Deals by design

How acquisitions bring
fresh ideas to RELX

Story by James Ashton

As Matthias Baumhof sat down for dinner one night in November 2017, he couldn’t help but feel apprehensive. Morton's The Steakhouse at San Jose’s Cityview Plaza was a popular local destination, well known for its Midwest prime beef and traditional seafood gumbo, and conveniently only two blocks from the office.

But the German software engineer was not particularly hungry. Rather than a social event, this gathering was strictly business. Under discussion was ThreatMetrix, the Californian technology company where Baumhof had worked for the last six years, and, crucially, its future ownership.

Part getting-to-know-you, part fact-finding mission, the dinner table that night was heavy with executives from LexisNexis Risk Solutions who had flown in from Atlanta, Georgia. Joining them were colleagues from their London parent company, RELX, which had declared itself a potentially interested buyer.

“There is always the concern that smaller companies will just be crushed into bigger organisations,” Baumhof says, explaining today his concern about the sale of the firm. “They can lose the specific DNA that made them successful.”

Within two months of the meal, RELX announced it had agreed to pay £580m for ThreatMetrix, making it the largest deal by the FTSE100 data and analytics company for a decade.

“The key principle of our acquisition strategy is that it starts with our organic strategy,”
says Sybella Stanley, RELX’s director of corporate finance.

“We talk a great deal internally about buying things where we are the natural home for the business - selected acquisitions of targeted data sets and analytics that supplement our organic growth," says Sybella Stanley, who attended the Morton's dinner among a string of formal and informal meetings leading up to the purchase.

Over several years, RELX has demonstrated it will only buy assets that bring new ideas, data troves, or improved technology into the business. They must strongly contribute to the existing growth path of its four divisions serving professional customers seeking to make quicker, smarter decisions based on tools that drill into mounting volumes of information.

Fast-growing ThreatMetrix ticked those boxes. Founded in Sydney by two entrepreneurs in 2005, it began with a contract to police unwanted emails on behalf of the Australian government by tracking IP addresses. But it went a step further, monitoring the devices which controlled the web traffic from numerous addresses because they were less likely to alter.

A further flash of inspiration was to build a contributory database, where every client added their data so it could be cross checked against a wider pool. Starting with retailers such as electricals chain Best Buy and the online marketplace eBay, ThreatMetrix combatted fraud in ecommerce by blending its device information with personal financial data and email addresses to create anonymous, digital identities that could be verified or flagged as suspicious as a transaction played out. Led by Lloyds in the UK, banks quickly followed retailers in using the system and at the point of acquisition it had built a database of 1.4bn identities from 4.5bn devices.

Baumhof, who had followed his brother Andreas from Germany to Sydney for work, moved again in 2015, to San Jose, to replace his brother as ThreatMetrix’s engineering vice president. Investors had encouraged the company to incorporate in Silicon Valley to capitalise on its potential, and it was those same investors that were keen to test the market for a sale.

An email from the firm’s adviser, Guggenheim Partners, dropped into Stanley’s in-box in late September 2017. The two sides already knew each other through a partnership where ThreatMetrix used LexisNexis Risk Solutions' services for some customer projects. “We thought they could be a good match for us,” says Baumhof.

Within a few weeks, a first meeting took place in ThreatMetrix’s boardroom from where the planes taking off and landing at the nearby Norman Y Mineta San Jose International Airport can be clearly seen.

“You've got three hours,” says Stanley. “What are the five things you’ve got to know to decide whether you’re going to spend more time on this?” Direct questions were required to cut through the marketing bluster. Those enquiries also earned some respect from the start-up for the far larger firm with 140 years of history.

An indicative offer submitted in December led to further due diligence, contract scrutiny and in-person meetings so that RELX could become as comfortable with the people as the numbers. A second bid, made in January 2018, was accepted and, from that point, the transaction was concluded in just 12 days.

The impact for ThreatMetrix was immediate. At the time, the firm employed 22 US salespeople, compared to the 500-strong sales team of LexisNexis Risk Solutions. In addition, its new owner already had commercial relationships with everyone ThreatMetrix wanted to reach, including the top 10 US banks.

By meshing this new digital data with the existing database of LexisNexis Risk Solutions that collates credit histories, court filings and driver records, some 10% of web traffic attributed to botnets and malicious software could be filtered from a client’s web page that is focused on completing secure transactions, such as a customer credit card application.

New innovation followed. The ThreatMetrix team began exploring behavioural biometrics including inconsistent keystrokes and mouse movements that suggest a scammer has taken control of a legitimate customer account. “We're always working backwards from the need in the marketplace,” says Grayson Clarke, LexisNexis Risk Solutions’ senior vice president responsible for market planning. “This was a growing problem that our customers were having trouble solving and we were well positioned to help.”

Similarly, a new application to tackle financial crime was launched in June 2021. Using IP addresses and location data, clients can check they are not inadvertently breaking sanctions or being drawn into money laundering.

