On November 30 2020, financial data provider S&P Global decided to buy financial analytics company IHS Markit for $44bn. The deal will create a financial data and analytics giant, well-positioned to compete with Bloomberg — the current market-leader in the financial data provider space. The takeover follows a series of major acquisitions in the financial data provider industry; London Stock Exchange purchased Refinitiv for $27bn in 2019, and Intercontinental Exchange (owned by the New York Stock Exchange) bought US mortgage data provider Ellie Mae for $11bn in August this year. Notably, this deal is set to be the largest all-stock deal of 2020 — demonstrating the increasing value of data and analytics within the financial industry.
Formed in 2016 through a merger between American-based IHS and British-based Markit, IHS Markit is a financial analytics and software company, with a market capitalisation of $36.9bn and P/E ratio of 40.43 (as of Dec 2). IHS Markit supplies economic data and forecasts to many of the world’s largest financial and energy companies, including commodities, auto, and maritime data. S&P Global (Market Cap.: $80.2B, P/E ratio: 33.4) is one of the world’s major credit rating agencies, and manages globally-recognised indices, such as the the US home prices index, the S&P 500 market index, and the Dow Jones Industrial Average.
The transaction has an enterprise value of $44bn, including $4.8bn of net debt. According to Bloomberg data, the enterprise value translates into about 10 times IHS Markit’s revenue in the last financial year, and 28.2 times earnings before interest, taxes, depreciation and amortisation (EBITDA). Under the terms of the agreement, S&P Global will pay 0.2838 of common stock for each IHS Markit share, representing a modest 4.7% premium on IHS Markit’s closing share price the day before the deal was announced. Upon completion, current S&P Global shareholders will own approximately 67.75% of the combined company on a fully diluted basis, while IHS Markit shareholders will own approximately 32.25%. The morning after the deal was announced, IHS Markit shares increased by 7% to $99.40, whereas S&P Global shares increased by 2.2% to around $349. The transaction is expected to close in the second half of next year, but is subject to regulatory approval.
Strategically, the deal will enable S&P Global to bolster its data capabilities through gaining IHS Markit’s insight into ESG, climate and energy transition, private assets and SME, counterparty risk management, supply chain and trade, and alternative data — representing $20bn of total addressable market altogether. Moreover, S&P Global and IHS Markit’s complementary product portfolios enable the combined company to serve expanded customer use cases in existing and new geographies at scale. Lance Uggla, CEO of IHS Markit, described the transaction as “a win for both IHS Markit and S&P Global”, as it allows both firms to leverage their “respective strengths in information, data science, research, and benchmarks”. Considering that the combined company plans to deploy over $1bn annually on technology, it is evident that this acquisition will position the combined company well to address the growing demand for innovative data analytics and insights within the financial industry.
From a financial perspective, the combined business estimates that the deal will generate $480m of annual cost savings, and $350m of revenue synergies (i.e. cross-selling opportunities). The combined firm also anticipates annual revenues of over $11.6bn, and annual free cash flow of more than $5bn by 2023, 85% of which will be returned to shareholders. The deal is expected to be accretive to earnings by the end of the second full year after completion.
Given the very similar business models and data offerings of both S&P Global and IHS Markit, it may be difficult for the proposed deal to gain regulatory approval. The financial index provider industry is relatively concentrated, with MSCI, S&P Dow Jones, and FTSE Russell (or the “Big Three”) possessing considerable amounts of influence over the passive investment management space. An open letter written to MSCI last summer by US senator Marco Rubio, questioning MSCI’s decision to invest in companies controlled by the Chinese government, highlighted the politicised nature of financial index construction. Since the financial crisis, some financial commentators and regulatory authorities have accused credit rating agencies of not making their decision-making processes transparent enough. Although these debates have largely settled down, a societal shift in attitudes towards the importance of ESG matters means that it may become difficult in the near future for financial data providers to continue making commercial decisions without being scrutinised. The London Stock Exchange Group, after almost a year and a half, is still in negotiations with European regulators on its acquisition of Refinitiv. Furthermore, the London Stock Exchange has already made a number of concessions to persuade the EU regulator to approve the acquisition, including the divestiture of Italian stock exchange Borsa Italiana. It is likely, then, that S&P Global and IHS Markit’s mega-deal will face regulatory scrutiny, and possibly even political risks if politicians decide to bring the world of financial data into the political forum.
The future of financial data
A deal of this magnitude signals the growing significance of data and analytics within an increasingly technological financial industry. The Economist claimed back in 2017 that “the world’s most valuable resource is no longer oil, but data”. Yet, much like the value of crude oil depends on how it’s been stored and refined, the value of data really depends on how it’s been collected, cleaned, and arranged. S&P Global and IHS Markit’s deal appears to take a bold step towards shaping the future of financial data, as management boards on both companies are cognisant of the various methods through which their combined company might realise untapped value within their current data sources and insights. Furthermore, the emergence of machine learning, the cloud, and the Internet of Things present fascinating possibilities for the future of financial data. However, it is possible that the growth potential of the financial data industry may attract unconventional players, who might undermine S&P Global’s market share. For example, fintechs and tech giants will most likely possess unique datasets that could add significant value to the financial (and alternative) data space in the long-term. Moreover, some companies may decide to cut out the need for a traditional data provider altogether. Tesla has already implemented data capabilities within its business model using telematics, with ambitions to provide insurance directly to its customers cost-effectively.
These considerations, on balance, suggest that the financial data provider industry is promising, and S&P Global’s acquisition of IHS Markit is exploiting the growth possibilities of a fast-evolving market. It remains, nonetheless, that S&P Global and IHS Markit may run into regulatory problems in the short-run, and should consider potential competitive threats in the long-run.