Consolidation strikes the patent industry
Thomson plans to buy Information Holdings, the parent company of MicroPatent. Peter Rees found out what this might mean to patent users
Two years ago, the Canadian electronic publishing giant Thomson lost a battle with its much smaller US rival, MicroPatent, to acquire the sophisticated patent search software firm Aurigin. Now, however, it is making a bid to acquire the victor.
Aurigin specialised in text-mining software and MicroPatent paid $12.4m to the bankruptcy courts to acquire it in early 2002. Thomson, whose own services include Derwent World Patent Index, was also one of the bidders and it responded to missing on that purchase by snapping up Delphion � a pioneering provider of web patent searches originally spun out of IBM � for $22m at the end of 2002.
Thomson has now agreed to pay $441m for MicroPatent's parent company Information Holdings (IHI). As well as patent databases and the Aureka analytical and patent-visualisation tools (developed by Aurigin) Thomson will gain two other important assets: Liquent, which develops software for staff that handle regulatory affairs matters in life science firms; and the Master Data Center intellectual property (IP) management software.
All of this is part of a grand strategy for Thomson, according to Vin Caraher, who is president and CEO of Thomson Scientific.
'Thomson is acquiring businesses that allow us to build 'integrated information solutions' for professionals. In short, we want to build a complete and valuable workflow tool that helps our customers make better decisions and make them faster. We are building and acquiring the content, the technology, and the applications we need to do this well,' he told Research Information. This strategy has not simply meant purchasing other companies; the company has also done some careful pruning. 'We have divested some wonderful businesses that simply fall outside of this core business model or our core customer focus,' he explained.
So how does IHI fit into this strategy? 'IHI and Thomson have very complementary capabilities. Together, we can make the discovery and innovation process a lot better for our customers,' said Caraher.
The purchase sounds like a good move for Thomson � and the financial community would tend to agree. But the reactions of customers have been more cautious. The possibility that the merger of the top two search companies could trigger price rises is 'a major concern to all of us,' commented one independent patent researcher. He added that smaller firms were 'more at risk' from any increases. Others in the industry welcomed the US Department of Justice (DOJ)'s investigation into the merger. A merger could lead to an 'unhealthy' concentration of power, 'with no trigger to continue developing [new tools],' said one.
Thomson is paying relatively generously for IHI, by common measures used in the financial community. As a result, claim financial analysts, it will have to extract value from the deal by eliminating costs from overlapping search technologies and/or by raising prices.
Indeed, the company is optimistic about healthy growth from its newly acquired business. Announcing the merger, the Thomson Group's president and CEO Richard Harrington said, 'We're continuing to build size and scale in this market growth and we expect our Scientific and Healthcare revenues to double over the next five to seven years through growth of existing businesses and strategic acquisitions.'
But Thomson claims that these revenue gains will not be achieved by simply increasing prices. 'We don't anticipate that the merger will impact on the pricing of current offerings in the market,' said Thomson's Caraher. 'In the long run, we think this acquisition enables Thomson and IHI to offer more value to the customer for their research dollar.'
Beyond pricing, another concern for patent users is what services will look like after the takeover. Will MicroPatent continue to operate under its present guise, or will it merge with Delphion? It may be too early to answer this type of question yet. Indeed the question could become irrelevant if US regulators attempt to force divestments on Thomson as a condition of approving the IHI deal (see section below: The status of the purchase).
If the merger is approved, there will be a whole new set of customers for Thomson to get to grips with. 'Until we have successfully completed the acquisition and done a complete assessment of what our customers want and need, it's too early to comment on specific changes to products. How we move forward will be driven by customer needs and preferences,' said Caraher. 'There would be no immediate changes to the customer's experience with IHI products and services or with Thomson products and services. Our goal is to create a superior customer experience by combining our best and brightest capabilities,' he added.
In the longer term, he continued, 'users will see improvements such as a more complete patent image file and trademark information and additional functionality including family de-duplication and keyword highlighting. They'll have additional alerting capabilities such as new citation alerting and assignee changes; and advanced visualisation through topographical analytics. They'll see more complete pharmaceutical drug development regulatory filing compliance databases and tools which would extend the work-flow benefits of our emerging industry-specific solutions like Thomson Pharma.'
The company is also considering the long-term approach to product support. 'There are a number of ways to support customers' needs as we come out with new and improved offerings,' said Caraher. 'We can and will, in some cases, continue on a parallel track and offer both existing and new products and solutions, as long they are in demand. We also know what needs to be done to ensure a smooth transition to a newer and better product or platform. The important thing to remember is that we'll be working with our IHI colleagues to maintain the knowledge, the service, and support that our customers need,' he added.
For now, customers, competitors, investors and industry observers will have to wait to discover what exactly will happen when the DOJ has completed its investigations. Some in the industry are fearful of the outcome, but some believe that the remaining companies in the patent search industry like Questel-Orbit are big enough to keep a level of competition, whatever the DOJ requests from Thomson.
And there may be new competitors on the horizon too. One such company is Univentio, a Netherlands-based firm that provides data to most of the major hosting companies. Univentio has been a supplier of full-text patent data for several years and says it is now the largest commercial patent full-text publisher and provider. It also provides customised patent information services to companies. Now, as Univentio's CEO Willem Langemaat told Research Information, the company is 'responding to consumer demand' and plans to roll out new customer-oriented services within six months.
The status of the purchase
Before the takeover can go ahead it must first be approved by shareholders and, perhaps more importantly, � as the major shareholders have already been consulted � US financial regulators.
Between them, Thomson and MicroPatent have a substantial portion of the consumer end of the patent search and delivery sector (some estimates go as high as 80 per cent). This leaves a limited number of competitors such as PatentCafe and Questel-Orbit.
Under US competition law, the companies must submit the merger for review by the US Department of Justice (DOJ) and the Federal Trade Commission to prevent breaches of competition (antitrust) law. Both parties have to provide a detailed description of the deal, the assets being acquired and their competitive relationship. They cannot then close the deal for 30 days. In this case, the clock was reset on 12 August when the DOJ made a second request for information and documents from IHI and Thomson. When the information has been provided, which the two companies say they will do promptly, the regulators have 30 days to decide whether to challenge the transaction in court.
Thomson has been through an antitrust investigation before. In 1996 the DOJ gave the go-ahead to Thomson's merger with another large legal publisher, West Publishing, but only on the condition that it sold more than 50 legal publications. The DOJ said that, without these sales and other conditions, the merged publishing company would have reduced competition in dozens of markets nationwide where Thomson and West were the only publishers. The combined company would also have reduced competition in the provision of online legal research services.
Many in the financial community dismiss the possibility of antitrust problems in the purchase of IHI. In a research note on Thomson, analyst Neil Godsey, of the investment bank Think Equity, said: 'We assume that both companies have already investigated this issue in depth.' Nevertheless, some analysts think � and the DOJ seems to agree � that there is at least a case to answer under the DOJ's 'Horizontal Merger Guidelines', which describe the analytical framework used by regulators. The key theme of the guidelines is that mergers 'should not be permitted to create or enhance market power or to facilitate its exercise,' where market power is 'the ability profitably to maintain prices above competitive levels for a significant period of time'.