200 Liberty Street
Dow Jones Telerate, Inc., is a leading purveyor of information concerning the financial industry to customers around the world. The company got its start listing prices for one type of financial instrument, and then grew rapidly when it made an alliance with another firm that allowed it to provide exclusive and vital information. During a period of rapid growth in the financial industry's boom years in the 1980s, Telerate was acquired by Dow Jones & Company, Inc. Subsequently, Telerate saw its growth slow as its competition became more formidable, and the financial industry as a whole underwent a transition.
Telerate Systems Inc. was founded in 1969 by Neil S. Hirsch, a 21-year old college dropout who was working as a clerk in a Merrill Lynch brokerage office. While working at the firm, Hirsch became fascinated with the electronic stock quote monitors. He noted that stock quotes were readily available on computerized terminals, but that information about the prices of other money market instruments could only be obtained by calling around to various financial industry firms that bought and sold those instruments. Hirsch's innovation was to expand the computerized communications mechanisms to include other areas of the financial industry.
The field in which Telerate first began operating was the commercial paper market. This market was made up of I.O.U.'s issued by companies when they wanted to borrow money for a short period of time. If a company wanted a loan, the rate of interest which it paid was determined by current, general interest rates, which were set by the Federal Reserve, and by the company's credit rating, which estimated its overall reliability. Once a company had borrowed money, the value of the I.O.U. it wrote, called 'commercial paper,' was fixed, but since markets and interest rates fluctuated constantly, its relative value went up and down. A complex market in these corporate debts had sprung up, in which other corporations, banks, insurance companies, and brokers bought and sold the debts. Although the market was extremely volatile, or 'liquid,' the only way to determine the going rates for corporate borrowing at any given time was to call around on the phone to firms or brokers buying and selling the debts, and ask them what they were paying.
Hirsch borrowed money to start Telerate, which made prices that had been gathered from commercial paper dealers available on computer terminals. In doing so, Telerate brought transparency to the commercial paper market, opening it up to outsiders, who were not part of the small, insular world of commercial paper brokers.
Within several years, Hirsch's fledgling company had lined up several dozen customers, but it had run out of money. The company was on the verge of selling stock to the public in late 1971, when it was approached by the Cantor Fitzgerald Securities Corporation. In 1972, Cantor bought a 25 percent interest in Telerate in exchange for $500,000 in debt. With this deal, Cantor also made it possible for Telerate to offer a new and lucrative service.
Cantor was an interdealer broker in U.S. Treasury securities. As such, it was one of five chief players in the market for Treasury bonds, notes, and bills. When the U.S. government wanted to borrow money, it did so by issuing these securities at various interest rates, and for various lengths of time. Cantor was one of five firms that acted as middlemen between the other brokers who sold Treasury securities to dealers, who, in turn, sold them to investors. Because of Cantor's position as a key link among the other main brokers within this hierarchy, it had access to the prices that other dealers were offering for the Treasury securities.
Because the market for U.S. Treasury securities was the largest debt market in the world, all other prices for money market instruments were set on the basis of this 'gold standard.' This factor meant that this information was extremely important and valuable to people active in the financial markets. Even people who were not directly involved in the market for Treasury securities needed to know what that market was doing, since it indirectly affected all others.
Before Cantor linked up with Telerate, the prices for government securities had been available only to a very limited and select group of companies--those within the inner circle of primary dealers in government bonds. Cantor wanted these prices more widely disseminated, in hopes that this would give it a competitive edge against other brokers, and so it hooked up with Telerate, which had already created the same conditions in the commercial paper market. In doing so, Cantor provided Telerate with access to the prices other brokers were offering for government securities.
When Telerate began to offer Cantor's price quotes on government securities as trades occurred among the dealers, it had a unique and extremely valuable piece of information to offer. Since the other four interdealer brokers refused to reveal their price information, Telerate had a monopoly on this essential information, and the company's alliance with Cantor marked the beginning of a remarkable growth spurt. By 1977, the company's earnings had increased to $1 million.
