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Advanced Risk Analysis Presentation Reuters Future Strategy. 1 December 2003 Tetsuo Iida Nora Khiyati Ryuji Kobayashi Mikhail Obodovski Yue Zhou. Agenda. Part 1: Company Overview Part 2: Financial Analysis Part 3: Environmental Analysis Part 4: Vision and Management Style

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Advanced Risk Analysis Presentation Reuters Future Strategy


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    1. Advanced Risk Analysis PresentationReuters Future Strategy 1 December 2003 Tetsuo Iida Nora Khiyati Ryuji Kobayashi Mikhail Obodovski Yue Zhou

    2. Agenda Part 1:Company Overview Part 2:Financial Analysis Part 3:Environmental Analysis Part 4: Vision and Management Style Part 5: Reuters Current Strategy Part 6:Reuters Future Strategy Part 7:Implementation Control Part 8:Conclusion

    3. Part 1 Company Overview Who is Reuters? History Key Figures Performance Activity Chain

    4. Who is Reuters?

    5. Company History 1858 – Offices opened all over Europe, telegraph used as a medium Pioneers to use radio to send news and quotations all over the world Expands to America and Far East First in the world to use computers to transmit quotes Establishment 1851 1858 1870 1923 1964 Set up Reuters Greenhouse Fund for technology companies Launches electronic marketplace for Foreign Exchange Announces major initiatives to exploit the Internet opportunities First in the world to create video terminals for FX dealing Launches Reuters Financial TV Acquires several specialist companies 1984 1973 1981 1995 1999 2000

    6. Reuters’ Key Figures • Founded in London in 1851 • 458,000 professional users • Information on 40,000 companies • Financial information from 244 exchanges and OTC markets • Over 16,000 staff in 220 cities in 94 countries • Reuters Group 2002 revenue £3.6 billion • More than 90% of its revenue derives from financial services business

    7. Reuters’ Value Chain Technology development Software development Information flow integration Solution development Information based services Product Users Development of new technology and software (communications, security, transactions etc) Integration of financial market and general information flows, product development, knowledge management Financial institutions (banks, funds, brokers etc)

    8. Organizational Structure Customer Service and Sales Product Development Support Services

    9. Trading Communications Content Technology Reuters’ Group Structure Reuters hold investments in companies which are closely aligned with its overall strategy. Its investments range from public, majority-owned subsidiaries to joint ventures and small stakes in technology companies

    10. Sales, profitability and stock performance Sales PBIT

    11. Part 2 Financial Analysis Segmentation Analysis Cost Structure Ratio Analysis Cash Flow Analysis B/S Structure Operational Figures

    12. Sales Growth and Profitability £m • Stagnant market and high competition causes sales decline in 2002 • PBIT / Sales declines mainly due to high operating costs • PBIT goes into negative in 2002

    13. Segmentation by Customer • Treasury customer (Forex) holds largest share • Treasury and Investment Banking show high ROCE • Instinet (Non-core) declines

    14. Segmentation by Location • Europe holds largest share • Asia’s high ROCE means most asset are allocated to Europe and the Americas

    15. Operating Costs £m • Employee costs accounts for largest part • Total Operating Costs/Sales increases as each costs/sales increases (profitability worsening) • High fixed costs + restructuring costs + impairment of assets lead to PBIT negative in 2002

    16. Return on Capital Employed • ROCE significantly declines due to deterioration of profitability • Asset Turnover oncedecreased, but slightly recovers due to restructuring

    17. Fixed Asset Turnover £m Investment in joint ventures Acquisitions • Large investments in 2000 caused Sales/Fixed Assets decline • Slightly recovers in 2002 due to asset reduction • Diversification strategy has not contributed to Sales and Profit

    18. Working Capital days (Using average stocks, trade debtors and trade creditors between opening and closing figures) • Relatively low Net Working Assets due to few stocks • But NWA/Sales gradually increases due to longer debtor days (stronger buyer power is expected)

    19. PBIT VS Operating Cash Flow £m • OCF/Sales (Cash margin on sales) decreases year by year • But OCF still remains positive even when PBIT goes into negative in 2002

