S&P Global to merge with IHS Markit for $44bn

In what is expected to be the biggest all-stock deal of 2020, S&P Global has agreed to merge with London-based IHS Markit to create a data goliath. At the same time, M&A activity touched a record high in Q3, with more than $1tn worth of transactions, mostly focused on coronavirus-resilient sectors such as healthcare and tech, according to Refinitiv data. Why? Dealmakers have become increasingly comfortable with large transactions in recent months, encouraged by positive vaccine news and the end of the US election.

The S&P Global-IHS Markit deal, valued at $44bn, marks the latest round of consolidation among the finance industry’s largest data providers. In August, New York Stock Exchange owner Intercontinental Exchange (ICE) struck its largest deal ever after agreeing to acquire Ellie Mae, a US mortgage data provider, for $11bn. Even before the pandemic, financial data providers have been on the offensive through M&A, kicking off with LSEG’s $27bn move to takeover Refinitiv last year (August 2019).

Who?

S&P Global

S&P Global is the world’s leading provider of credit ratings, benchmarks and analytics in the global capital and commodity markets. It is the provider of the popular S&P 500 Index, as well as several other global market indices. Its divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Platts.

IHS Markit

Formed out of a merger between IHS and Markit in 2016, IHS Markit is a global diversified provider of critical information, analytics, and solutions for major industries and markets. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well‐informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80% of the Fortune Global 500 and the world’s leading financial institutions.

The Deal

Announced: 30 November 2020

Anticipated completion: second half of 2021

Value: $44bn (all-stock deal, with S&P Global owning 67.75%)

Financial Advisors to S&P Global: Goldman Sachs, Citi, Credit Suisse

Financial Advisors to IHS Markit: Morgan Stanley, Barclays, Jeffries, J.P. Morgan

Why?

Separately, both IHS Markit and S&P Global are major players in financial analytics, through collecting, refining and piping data that "power chunks of modern finance".

Combined, they have the potential to compete with the likes of Refinitiv and Bloomberg, whose pricey terminals are ubiquitous on Wall Street. The deal will group S&P Global's presence in the stock market index business and credit ratings with IHS Markit's strong position in debt market and derivatives analytics (i.e. fixed-income benchmarks and indices, bond pricing), as well as its host of corporate research in areas like natural resources, automotive and engineering sectors. Bloomberg Intelligence's head of market structure research, Larry Tabb also stated that “Defence is the new offence,” and “Given the fee pressure the industry is under, it will be the bigger players that survive and thrive.”

Even though the S&P Global-IHS Markit deal marks the biggest deal of the year, the market will remain dominated by Bloomberg and Refinitiv. As depicted below, the combined IHS Markit and S&P Global will only control about 8% of the market. However, Robert Iati from Burton-Taylor International Consulting (a global leader in financial market data industry analysis) reasoned that, rather than taking on the data giants directly, the merger is more about building specific niches. “The last two decades has been about chasing the two behemoths, but to beat them you need to do it by going after the data of the future”.

Source: Financial Times

Strategic Rationale:

The transaction joins two leading organisations with unique, highly complementary assets to enhance customer value proposition.

Enhanced scale and business mix:

The combined company will benefit from increased scale and mix across core markets with attractive growth adjacencies. S&P Global chief executive Douglas Peterson highlights that "Scale matters because you can get more volume through the same operational set. More customers, more products, more innovation". Both companies underlined that the merger will generate annual free cash flow exceeding $5bn by 2023, which, in addition to the achievable savings, would allow the group to deploy more than $1bn annually into technological improvements. Furthermore, the group will also benefit from balanced earnings across major industry segments and a resilient portfolio, providing additional financial flexibility to pursue value‐creating opportunities. For S&P global specifically, this is significant as it will reduce the dominance of its namesake ratings business, which accounted for more than 50% of its overall operating profit last year.

Peripheral to the core prospects that the combination presents, one interesting component of the deal is the "opportunity to create new products from very valuable datasets in both S&P Global’s bond issuance and IHS Markit’s fixed income pricing and valuation". This could result in additional revenue synergies "outside of the obvious cross-selling opportunity,” Jefferies analysts wrote in a research note.

Financial Benefits:

Synergies and earnings accretion:

The deal has a targeted total run-rate EBITA impact of approximately $680m, to be achieved by year 5. Breaking this down: the combined company expects to deliver annual run-rate cost synergies of $480m, with approximately $390m expected by year 2 end (post-closing). An additional $350m in run-rate revenue synergies is expected from cross-selling and new products. Finally, the transaction is expected to be accretive to earnings by the end of year 2, post-closing.

Enhanced growth profile:

The pro forma company will have 76% recurring revenue and expects to realize 6.5‐8% annual organic revenue growth in 2022 and 2023, balanced across major industry segments.

Uncertainties:

Completing mega-deals is easier said than done. The tie-up between S&P Global and IHS Markit will likely warrant lengthy probes from antitrust authorities due to the overlap between their data offerings. It could also force possible divestitures, as evidenced by LSEG’s sale of Borsa Italiana. Regulators have expressed concerns over the control of data that large organisations hold as it can lead to industry gatekeeping, and the current rapid creation of data ‘supergroups’ and subsequent market shrinkage (as a result of the frenzied consolidation race among financial information services) should raise alert levels. The difficulty that the smaller $27bn LSE-Refinitiv data deal attracted is a strong indication of what's to come.

“Antitrust watchdogs are increasingly concerned about the oversized market power of an ever-shrinking group of data providers” – Financial Times

Reuters reported that "S&P Global may have to divest part of IHS Markit's 'resources' division that focuses on market pricing to secure regulatory approvals for the deal." This is because it includes an overlap between IHS Markit’s oil price information service Opis and S&P Global's commodities and energy information service Platts. However, it was added that it is a small overlap and a sale of parts of Opis would not impact the companies' profitability.