With the new availability of 'executable' prices on Treasury securities, Telerate's sales boomed. Over time, Cantor increased its ownership share of the company, to nearly 70 percent. In 1977, Telerate formed another important alliance, when it joined with AP-Dow Jones. AP-Dow Jones was a joint venture of the Associated Press and Dow Jones that had been formed to deliver financial information and business news in Europe, Asia, and Latin America. Together, AP-Dow Jones and Telerate moved to expand Telerate's market to include customers overseas.
Four years after Telerate began to make inroads into the foreign market for financial information, Cantor sold its majority share in the company to a British investment group called Exco International. This London based consortium was made up of five partners: Guinness Peat, a financial group; Astley & Pearce, a money broker; Godsell, another money broker; the British & Commonwealth Shipping Company; and the Save & Prosper Group. In a complex transaction, the British investors acquired 89.6 percent of Telerate for $75 million. The firm's remaining shares were left in the hands of its executives. At the time of the sale, Telerate's annual earnings had increased to $13.6 million.
Two years after its sale to the British firms, shares in Telerate were offered to the public for the first time. The company was listed on the New York Stock Exchange in April of 1983, and Exco's stake in the company was reduced to 49 percent. At the time of the stock offer, Telerate's financial fortunes were booming, and the sale of stock made founder Hirsch's 7.6 percent stake worth $70 million.
The company's information service had been expanded to include price information and updates on a wide range of financial instruments, including fixed-income securities, foreign exchange rates, and precious metals. Every 24 hours, Telerate provided 10,000 electronic 'pages' of information on commercial paper, certificates of deposit, Federal agency securities, mortgage market securities, financial futures, and energy quotes, among other facts. Telerate's bond and note quotations remained most important among this selection of information. For this service, customers paid from $540 to $700 a month. More than 8,000 terminals in the United States and Canada had already been installed to receive this information, along with 2,500 terminals in 21 foreign countries.
Three months after its stock offering, in July of 1983, Telerate updated its agreement with AP-Dow Jones, and the two companies agreed to form a new business together. This foreign subsidiary, to be called AP-Dow Jones/Telerate Company, would provide Telerate services overseas. It was to be 49.9 percent owned by Telerate, and 25.05 percent owned by Dow Jones and AP, separately. Two months later, Exco, the company's British parent, announced that it would increase its holding in Telerate to 51.5 percent, pushing its share just over the half mark.
Exco's interest in solidifying its possession of Telerate was justified by the company's strong financial results. At the end of 1983, Telerate posted pretax profit margins of greater than 55 percent. The company reported 90 percent growth in earnings in its last fiscal quarter, and annual revenues that had nearly doubled, from $11.1 million in 1982 to $20 million in the following year. Revenues had risen 61 percent, from $41.6 million to $67 million.
These financial gains were made possible by the general financial climate of the 1980s. As the United States government pursued a policy of deficit spending by borrowing large sums, trading in government securities increased dramatically. Interest rates, tied to rates on Treasury bonds, became more volatile, and investors began to seek sanctuary from the fluctuating rates. The Chicago Board of Trade introduced a futures contract that allowed investors to gain some measure of security against changes in the interest rate, and it became an extremely heavily traded item. All of this activity, as well as the entry of foreign investors into the market for Treasury securities in large numbers, made Telerate's service even more essential and widespread than it had been before. In five years, the company's customer base quintupled, and sales climbed six-fold.
By the beginning of 1984, Telerate had started to see the threat of competition for the first time, primarily from the British news service Reuters Holding PLC. In an effort to make its service more valuable, the company introduced Telerate II, software for use on IBM-compatible computers, which helped users to analyze and manipulate the information provided by the company. With these extra services, the company hoped to boost revenues by charging customers higher fees. In addition, Telerate introduced a handheld pocket display quote machine, which was portable, and received information via radio waves.
Despite this effort, Telerate's growth began to flatten in 1984, and its orders for installation of new terminals also started to slow. This process was exacerbated by difficulties involving the newly split-up phone company, which caused a large backlog of orders for installation which went unfilled. By September of 1984, the company's stock price had sunk well below its initial offering level, and Hirsch was complaining to the press that Telerate was underappreciated.
