When news broke on July 6 that managed-care provider UnitedHealth Group was in talks to acquire a competitor, PacifiCare Health Systems, the market reacted instantaneously. After the merger talks wereannounced at 11:38 a.m., UnitedHealth shares rose briefly from $53.25, then fell to their day’s low of $52.25 before recovering part of their losses.
But it took market participants another 20 minutes to recognize that the news might also affect Medco Health Solutions, a pharmacy benefit manager that works with UnitedHealth. Because PacifiCare has an in-house PBM, it was possible that Medco would lose UnitedHealth’s business if the merger went ahead. At 11:38 a.m., Medco’s shares were trading at $52.80, and they held steady until noon, when the stock began falling to its intraday low of $48.50, before rebounding slightly. Traders quick to recognize the Medco link could have profited by selling the company’s shares before noon. Later that day Medco issued a press release quoting UnitedHealth’s CEO affirming that UnitedHealth had no intention of changing its relationship with Medco.
Making such connections is the essence of savvy trading. Investors have long used financial databases or the U.S. Chamber of Commerce’s standard industrial classification code to identify a company’s suppliers, distributors, customers and competitors. Now technologists are creating software systems that help investor automate such “food chain” investing.
San Franciscobased Revere Data offers a relational database that systematically helps investors make food chainbased stock selections. American Stock Exchange specialist Boris Lvovsky of Weiskopf, Silver & Co. integrates Revere’s product into his real-time trading system. “It gives me information on what a group is doing, to confirm a trading idea or see how news is impacting an entire sector and how stocks are trading relative to news in the group,” Lvovsky says.
Meanwhile, at Credit Suisse First Boston, equity analysts are testing a new system developed jointly with Relegence Corp., a New Yorkbased news-filtering software company, that watches for news items like the UnitedHealth-PacifiCare merger talks and quickly maps out all the companies that might be affected.
CSFB wants to harness the knowledge of its many analysts to find lateral relationships, says Stefano Natella, global head of equity research. The firm’s equity analysts have identified food-chain information for every publicly traded U.S. company: suppliers, customers, competitors, joint venture partners and equity investors. This data has been linked to the Relegence platform, which monitors, indexes and filters tens of thousands of live streams of structured information, such as news wire reports, and unstructured information, such as pages from competitors’ Web sites.
On July 6, the day the UnitedHealth-PacifiCare story broke, users of the CSFB-Relegence system would have been able to check two simultaneously displayed windows: one scrolling news on UnitedHealth and the other -- a customized screen -- displaying information on the company’s food-chain relatives. Users could have screened both the primary stock and its relations by various criteria, such as ticker, product and degree of relevancy.
Revere’s offering was developed in the late 1990s, using a tree structure to map companies making similar products, says CEO Glen Wolyner. This allowed, say, biotechnology investors interested in AIDS or multiple sclerosis drugs to diversify investments beyond a single company.
Revere has expanded its database to cover all aspects of a company’s food chain. Using a staff of U.S. analysts who a team in India that scrutinizes news announcements, Revere constantly updates information on companies and their relationships, primarily through the use of public records. The data can be piped into a user’s own applications. “Why not make your data as smart as possible?” asks Wolyner.
Weiskopf’s Lvovsky says he uses Revere to hunt down information about companies that are similar to, or competitive with, those he trades. “It allows me to quickly find 20 other layers in that field, and it gives me nformation on what the group is doing,” he says.
Revere will soon be getting more competition. CSFB has decided to offer its product, which it has been testing since April, to its buy-side customers; it’s still working out the details of how the product will be marketed. CSFB and Relegence may create separate versions for the bank’s traders and sales representatives. As these products become more widely used, food-chain investing may turn up on the menu at more and more institutions.
