure Gordon. 'The client doesn't want to have to rush around finding solutions for different bits of the system.'

Reuters shares fell 2p to 1758p.