    20. Interest Cover and Dividend Cover Interest Cover Dividend Cover • Both well covered until 2000, but declines afterwards • In 2002, not covered in conventional ratios, but still covered in cash basis

    21. Balance Sheet Structure and Liquidity £m • Current Assets and Liabilities account for large part of Total Assets • Current Ratio gradually increases, but still under 1.0

    22. Gearing Repayment by liquid resources Capital replaced by borrowings • Gearing once went down, but gradually goes up again • Interest is still covered in cash basis, but potential risk increases

    23. Cash Inflow – Source of Operating Cash Flow £m • Main source of OCF is Operating Profit + Depreciation • But deteriorating profitability erodes cash generating ability

    24. Cash Outflow – Use of Cash before Financing £m • Cash outflow decreases as cash inflow decreases • Especially, Investment decreases under restructuring

    25. Cash Flow Table before Financing Blue zone is covered by OCF Red zone is not covered by OCF • Until 2001, main cash outflow is covered by OCF (good cash generator) • In 2002, OCF is still positive, but not enough to cover capital expenditure

    26. Cash Flow Table after Financing Lack of cash is covered by Borrowings or Liquid resources • Movement of debt is sometimes linked with liquid resources • That means movement of debt is not so linked with core business

    27. Total Cash Flow (2000) Total Cash Inflow £m Sale of Assets Disposals Liquid Resources and others OCF Borrowing Share Issue 852 71% 126 11% 28 2% 30 2% 162 14% Cash Pool 1,198 (100%) Total Cash Outflow Liquid Resources and others Financial Investment Borrowing Repayment Acquisition CAPEX Dividend Tax Interest 2 0% 208 17% 304 25% 274 23% 205 17% 159 13% 35 3% 0 0% Retained Cash 11(1%)

    28. Total Cash Flow (2002) Total Cash Inflow £m Sale of Assets Disposals Liquid Resources and others OCF Borrowing Share Issue 355 44% 15 2% 2 0% 398 49% 44 5% Cash Pool 814 (100%) Total Cash Outflow Liquid Resources and others Financial Investment Borrowing Repayment Acquisition CAPEX Dividend Tax Interest 24 3% 13 2% 80 10% 168 21% 139 17% 73 9% 58 7% 173 21% Retained Cash 86 (10%)

    29. Operational figures • Per employee figures Cost going up Profit going down • Per terminal figures Terminal number going down

    30. Summary of Financial Analysis • Sales declining • Stagnant financial industry and high competition hit Reuters • Large investments (Acquisitions etc) have not been successful • Basic profitability now in danger • High fixed costs are heavy burden • Leads to Return on Capital Employed deterioration • Weak operating cash flow erodes cash generating ability • OCF is still positive, but not enough to cover capital expenditure • Decrease of cash inflow means limited investment and growth Cost cutting / operational efficiency is inevitable to generate cash and go turnaround Need to move before it’s too late Need to sell non-core business and focus on core

    31. Part 3: Environment Analysis Arena Industry Fact Sheet / Environmental Matrix Pester / Five Forces / Space Strategic Groups Competitive Landscape Critical Success Factors

    32. Financial institutions • Exchanges Financial Services Trading facilities instant message and e-mail Content Solution • Telecommunication companies • Internet/cable TV providers • Delivery service Financial information Communication • Traditional Media • Research companies Information Software solution IT • Software companies • Hardware vendors Arena

    33. The Strategic Environment Matrix Many Specialisation Fragmented SOURCES OF COMPETITIVE APPROACH Reuters Stalemate Volume Few Small Large SIZE OF COMPETITIVE ADVANTAGE

    34.     Industry Fact Sheet – Past (2000)

    35. Weak Strong Moderate Weak Weak Five Forces Analysis (2000) - Overview • New Entrants • Technological changes required IT expertise • High fixed cost • Intense competition • Supplier • Possible direct sale to end-customers • Competitive Rivalry • Increased competition with limited market growth • Reduced margin • Buyer • Strong economy • Traders allowed to have multiple terminals • Weak cost pressure • Substitute • In-house solutions

