BUSINESS

Buying legal history

Thomson’s biggest takeover draws mixed reaction

JOHN FAUSTMANN March 11 1996
BUSINESS

Buying legal history

Thomson’s biggest takeover draws mixed reaction

JOHN FAUSTMANN March 11 1996

Buying legal history

Thomson’s biggest takeover draws mixed reaction

Considering his penchant for privacy, billionaire mogul Ken Thomson probably has only himself to blame for the fact that most Canadians still think of his company as a newspaper publisher. In reality, Toronto-based Thomson Corp. decided a decade ago to begin selling off many of its dailies and investing in specialized publishing and electronic databases—a policy, says Thomson president Michael Brown, that it has since followed “with utterly boring consistency.” Consistent, yes, but there was nothing boring about the reaction last week to Thomson’s latest move: its $4.7-billion purchase of West Publishing Co., a Minnesota-based company that operates more than 6,000 electronic databases on law, medicine and insurance.

The acquisition was Thomson’s largest takeover ever, and a record deal in the reference database industry. Many outsiders, however, were unimpressed. Two Canadian bond-rating services, noting that the purchase depended heavily on borrowed money, slashed Thomson’s credit ratings. A few analysts suggested that the conglomerate had taken a risk because some of the data West distributes is already freely available on the Internet. Others said flatly that Thomson had overpaid for the U.S. company. “We were surprised that Thomson paid so much,” said Kathryn McAuley, an analyst with New York City’s Brown Brothers Hamman & Co. She added that many observers valued West at between $800 million and $1.2 billion.

Thomson officials were quick to defend the deal. Chief financial officer Nigel Harrison said the price was reasonable compared with last year’s $2.6-billion purchase of CCH Inc., a major U.S. tax publisher, by Wolters Kluwer of Amsterdam. As for free Internet access, Harrison said that West’s database of court decisions goes back at least 100 years, and that the system’s ability to search for data represented an added value that would be “extremely difficult to duplicate.”

Thomson’s track record for successful acquisitions is undeniably impressive. When Ken Thomson inherited his father Roy’s business empire in 1976, annual revenues stood at $725 million. Last year, the company reported revenues of $8.6 billion. It has 43,000 employees, 140 North American newspapers and a travel business with annual revenue of more than $2.7 billion. In the past 15 months, Thomson has been moving through the corporate jungle with the stealth of a giant anaconda, sloughing off newspapers like old skin and gobbling up database companies in huge bites. Last November, Thomson completed the sale of its 66 British

GOING DIGITAL

While selling many of its newspapers, Thomson Corp. has gained an internationally dominant position in electronic information and reference databases. Products include:

270 on-line services

380 CD-ROM titles

6,540 software packages

1,600 video/audio products

SOURCE: THOMSON CORP. 1994 ANNUAL REPORT

newspapers and sold 46 Canadian and U.S. papers, mostly to Conrad Black’s Hollinger Inc. newspaper group. In October, 1994, it paid $638 million for Information Access Co. of Palo Alto, Calif.—a database that, for a fee, provides full on-line texts of articles from hundreds of periodicals, including Maclean’s. A month later, it spent $465 million for The Medstat Group, a U.S. supplier of health-care information and software.

That same year, Thomson lost to the AngloDutch consortium Reed Elsevier PLC in the bidding for the Lexis-Nexis database, a leading information service with exclusive rights to the electronic archives of The New York Times. Some observers believe Thomson’s disappointment in failing to snag that prize may have accounted for the hefty price tag in the West Publishing sale. “I think they were determined not to be shut out this time,” said Andrew Prozes, president of city newspapers and new media for Southam Inc., a major Toronto-based media company. Added Maggie Weaver, an on-line researcher for the Metro Toronto Reference Library: “Thomson always buys the best. Whenever there’s a real plum, they’re the ones who buy it.”

Few would dispute West’s plum status. The firm traces its roots to the 1860s when founder John West took law books on horseback, selling them across the central United States. With its current 7,000 employees, a client base that includes virtually every major law firm in America, and operating profits that hit $283 million in 1995, West is a major force in legal research, both on-line « and in print. ‘West is the de I facto official version in a I number of U.S. states,” says s James Spence, a legal librari| an who teaches in the Univer| sity of Toronto’s faculty of in“ formation studies. Even more important, he adds, is that when Thomson bought West “it eliminated a huge amount of competition” for Thomson’s own legal publishing operations. Indeed, the takeover has already drawn the attention of U.S. antitrust regulators, who could block the deal if they decide that it would give the company too much power to dictate prices.

Thomson appears to have eliminated another potential obstacle last fall by approaching a group of nine banks in Canada, the United States and Europe for an unusual financing agreement. Explaining that it had its eye on several potentially large deals, Thomson reportedly agreed to abide by the terms set by the most demanding institution. In return, the core group of bankers agreed not to sell their shares of the debt to any third parties. With that assurance, Thomson executives needed little more than a phone call to secure the $4.5 billion in loans they needed to complete the West purchase. With careful planning like that, Thomson hopes to realize its goal of becoming the world’s largest information database company.

JOHN FAUSTMANN