The Race for Data
Movements Among Stock Marketplaces
Q4 2020 and Q1 2021 has seen two large deals take place involving Standard & Poor’s (S&P) and the London Stock Exchange (LSE) stepping up efforts in gaining a competitive edge against rivals such as CME Group and Bloomberg in order to provide global financial data to markets. S&P Global is a corporation which provides financial information and analytics. LSE is a diversified international markets infrastructure business. S&P Global agreed to buy analytics group IHS Market for $44 billion. According to the FT, this is the largest deal of 2020. The deal is in line with the firm’s ambitions of creating a financial information powerhouse. Previously, the LSE had agreed to buy Refinitiv in August 2019 and the Intercontinental Exchange, Owner of New York Stock Exchange (NYSE), bought US Mortgage data provider Ellie Mae for $11 billion. All of these deals involve gaining access to data providers which will help firms like LSE and S&P gain market share and compete with Bloomberg.
The chart above shows the reaction of shares in LSE after the acquisition was approved by competition authorities in Brussels on Jan.13,2020. Markets reacted positively to the announcement. The CEO of the London Stock Exchange Group, David Schwimmer, commented on how both companies have provided data, analytics, and tools for investors to make decisions, as well as the stewardship of clearing houses used to manage risk and capital and together, they can build on those foundations to innovate and provide value to customers.
Shares in IHS Market jumped 7% while S&P Global rose by 2.2%. Investors liked the pure play capabilities of both firms and as a result reacted positively to the deal. It was also the group’s largest ever acquisition and a signal of intent of the firm’s plans to compete with Bloomberg as the leader for financial information. The acquisition also cements S&P’s spot as the third largest global market data provider behind Refinitiv and Bloomberg representing about 7.9% of market data industry’s revenues. All these reasons increased share prices of both firms.
Benefits and Drawbacks of Acquiring Financial Data Firms
IHS Market provides a lot of synergies to the deal. The first synergy it provides is the enhanced product portfolio it brings to S&P Global. Some types of financial data where IHS can help its new parent company gain an advantage are fixed income indices, transportation sector data, and pricing data of corporate and sovereign bonds. This is something which S&P can leverage considering these types of data haven’t achieved sophistication similar to stock market data. With more borrowing, governments are likely to issue more bonds and investment firms will look to firms such as S&P to provide them with the necessary data to help with investment decision making. Refinitiv is arguably more established than IHS and help transform the LSE’s data capabilities.
Another revenue synergy IHS along with other companies S&P has previously acquired is improved trading platforms which can help increase market share. High frequency trading and quantitative strategies are constantly being used to generate returns for investors. Hedge funds are delving into quant-based strategies to take advantage of arbitrage while applying an unconventional way of investing. Often, for these arbitrages to be taken advantage of, data must be updated in terms of milliseconds. A combined HIS-S&P platform can improve the capacity of the technology to constantly churn out live data to traders due to the R&D capabilities both firms possess. This can lead on a lot of firms to switch to S&P and IHS terminals instead of Bloomberg which can bring additional revenue to the combined entity. Similarly, Refinitiv can help the LSE attract more investment into the marketplace due to confidence in the stock exchange arising from enhanced data capabilities which suits high frequency and quant based traders.
The possibility of integration is certainly an exciting one for investors and people involved in finance. However, is yet to be seen how S&P incorporates IHS. Previous acquisitions such as Panjiva and Kensho Technologies have yet to be fully integrated. Ensuring a smooth transition will be costly as consultants and advisors will need to be hired. Another possible way integration costs will build up is the way integrated product offerings will be offered. Combining software and technology requires a large R&D budget as a lot of brainstorming will needed to be done to ensure quality control and delivery. However, I believe S&P is a well-established firm to get this done and firms like Apple and Facebook have acquired tech companies and ensured smooth transitions in product offerings and corporate structure. S&P is arguably a much more mature firm and has experience in achieving successful integrations. The LSE can keep Refinitiv separate while incorporating some inhouse programs to leverage its data against other stock exchanges.
A Case of Shareholder Value Creation
S&P are ensuring they adapt to the information age by acquiring an ‘information company’. Not only will this help in increasing market share, but it will also allow S&P to provide data services which it previously has struggled to deliver. In addition, it gives both firms the necessary standing in terms of financials and technical prowess to cater to shifting trends in the trading and investment management industry. Due to these reasons, I believe the deal will benefit shareholders in the long run and opens up the realm of Bloomberg no longer being the leader in financial data.