    36. Five Forces Analysis (2000) - Key Impact Factors • Key Impact Factors • Intensifying competition for market share with limited growth room • Still customers are generous about spending on financial information • Technological changes deters new entrants • Industry Attractiveness • Oligopolistic industry – Reuters and Bloomberg • Competition between incumbents are tough • But relatively stable under the upbeat market

    37. Aggressive Competitive Reuters Space Posture (2000) • Steady revenue growth • Strong cash flow FS • Limited growth • Pressure on margin • Strong at technology • Diversified portfolio CA IA ES • Maturing market • Technological changes

    38. Space Posture (2000) - Interpretation • Aggressive Strategy – maintain leadership position in the core information market • Product customisation for specific user needs • Adopting web-based technology • Competitive Strategy – reduce environmental uncertainty • Funneling cash from core business to new opportunities • Building new business portfolio • Electronic Communication Network (Instinet) • Software (Tibco) • IP Network (Equant) etc.

    39. Space Posture (2000) - Potential risks and change • Risks of Aggressive Strategy • Structural change of the industry • Lack of capacity for growth • New competitors • Risks of Competitive Strategy • Danger that competitive advantage weakens • Further deterioration of environmental stability  Happened  Slowed down  Entered  Weakened  Deteriorated

    40. PESTER Analysis (2002) • The on-off debate on whether or not UK should replace sterling with Euro • Pension funding gap and increased saving – reduce market transactions Politics • Consistent weak economy both in US and Europe • Bear stock market in US and Europe • Slower recovery of Investment banking sector in Europe. • Further consolidation in financial institutions Economics • Development of Web-based technology • Development of of mobile technology Technology • The regulation on bundled brokerage and soft commission arrangements • Basle II requirements of capital adequacy Regulation • Globalisation • Faster change of environment Environment Social/Culture • Aging population – links to pension funding gap in the “Politics” section

    41. Corporate Suppliers Customers • Price pressure • Availability of cheaper technology • Intensifying competition • Demand decline • Price pressure • Reduced margin • Reduced revenue • Consolidation • Polarization • Increased IT spending PROFIT MARGIN COMPETITION DEMAND PRICE Screening for Environmental Impact WIDE ENVIRONMENTAL IMPACT

    42.    Industry Fact Sheet – Present (2002) Future Decline More price sensitive Intensifying competition Quality and usability

    43. Moderate Strong Strong Weak Weak Five Forces Analysis (2002) - Overview • New Entrants • Technology reduces delivery cost • But still high fixed cost • Intense competition • Supplier • Direct sale to end-customers realistic • Competitive Rivalry • Increased competition at both high-end and low-end • Reduced margin • Buyer • Decrease in the number of transactions • Pressure to cut costs • In-house solutions • Substitute • In-house solutions

    44. Five Forces Analysis (2002) - Key Impact Factors • Key Impact Factors • Increasing buyer power – consolidation • Lowered entry barrier – technological advances • Intensifying competitive rivalry – mature market • Industry Attractiveness • Industry under structural change – underlying forces are not temporary • Moving toward less attractive

    45. Defensive Reuters Space Posture (2002) • Revenue decline • Weak cash flow FS • Shrinking market • Increased competition • Sluggish IT spending • Eroding market share CA IA Focus on Core Business !! ES • Slow market recovery • Lowered entry barrier

    46. Space Posture (2002) - Interpretation • Defensive Strategy – focusing on core business • Reshaping cost base • Sale of non-core business • Streamlining product offerings • Potential risks • Cost cutting may just cover the revenue decline • Lose growth opportunities for the future • New products induces customers to consider alternatives

    47. Global Players Reuters Bloomberg Thomson Local Players Intermediate Players Telerate Quick Telekurs Focused Players Specialists ADP EBS AP Advent Lexis Nexis AFP Sungard Gartner Misys Financial Information Industry Strategic Groups Broad Product Range Narrow National Global Geographic Coverage

    48. Industry Strategic Groups Trends • Global Players increase market share • Limited market growth • Scale economy • Focused Players move into Global Players • Thomson and Bloomberg joined Global Players • Alliance between Bloomberg and EBS • Lowered entry barrier due to technological changes • Intermediate / Local Players lose market share • Lack of scale economy • Intensifying price pressure