Adapting to Customer Needs
As the new IT capabilities began to gel, Instinet executives also gained eye—opening insights into its customers' needs and expectations. Instead of looking at customers' businesses as their customers see them, Instinet had been forcing customers to adapt to its internal IT organization. Some broker/dealers wanted nothing more than a fast, efficient, reliable network. Others, mainly institutional investors wanted added functionality tailored to their unique circumstances. With very different customers willing to pay for different levels of service, the company came to a stark recognition that it was really in two businesses, not one. If Instinet and Island were to thrive, they had to be separated.
To extract the highest value from the revived divisions, Reuters decided to sell Island to Nasdaq, where Island was folded into the over—the—counter market's SuperMontage electronic commercial network. Island, which had been acquired for $508 million in Instinet shares in 2002, ended up fetching a cash price of $2 billion. At the same time, the reinvigorated Instinet division, now focused on institutional clients, was sold to Silver Lake Partners, a private equity firm, for $208 million. In all, the sale of Instinet ended up netting Reuters' shareholders $1 billion, value that was created by renewing the division's core businesses with rediscovered capabilities.
Capabilities are different from other kinds of hidden assets a company possesses because, at least in theory, they are usually also available to rivals. The special chemistry that's created by the unique mix of capabilities gives them their value. By unlocking that chemistry to discover a hidden asset in Island's core IT capabilities and systematically putting them to work, Instinet was able to breathe new life into a business that had lost its way.
Chris Zook is co-head of the Global Strategy Practice and Rudy Puryear is a partner and head of the Americas' IT practice at Bain & Co. Senior Advisor David Shpilberg contributed to this article.