Bridge Buys Telerate, Creating No. 2 Vendor; Cantor Issue On Table

NEW YORK--Ending months of internal agony and weeks of external speculation, Dow Jones & Co. agreed to sell its Dow Jones Markets unit to Bridge Information Systems for $510 million in notes and cash. In outbidding a rival group that included US Treasury interdealer broker Cantor Fitzgerald, Bridge has established itself as the No. 2 player behind Reuters in a market now consolidated into three global real-time data vendors.

The agreement also heralds the return of the Telerate name: Bridge plans to run the former Dow Jones Markets as a separate legal entity known as Bridge/Telerate.

While the deal marks the end of weeks of wrangling between Bridge, Dow Jones and Cantor Fitzgerald, it marks only the beginning of a new set of challenges for Bridge's senior management. Chief among them is Bridge's relationship with Cantor, which is being discussed by their respective lawyers.

Following close behind is the integration challenge; Bridge's acquisition of Knight-Ridder Financial two years ago was a wrenching experience for management and customers alike. Bridge will be hoping to effect a smoother transition this time around.

The $510 million price tag appears hefty after rumors of bids as low as $300 million (although its peanuts compared to the $1.6 billion paid for Telerate). Under the terms of the agreement, Bridge will pay Dow Jones $360 million in cash and issue it $150 million of preferred convertible Bridge stock. Those notes, paying four percent interest, are convertible into a 10 percent stake in Bridge within five years. This aspect of the accord could give Dow Jones a nice boost, particularly if Bridge goes ahead with an IPO as planned. (Bridge will be hoping that Bloomberg takes the IPO route also, and sets a healthy precedent in terms of funds raised.)

According to insiders, the Bridge bid topped the lowered one of $375 million from the Cantor group, which also included Dow Jones Markets senior vice president of content Greg Smith and the Texas Pacific Group, a venture capital fund. This group, sources say, had been willing to raise their bid to $400 million, but didn't once put a higher bid than Bridge's on the table.

At the top of Bridge management's priority list will be stabilizing its relationship with Cantor Fitzgerald. This is a touchy subject, for a number of reasons.

For one thing, Cantor chief Howard Lutnick was on the losing side in the bidding war for Dow Jones Markets. For another, rivalry between Lutnick and Bridge CEO Tom Wendel is deep-rooted: Wendel helped found Liberty Brokerage, Cantor's main competitor in US Treasury brokerage, which was created specifically to provide an alternative to the dominant Cantor.

But the real point is money. At issue is the amount Bridge will pay Cantor for the exclusive rights to carry the broker's US Treasury prices, which are a benchmark for the global fixed-income market. Under its exclusive distribution agreement with Cantor, Telerate must pay Cantor an estimated $45 per month for each screen receiving Cantor data. Since Cantor's prices are bundled into the Telerate service, Dow Jones Markets has been paying the fee for each of its 90,000 screens, for an annual total in 1997 of around $50 million.

In an attempt to circumvent the issue, Bridge will operate the former Dow Jones Markets as a separate legal entity known as Bridge/Telerate. This unit would have its own products and data content, based on Dow Jones Markets' existing offerings. Cantor's data would be distributed only via these services, and wouldn't be available on Bridge's other services. Bridge would, however, migrate certain content sets from those services to the Bridge/Telerate products.

That approach, Bridge believes, would limit the number of screens for which it has to pay the Cantor fee to those operated by Bridge/Telerate.

It appears that Cantor sees it differently, however. "Because of the sale, the combined entity's screen population is about 160,000," says Debra Walton, managing director at Cantor Fitzgerald. "As a result, our revenues from market data sales will increase substantially, potentially by more than 60 percent."

Walton declines to comment further. But industry sources who have discussed the issue with Cantor executives say the firm believes that its contract requires payment for all screens operated by the owner of Telerate and all associated subsidiaries. The contract's so-called "qualifying information" clause that defines many data sets in the markets of the Group of 10 largest economies as fee-liable, sources say. This scenario would make Bridge's other services liable, whether or not they carried the Cantor data. Bridge claims it has 75,000 screens in the field, yielding an additional exposure of $40 million per year.

It is unclear how far Cantor will push to exert its rights with respect to these issues. Past experience, though, shows Cantor as a tough adversary in legal disputes. Insiders suggest that Cantor would gain best leverage by suing before the Dow Jones/Bridge agreement closes. That, they suggest, could push Bridge into negotiating a lower price. Whatever the case, a Cantor lawsuit would represent a management distraction Bridge could happily do without.

