When financial media giant Thomson-Reuters (NYSE:TRI) reported better-than-expected third quarter results last week, investors quickly bid the shares up by 12% convinced that the evidence was now in that the newly merged entity had the appropriate level of diversification to get through the downturn in its primary markets, the financial services industry, relatively unscathed.

CEO Plays Up Positive Outlook
That conviction was further bolstered when CEO Tom Glocer suggested in a conference call, that its sales to the financial services market could still rise next year, even as the company's client base shrinks. While he declined to give a specific number, he didn't rule out the possibility that the company's financial services products division could produce positive sales in the coming year; a surprising level of optimism in light of the fact that organic revenue growth for this division, which accounts for 60% of sales, decelerated to 5% during the latest quarter, compared with the 7% and 9% rates realized in the two previous quarters.

Is such conviction grounded in facts, or like most hard pressed CEOs these days, is Glover simply "whistling through the graveyard" in the face of truly scary prospects for his and other companies relying on the health of the financial services sector for the lion's share of their revenues and profits?

Merger Move Was a Defensive Play
Formed last April as a result of the acquisition of legendary British financial news service Reuters Group plc by Canadian media company Thomson Corp for $15.9 billion, the deal produced an entity that, while still heavily depended on the financial services markets, now gets about 40% of its revenues from the provision of data to the legal, scientific, healthcare and accounting businesses; areas that are largely resilient to the ups and downs of economic cycles. The benefit of this sort of diversification obviously wasn't lost on Reuters shareholders who saw their shares collapse for 16 pounds to under 1 pound in London trading during the 2001-2004 downturn when revenue for Thomson Reuters financial services unit dropped 18% on a 10% drop in staffing levels in the financial industry according to numbers compiled by UBS analyst Jeff Fan. (For more on mergers, be sure to check out our Mergers And Acquisitions Tutorial.)

Financial Sector Bracing For More Layoffs
While this new entity is unquestionably a different animal from the standalone Reuters of the past, which relied on the financial services sector for 90% of its revenue, the financial industry now looks set to take a much bigger hit than at any time in the post-war era. In a recent Reuters interview, top ranked financial industry analyst Meredith Whitney of Oppenheimer & Co re-iterated her earlier forecast that Wall Street would cut 25-30% of its workforce between January of this year and March of 2009. So far, job losses in the investment banking sector are estimated at 15-20% and banks worldwide have let go about 150,000 of their staff. And industry executives still expect more lay-offs in the coming months.

Those expectations are already becoming reality. Last week, Citigroup (NYSE:C) announced that it was slashing its headcount by 52,000. Earlier, Goldman Sachs (NYSE:GS) let go 3,200 employees, or 10% of its global workforce, and Morgan Stanley (NYSE:MS) reduced its institutional securities and money management staff levels by 10% and 9% respectively. And JPMorgan & Chase (NYSE:JPM) recently hinted that 40,000 financial industry jobs could disappear this year in London alone. All this means that they'll be a lot fewer occupied desks out there on which a Reuters, or for that matter, a Bloomberg terminal will be placed.

The Final Word
Despite the fact that the shares are down by about one-third from their value at the time of last April's merger, it's hard to buy into the notion that all the potential bad news is already priced into the stock. While such a view recently prompted RBS Research to change its call on the stock to 'hold' from 'sell', it may be a tad too early to get back into this sector, given the tsunami of financial industry job losses now on the way.

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