As an independent firm, ThreatMetrix had no problem finding funds to invest in its service, but RELX ownership has given it the security to plan five years out. The company had 60 engineers at acquisition. Now, through recruitment, Baumhof, who was elevated to become the company's chief technology officer, oversees 150, plus another 100 from the subsequent acquisition of Emailage, a venture that spots fraudulent email addresses, and some he inherited from elsewhere in LexisNexis Risk Solutions.

Finally, there has been an exchange of technological knowhow. With 3.25 petabytes of information stored across the group, RELX knows how to manage big data. What ThreatMetrix brought was expertise in running low latency, high volume systems. Since the deal was done, its volume of activity has doubled, so that now it verifies 4,000 online transactions a second.

Speed matters, but good deals can’t be rushed. And most doubters admit eventually that getting together with another company can power new success.

Matthias Baumhof, chief technology officer, ThreatMetrix, LexisNexis Risk Solutions

Sybella Stanley, director of corporate finance, RELX

The RELX average annual spend on acquisitions is about £500m, compared with a market capitalisation of £44bn.

Nick Luff, chief financial officer, RELX

The transactions Sybella Stanley looks back on most fondly are those that helped to reconfigure the underlying business that was conducting them.

After training as a barrister, she spent a decade at Barings Corporate Finance in the City of London, where deals such as the disposals of insurance and tea divisions that converted Inchcape from a broad trading company into a focused FTSE250 car dealership linger in the memory. So too does the Liverpool Daily Post’s journey through acquisition from regional publisher to becoming one of the UK’s leading newspaper groups, now called Reach.

At RELX - then Reed Elsevier - since 1997, Stanley is hard pushed to pick a favourite. Worth noting, however, is 2004’s Seisint, which for £414m brought with it the big-data computing system that renewed the company’s technology base, and, costing £2.1bn in 2008, ChoicePoint, whose information supporting insurance underwriting, signficantly exapnded what became RELX’s risk division.

These are unusual examples because of their size. The average annual spend on acquisitions is about £500m, compared with a market capitalisation of £44bn. The annual spend over the last ten years peaked at £978m in 2018, the year of Threatmetrix. There were 12 buys in 2021 for a total consideration of £255m, which Stanley reports was one of her team’s most active to date, on account of how much they reviewed.

The brisk market was powered by ample capital searching for a home and relatively cheap debt financing because interest rates were low. RELX has had to be mindful of rising valuations, particularly in the fields of data and analytics, and, because businesses are being brought to market at an earlier stage, how to tie in key management to carry on building their venture regardless of ownership. “One of the things that we have to unpick is the market appetite for these early-stage products and - importantly for us - what is the path to profitability?” says Stanley.

Her corporate finance unit is compact for a company of RELX’s size. Of its three business development directors, one joined from Citibank and the other two have backgrounds in transactions services, at Deloitte and EY. That means they are well-versed in crunching the numbers, understanding the commercial story behind them – and challenging both. The quartet used to sit together in London but since Covid have been dispersed to Wiltshire, Devon and Kent. With the global remit of the team, much of their day is spent on the phone or Microsoft Teams.

Stanley estimates RELX sifts up to 1,000 potential purchases a year. About 60% of prospects come in via investment bankers and brokers with an asset to sell. The balance have been spotted by the managers in each of the group’s four divisions who think they might make a good fit.

The team reviews them in tandem, or else managers would never have the time to manage their existing business. That tight integration, from which a combined view of an asset develops over time, is where Stanley thinks they differ from similar functions at other FTSE100 firms. “We never want to be in a position where the commercial team is in one place, and we and our external specialist advisers are in another,” she says. “It would be ridiculous for a central team to second guess the deep domain knowledge of those commercial managers.”

When an asset has cleared their threshold, every prospective deal, no matter how small, goes to RELX’s chief executive, Erik Engstrom, and Nick Luff, the chief financial officer, before a formal offer is made.

A paper is jointly prepared and sponsored by the business unit head. It must summarise the opportunity, cover what the asset does, its specific market, products, data set, how it would augment RELX’s strategy and add value for customers, plus include detailed financial modelling, growth prospects and development path. Then it is presented to Engstrom and Luff and discussed among a small group.

“Our review of any opportunity will focus on how it fits with our existing strategies, what the business would bring to us and how being part of RELX will improve the business being acquired. We will look at how we would run the acquired business and how it would be integrated. We assess the risks, alongside the upside potential,” says Nick Luff.

The statistics prove that the filter is working. From the estimated 20 papers the senior duo see annually, typically 15 deals will get done. Of course, not everything gets over the line.

"When we don’t proceed, it’s typically because the team have concluded the fit isn’t as good as we had initially thought. Or that there’s a better alternative, either another business to acquire, or a way of developing the opportunity or capability ourselves," says Luff who joined RELX from the energy group Centrica in 2014. "Even the deals we don’t do are valuable, because we learn from them. We see what other companies are doing, assess our own capabilities against other players, and have a close look at market growth potential in different areas,” adds Luff.

"If we are ready to proceed, we’ll have a debate about how much we are prepared to pay and how we’ll manage the auction process. It’s all about setting the right approach to maximise our chances of success.”

“If we are the natural owner, there will be substantial synergies in both revenues and costs and the acquisition will add significant value to us and to the acquired business. Given these substantial synergies, the business should be worth more to us than anyone else, so we can pay the best price. Which we have to of course if we are going to be the successful bidder, particularly in an auction situation.”

