Becoming a Better Buyer

Treasurer David Shaw revamped how Thomson Reuters analyzes potential acquisitions.

"Thomson Reuters Corp. is a fairly acquisitive company,” David Shaw says, speaking in his rapid-fire New York accent, but sounding as understated as a Minnesota farmer. Acquisitive indeed! When Thomson purchased Reuters in 2008, the combined company became a global business information giant. And that was only the beginning.

Shaw notes that over the past 18 months, the company has increasingly targeted global deals, with its acquisitions having gone “from being 80% domestic to being 70% to 80% international.” Shaw, who was treasurer of $7 billion Thomson prior to its acquisition of Reuters, now serves as treasurer and senior vice president of Thomson Reuters, which had $13.1 billion in 2010 revenue.

All that growth, along with a focus on international acquisitions, “has forced us to take a look around at how to make the right investment decisions,” says Shaw. “We felt that we needed to modify our thinking as an international company.”

Take country risks. “There is inherently more risk in doing an acquisition in China or Latin America than in Western Europe,” he explains.  

Accordingly, Shaw and his treasury team created an equity risk premium that’s added to the base threshold used in assessing acquisitions. “We try to capture the country risk, and developed a framework to think about it,” he says. 

Countries are divided into three categories. Shifting from one category to another can move the base hurdle rate for an acquisition up or down by as much as 200 to 400 basis points, he says. “This is not something we just pick out of the air,” Shaw adds. “It’s very systematic.”

A second change he introduced in analysis of potential acquisitions is weighing projected returns. “Looking at returns, we consider the FX and tax considerations, and we do this at the business unit and at the project level, as well as the corporate level,” he says.

“We just started going through this process, using it for the last few acquisitions,” he adds. “I think it will really yield good results.”

Another challenge Shaw faced over the last year or so was free cash flow. He notes that in 2008, the company saw a contraction in working capital that threatened its free cash flow, “and that is one of our key core measures.”  Shaw notes that there are three factors that drive free cash flow: profitability, capital intensity and working capital. 

“The CFO asked me and my team to look at working capital and to understand the trend,” he says. “And what became apparent to us is that it’s very hard to understand what you can’t measure effectively.”

So Shaw assembled a working capital task force that developed a capital metrics report issued both monthly and, in more detail, quarterly.  “It took a lot of time to get there, but now we have a metric that everyone is using,” he says. 

As a result the treasury team has learned a lot more about the business. For example, Shaw says, they realized that while a project to centralize all payments streamlined that process, paying bills more efficiently actually reduced the company’s free cash flow. “So we had to offset that,” he says, with measures like extending payment terms. Shaw notes that the project wound up generating an extra $100 million in free cash flow.

Going forward, Shaw sees a challenge in “making sure we have all the right things in our 401(k) plan” as Thomson Reuters makes its defined-contribution plans its primary retirement benefit, rather than defined-benefit pension plans.  For example, he wants employees to have “a lot more annuity options.” Another challenge, he predicts, will be refinancing the company’s credit facility next year.







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