For its part, Bridge's senior management team now finds itself with a lot on its plate. Wendel and Bridge executive vice president Dick MacWilliams are about to embark on a global tour of Bridge and Bridge/Telerate offices, in part to spread Bridge's vision for the combined entity and in part to reassure staff.

This latter task is another major challenge. Morale at Telerate has been running low for some time. While the sale represents a relief of sorts, rumors of post-acquisition layoffs have worried staff worldwide. Bridge says it has no layoffs planned. Ultimately, though, it will have to slim down the merged entity's staff; this process likely will take many months.

A more immediate staffing issue will be how to deal with the former Dow Jones Markets' expensive executive team. With most of their functions already duplicated at Bridge, some members of this group likely will be shown the door in the next few weeks. The Dow Jones Markets executive team comprises: executive vice president responsible for sales and customer service Julian Childs; senior vice president for technology Emily Susskind; senior vice president for marketing Debra Isenberg; senior vice president for strategic communications Geoff Moore; and senior vice president for content Grey Smith.

According to MacWilliams, Bridge/Telerate will be run by Bridge's existing senior management. This means there will be no single executive with responsibility for Bridge/Telerate. Instead, the various aspects of Bridge/Telerate's business will be run by the appropriate Bridge manager, essentially rendering Bridge/Telerate a brand name with its own set of products. (Sources, meanwhile say Bridge's Rick Snape will head the transition team.)

Bridge/Telerate will continue to operate its product line. Key products are the Telerate Workstation, the Telerate Digital Page Feed (not Bridge/Telerate Digital Page Feed, please!) and the Telerate Platform. Bridge/Telerate will continue to roll out its Active 1 user interface for the Telerate Platform. The future of the Interactive Desktop remains unclear, however. And sources indicate that the much-vaunted Telerate Feed, slated for release in April, will be discontinued and superseded by Bridgefeed.

More out of convenience than strategic thinking, Bridge will pitch Bridge/Telerate services toward capital markets users while focusing Bridge products on the company's traditional equities user base. Implicit in that arrangement is a migration of capital markets-oriented data sets -- like certain Knight-Ridder Financial and EJV data, and Fininfo SA's Finbond service -- from Bridge to Bridge/Telerate.

Telerate's new management will also have to sift through the various relationships that have been established by the vendor over the years. Some, like Technical Data, appear to have negotiated escape clauses. Others may choose to leverage the ownership issue to seek better terms. As of this writing, the status of many of these relationships was under scrutiny (see related story, this issue).

MacWilliams confirms that Bridge/Telerate will inherit Dow Jones Markets' participation in the Electronic Broking Service foreign exchange transactional system. He says Bridge may withdraw from the other transactional venture it now finds itself part of -- Optimark. Bridge already has a relationship with Boston-based Lattice for North American equities execution. (Optimark technology chief Bill Adiletta finds himself working for Bridge again, albeit temporarily.)

One relationship that is clear is with Dow Jones. Under their agreement, Bridge/Telerate will continue to distribute Dow Jones' newswires. However, Dow Jones has managed to negotiate out of the exclusive arrangement Dow Jones Markets enjoyed for Capital Markets Report and certain optional newswires like the Bankers Report. Bridge will be able to distribute those services, but not exclusively. Of course, Bridge has its own newswire -- Bridge News -- which it can safely pitch as an alternative to CMR.

Although the Dow Jones Markets sale prospectus had laid out a five-year exclusive period for Dow Jones newswires, Dow Jones news executives appear to have decided that going nonexclusive represents a significant business opportunity.

Bridge meanwhile may opt to distribute other Dow Jones newswires, such as the Dow Jones News Service, which could bolster its content offerings for the US retail brokerage marketplace. In a further attempt to strengthen its European news offerings, Bridge is in discussions with FT Information about the possible acquisition of its AFX News unit.

It appears that some of the news relationships established under the guise of Dow Jones Markets in the past 18 months will remain with Dow Jones. These include relationships with Primark for the Primark Dow Jones News Service, which is currently in beta tests, and with Nikkei/Quick. At press time, the status of Telerate's long-standing relationship with Japanese distributor KK Kyodo wasn't known.

Based on 1996 revenue figures for real-time market data services, the combined entity's annual sales would be in the region of $1.3 billion, making it likely that the combined entity will be larger than Bloomberg in terms of revenues.

Bridge executives stress that the company will have its sights set on Reuters rather than Bloomberg. The Telerate acquisition gives it 90,000 new customers and bolsters the company's product offerings in the capital markets area. Perhaps most strategically, though, Telerate's client base is distributed almost evenly through its three operating regions. Bridge's traditional strength has been in the US, so the deal gives it a presence in Asia and particularly in Europe that even Knight-Ridder Financial couldn't offer.