Divestments are different, and RELX doesn't do very many anymore. They stem purely from housekeeping within the divisions. Is this asset running out of growth? Will it struggle to attract investment versus other parts of the business?

Here, Stanley only uses external advisers when buyers are far flung or the field is particularly specialist. And the final decision is not purely driven by price, but finding a good fit too. “Businesses are worth what the market will pay,” she adds. “And there are often considerations around ensuring security of employment for our staff which can be more important.”

“We’re looking for acquisitions that fit with our existing strategies; businesses that we are the natural owner of, because they can enhance and accelerate our organic development.”
Nick Luff, CFO, RELX

When Irene Walsh strode out onto the stage at the Bill Graham Civic Auditorium in San Francisco in September 2015 it was a pinch-me moment. The design chief had been chosen to appear at one of the highlights in the consumer electronics calendar, the hotly anticipated unveiling of technology giant Apple’s latest device.

Months earlier Walsh had been taken into the secretive firm’s trust and on the day itself she sat next to Apple chief executive Tim Cook having her stage make-up applied.

The company was eager to showcase the functionality of its new gadget, the iPad Pro, to best effect. Previewing the Complete Anatomy app, Walsh did just that. On a giant screen, she zoomed in on a detailed 3D image of a knee, showing how to overlay flexing muscle, a skin layer, and then cut it all away, next earning a round of applause for modelling the effects of arthritis.

“That's what Apple loved,” says Walsh. “It was something they could put in their app store that provided expanding knowledge on a topic that's usually reserved for those who attend very expensive medical schools.”

Not only did her appearance show off the app, but it threw an international spotlight on 3D4Medical, the small Irish company that created it.

Thousands of miles away in Oxford, UK, Elizabeth Munn was watching. Elsevier’s managing director for health content outside North America – whose brands include the world’s top anatomy texts Netter’s, Gray’s and Sobotta – already knew about the app. She marvelled at students’ long-held affinity with books but knew from her own growing digital income that learning was changing.

“Anatomy is genuinely the cornerstone of teaching medicine so when you see a phenomenal idea emerging, you know we have to be there,” Munn says.

The roots of 3D4Medical lay in FDS, a company that made software for training pharmaceutical salespeople. When it went into liquidation, its founder, John Moore, began another venture based around the 3D imagery his team had created. Expanded to 18,000 high-resolution graphics, it earnt royalties through photo libraries Getty Images and Corbis, but a slowdown prompted him to pivot again, creating a suite of mobile phone apps just as Apple’s iPhone took off.

The stage appearance of Walsh – who was recruited in 2013 to improve user experience - marked the next big shift. Earlier apps had been one-off purchases but Complete Anatomy was subscription-based, enabling the firm to build a relationship with users. “Students were bringing it to class and saying to their educator, “I'm using this, can you use it?”” she says. Offering subscriptions to medical schools followed.

Meanwhile, Munn had explored whether Elsevier – RELX’s science and medical arm - could create a similar 3D database but found it would take the best part of three years. Initially put off by 3D4Medical’s consumer focus, now it was targeting institutions, the synergy was clearer.

When Elsevier bought 3D4Medical in November 2019, Walsh became director of product, design and content. She valued the gradual phasing into the rest of the group for her and her 70-plus colleagues. Rather than a barrage of introductions in the first month, “we were quite protected, with three really solid points of contact to reach out to when questions arose,” she says.

What has changed is today they have the financial stability that any start-up serving the very seasonal academic market craves. Investment is up by two-thirds and where that new money is spent is guided by Elsevier’s broad market insights – and its effectiveness is closely tracked too. The team has moved back to the centre of Dublin and into a cluster of like-minded tech firms.

It quickly became clear how easy it was for 3D4Medical to tap into Elsevier’s academic expertise, for example finding experts to help with a project to vary the skin tone of its models so that the default option is no longer a white male.

And introduced within six months of the deal closing was an addition to Complete Anatomy. Next to its own 3D imagery for radiology students, 3D4Medical added some of the 200,000 2D images collated by STATdx, a new sister company that supports clinical decision-making in that field. More recently, it launched the most advanced 3D female anatomy model.

Now Munn plans to tap Walsh’s experts as she builds a technology team for Elsevier’s new division, global medical education, of which she has become managing director. The key to a successful acquisition is to cultivate what attracted the buyer in the first place. “You might say one of my roles was as chief protection officer,” Munn says. “I had to ensure we grew and invested in the expertise which we didn't have replicated within other parts of the organisation.”

Read more about RELX's strategy in this story.

Irene Walsh, senior director of product management, 3D4Medical, Elsevier

Complete Anatomy's new full female model provides more insight into the workings of human anatomy and creates gender parity in our understanding of the female and male bodies. "Creating the 3D female model was so important to us because of the societal impact we knew it would have. It was about stepping up and being able to contribute something really positive to the world of learning anatomy. It was about being part of a company like Elsevier, whose overall goal is to drive better patient outcomes, reinforcing the feeling you’re contributing to something bigger." Irene Walsh