One company that did appreciate Telerate was its foreign marketing partner, Dow Jones. In 1985, the media conglomerate purchased a 32 percent stake in the company from Exco International for $285 million. This investment was justified as the government bond market continued to boom, driving Telerate to a 45 percent compound annual rate of earnings growth. To keep up with this growth, the company expanded its staff and office space.
At the end of 1986, Telerate bought back from its partners, AP and Dow Jones, the percentage of the group's foreign joint venture that it did not already own. Months later, in September of 1987, Dow Jones put an additional $416 million into Telerate, upping its stake in the company to 56 percent.
One month later, Telerate announced that it would join with the American Telephone and Telegraph Company (AT&T) to offer a foreign exchange transaction service. This move was designed to let Telerate to compete with its primary rival, the British giant Reuters Holding PLC, in the lucrative foreign currency trading industry.
Telerate also began to develop a system called Matrix that would allow personal computer owners to manipulate the data that the company supplied. This effort was a response to the introduction of a competing financial information system, called MoneyCenter, which had begun to gain customers rapidly during this time. Long the beneficiary of a monopoly, Telerate had fallen behind in customer service and cutting edge technology.
In the following year, Dow Jones increased its holding in Telerate further, paying $148 million to increase its share to 67 percent. In 1988, Telerate introduced its Matrix program, but the sales were disappointing, as customers judged its capabilities limited and its graphics weak. Also in that year, Telerate was weakened by the collapse of the savings and loan industry, which sharply reduced the number of potential customers for its service.
In September of 1989, Dow Jones moved to complete its piecemeal acquisition of Telerate. The company offered $18 a share for the rest of the company's outstanding stock, but Hirsch rejected this offer as too low. In November, Dow Jones increased its bid to $21 a share, and purchased another 25 percent of the company for $515 million. It then owned 92 percent of Telerate, and it was only two months later that Dow Jones finalized its acquisition, spending $161 million, for a grand total of $1.6 billion. This made Telerate the most expensive acquisition in the history of its venerable parent company.
In addition to its expenditures on Telerate, Dow Jones had spent $22 million buying out AT&T's half of the company's joint venture in foreign currency trading in December of 1989. Late in that year, The Trading Service (TTS) went on line, and Dow Jones began to absorb all of its start-up costs, which totaled $51 million in 1989.
Firmly in control of Telerate, Dow Jones began to make rapid changes in an effort to return what had once been a cash cow to its highly profitable ways. The company brought in new engineers to rebuild Telerate's technological capabilities, and it stepped up efforts toward customer service. When a group of Cantor's fellow interdealer brokers announced that they would make price quotes on government securities available, effectively ending Telerate's monopoly over this information, the company moved to counter the impact of this blow by negotiating the right to carry this information in addition to its long-standing Cantor rates.
Despite these efforts, the company reported earnings down significantly in mid-1990, and 41 workers were laid off. In addition, the two companies experienced a clash in corporate cultures between the younger and more freewheeling Telerate and the older and more conservative Dow Jones.
In June of 1991, Telerate saw the final erosion of its exclusive Cantor franchise, when a consortium of three brokerage firms, 40 primary dealers, and five interdealer brokers began to disseminate real-time price information on trading of government securities in a service called GOVPX. This move was made in response to a 1990 government report that called for wider access to this data. In response to this threat, Telerate expanded its Treasury bill reporting at no charge to its customers. Nevertheless, the GOVPX price of $140, compared to Telerate's basic price of $600 a month, appeared to pose a serious threat to the company.
In April of 1992, Dow Jones restructured its on-line information services, forming Dow Jones Telerate, Inc., and two separate business news services. In the following year, the company moved to update its services by introducing a program that ran on the new Windows personal computer operating system, and by rolling out new TeleTrac financial software. In early 1994, Telerate announced that it would begin to list government bond prices from a major broker for primary dealers called Liberty Brokerage Investment Company. This information, from a company that specialized in short-term bonds, supplemented the company's Cantor figures, which were stronger in the long-term bond field. In addition, the company strengthened its Asian information services.
Although Telerate's days of flying high along with the rest of the government bond market in the 1980s had passed, and its once unique market niche had been invaded by an ever-growing number of competitors, the company's years of experience and its backing by Dow Jones, a giant in the financial information industry, seemed to insure that it would compete effectively in the coming years.