S&P Global to acquire IHS Markit in an all stock $44 bn deal
By: Aidas Kaveckis, Rachel Tang, Jasmine Karimzada, Solomon Wong
On November 30 2020, S&P Global Inc agreed to buy the London-based financial information company IHS Markit in an all-stock $44 billion deal, the biggest corporate acquisition of the year. Through this acquisition, S&P Global is set to become the third-largest data provider globally, thereby increasing the benchmark competition in the market data industry.
Company Details: S&P Global Inc
Standard and Poor’s (S&P) Global Inc is an American publicly traded corporation, offering services to people worldwide. Its primary areas of business are financial information and analytics. It is also the parent company of S&P Global Ratings, S&P Global Market Intelligence, and S&P Global Platts, CRISIL, and a majority owner of the S&P Dow Jones Indices.
Headquarters: New York, United States
President and CEO: Douglas L Peterson (Since 2013)
Number of employees: 23,000+
Market Cap: $78.151 billion
Enterprise Value (EV): $79.41 billion (10 December 2020)
LTM Revenue (Up Until June 2020): $7.31 billion
LTM EBITDA: $3.726 billion
LTM EV/Revenue: 10.86
LTM EV/EBITDA: 21.31
P/E Ratio: 32.56
Company Details: IHS Markit
IHS Markit is an American-British information provider, acting as a leading source of information and insight in critical areas like financial markets, transportation, and resources that shape today’s business landscape. They are a top provider of data and analytics to corporate and sovereign clients and help clients improve efficiency, outpace competitors, and drive growth.
Headquarters: London, United Kingdom
President and CEO: Lance Uggla (Since 2018)
Number of employees: 14,000+
Market Cap: $37.68 billion
Enterprise Value (EV): $42.63 billion (10 December 2020)
LTM Revenue (Up Until June 2020): $4.301 billion
LTM EBITDA: $1.776 billion
LTM EV/Revenue: 9.912
LTM EV/EBITDA: 24
P/E Ratio: 39.01
*However, IHS-Markit merger took place in 2016
The merger between S&P Global and IHS Markit consists of a number of strategic and financial benefits to both firms. Firstly, the combined company would have the potential to deploy above $1 billion annually on technology and honor their commitments to remain on the cutting edge of technology and innovation. Furthermore, the merged entity will be differentiated in areas like ESG, Climate, and energy transition which represent almost $20 billion of the Total Addressable Market. Secondly, with distinguished core competencies, they would be able to serve a diverse range of customers across financial services, corporates, and governments with advanced databases and intelligence.
The expected Financial Benefits include the combined company expecting to generate an annual free cash flow exceeding $5 billion by 2023 and a targeted dividend payout ratio of 20-30%. Mr Uggla, IHS Markit CEO, also reinforced these points by saying “This transaction is a win for both IHS Markit and S&P Global as we leverage our respective strengths in information, data science, research and benchmarks"
There has been a trend in stock exchange firms acquiring market analytics firms as they seek to expand their digital competencies. For example, earlier this year, we saw LSEG acquiring Refinitiv and Nasdaq acquiring Verafin. Looking at these deals, one may wonder what are key drivers behind such a movement?
Some points have been listed as follows to further elaborate upon this question:
1. Stock exchange firms are transforming themselves from pure stock market operators to technology solution and data providers.
As the profit margins in traditional stock exchange operation businesses are growing thinner due to stricter compliance rules and decrease in market transaction fees, stock exchange companies are diversifying their business to other areas, such as FinTech, trading technology, and data subscription services. Why? These technology-related fields have higher margins, more runway for growth and most importantly, it brings recurring revenue for stock exchange companies, which adds stability to their business in light of the higher market volatility.
2. Covid-19 has accelerated the demand for data analytics in the financial service industry.
During the pandemic, companies have seen increasing challenges to the operations of their business, and 69% of C-suite executives are investing in more technology to increase their decision-making capabilities. Because of this, demand for market analytics services, in ESG, climate and energy transformation, technology, alternative data has grown significantly. As we saw before while discussing the rationale, this is one area which represents about $20 billion of the total addressable market. Therefore, stock exchange companies are seeking to expand their client reach through M&A and to capitalize on this opportunity.
3. Increased competition among stock exchanges in data analytics and growing need for scale.
As of 2020, 43% of S&P Global’s revenue is now coming from its subscription business, while its other competitors, LSEG and Nasdaq’s revenue from information services are roughly at 42% and 33% respectively. Hence, there is more competition between stock exchange firms in the data analytics market, and through M&A, they are building scale in this specific area to compete against one another.
Synergies and other advantages
Through the largest deal of the year, S&P Global hopes to create a financial data powerhouse that would rival Bloomberg, the market leader for the provision of financial data. The reason for this is that the deal would combine S&P Global’s core ratings business with IHS’ provision of complex financial information including derivatives.
Overall, the combined business is expected to generate an annual revenue of $11.6bn.
In 2019, close to 30% of the S&P Global’s revenue came through financial and market data. IHS Markit, on the other hand, collects complex pricing and reference data on a range of asset classes, as well as financial indices and valuation services, which is not easily available. It also gathers derivatives data, e.g. credit default swaps. This creates value for S&P by becoming more competitive in the market by offering a larger range of complex financial data to clients.
According to the FT, there are significant cross-selling opportunities worth $350m available through this deal. One such opportunity is an integration of the energy data offerings from IHS’ Energy and S&P’s equivalent Platts platform.
In addition to this, there is expected to be $480m of annual cost savings. The S&P Global plans to reinvest these savings (and its revenue) into investment in technology, amounting to $1bn per year, which was one of the rationale points as highlighted by company CEOs.
The combined business will experience an increase in scale that will allow it to grow in adjacent businesses such as ESG and alternative data (markets of $20bn, growing at least 10% annually), reinforcing the strength of its core business, differentiating its business and diversifying its income streams.
Risks and uncertainties
Within this massive deal, there are very few scenarios which could present a serious risk. However, we can highlight two.
Firstly, the sheer size of the acquisition will probably trigger a tough opposition from antitrust enforcers. Even if both companies have stated that the probability of a regulatory scrutiny is low, the oversized market power of the resulting firm could be a big risk to other competitors. Moreover, we cannot miss the fact that LSEG’s deal with Refinitiv has been facing intense scrutiny. And, according to Seth Bloom of Bloom Strategic Counsel, “the deal will run into really tough scrutiny in the Biden Justice Department”. So, in terms of legal risks, this deal could be even worse than the one between the LSEG and Refinitiv. All in all, even though the chances of a serious scrutiny are low, we cannot let it take us by surprise, especially, taking into account the size of the deal.
On the other hand, similar to what happened when Fiserv bought First Data in 2019, this deal could set off a wave of consolidations in the sector. If this ends up happening, it could diminish the positive effects and synergies of the deal. With more financial data and information services companies enrolling in mergers, the newly formed firm resulting from this deal could not fulfil all of its goals and would have to face some tough competition. According to Peter Heckman, a senior research analyst at D.A. Davidson, MSCI, Morningstar, Dun & Bradstreet or FactSet Research Systems, could consider mergers. And we already saw that last year, with Fidelity National Information Services’ $34 billion acquisition of Worldpay.
Nevertheless, the probabilities of these scenarios are very low and, overall, we can expect the fulfilment of the deal and significant positive consequences and synergies for both firms