As revenues derived from traditional businesses are declining, and regulators and consumers are increasingly pushing back against market data fees, exchanges are looking for tie-ins that will diversify their businesses. As a result, exchanges have been increasingly turning to the traditional vendor community to round out their offerings, through acquisition and partnerships.

On Friday, the Financial Times broke the news that another blockbuster deal might soon be in the books: the London Stock Exchange Group (LSEG) is in talks to buy Refinitiv in a deal valued at $27 billion (£22.1 billion). A merger of the massive bourse and the data giant would form one of the largest technology companies in Europe—if regulators allow it.

Currently, funds managed by Blackstone own 55% of Refinitiv, while Thomson Reuters owns 45%  (Prior to its buyout by Blackstone and affiliates, Refinitiv was the Financial & Risk business of Thomson Reuters). Refinitiv shareholders would own 37% of the enlarged group. Combined, the firms would be the largest listed global financial markets infrastructure provider by revenue, with a joint annual revenue of over £6 billion ($7.3 billion) in 2018, according to a press release that had to be cobbled together on Saturday following the initial reports.

The industry is consolidating as companies seek to offer one-stop-shop services. On the exchange front, one only needs to look at the Intercontinental Exchange’s acquisition of Interactive Data, Nasdaq’s purchase of eSpeed, and the CME Group’s deal for NEX as examples.

It is far from guaranteed that this deal will be approved by the regulators—for example, there’s the tricky question of whether an exchange can offer services that connect to competitors’ data—but for the time being, this deal points toward broader market trends and raises major questions for the LSEG and Refinitiv. Yes, this is clearly a major play by LSEG to build out its market data offering, but there are other tech and people aspects of the deal that can’t be ignored.

For instance, while there are clearly complementary products between the two, Refinitiv has a wide array of services that will not easily fit in with LSEG’s offering. Furthermore, if you’re a talented developer on the Refinitiv team, will you be willing to go through another acquisition so soon after the last major acquisition? Also, with any acquisition, there’s usually some cost-cutting involved, as well as the need to identify areas of organic growth that meet publicly-announced expectations—where will all of that happen?

There are many questions that will arise from this deal over the coming months, not least of which is whether it will actually get approved—lest we forget the failed merger between Deutsche Borse and LSEG. WatersTechnology spoke with several industry participants to get an early preview of what might come.

‘Herculean’ Task

“The core of Refinitiv’s business is selling trading platforms, data, data management [services] and data analytics [platforms] to the sell side,” says Mack Gill, COO of Torstone Technology, and previously CEO of the LSEG’s technology subsidiary MillenniumIT from 2013 to April 2017. “So it is interesting to see a financial market infrastructure provider like the LSEG extend its platform and … portfolio out of core exchanges into the sell side. That is another part of the strategic logic that you are seeing here with this deal.”

While the market data component is the major piece to this deal, Virginie O’Shea, research director at Aite Group, says that Refinitiv’s compliance assets—including its sanctions database World Check—will also fit in nicely with LSEG’s services.

“They tend to focus on reconciliation and regulatory reporting; something like the [LSEG’s] UnaVista business might fit with the compliance aspects of Refinitiv,” she says.

The deal could also really benefit Refinitiv’s tax and risk offerings, O’Shea adds. “World Check is a hugely important part of the business that the LSEG will want to get its hands on, and could expand it by adding it to the regulatory reporting stuff LSEG is doing,” she says, especially considering Nasdaq’s 2010 acquisition of Smarts and its work building out its KYC/AML offerings.

While there are obvious synergies, should the deal be approved, the firms will have to do a lot of work fitting multiple businesses together. The LSEG is siloed, analysts say, with many different departments and independent platforms that don’t necessarily communicate seamlessly.

The big challenges for the LSEG will be convincing the market that it isn’t simply increasing prices—more services means heftier price tags—to drive growth, and will not stifle investment in innovation and services to support profits, say sources at competing firms. Additionally, even if this deal is approved, there will be numerous regulatory hurdles that will have to be overcome—which usually means concessions—and a reorganizing of the workforce and integration of platforms before the benefits of a combined entity can truly be felt. That can be challenging enough under normal circumstances, but it becomes even more complex when you consider that a similar effort was already underway at Refinitiv following the Blackstone-led-consortium acquisition.

Refinitiv declined to comment for this story. The LSEG said the exchange had nothing to add to its initial public comment.

Gill notes that while it’s great to have a robust data offering, it’s also key for those platforms to be able to talk to one another and be streamlined across the organization to deliver that data to customers. Without that ability to share data, you lose the economies of scale.

“So now you are adding Refinitiv, which has another three or four major businesses that themselves are relatively independent, because again they were bought together by acquisition. So there are an awful lot of moving pieces in this new entity that are in different businesses, in different markets; they are on different technology-specific management teams,” Gill says.

The integration challenge will be “Herculean”, Gill says. “They have signed up to some pretty big numbers—$350 million I saw as a cost-saving target. That is a big number to hit. That is a long, multi-year challenge to look for those opportunities.”

And, again, it can’t be overlooked that the trickiest part of the merger will be gaining regulatory approval around Refinitiv’s Enterprise Platform, its data management and market data distribution business, Aite’s O’Shea says.   

“The Financial Conduct Authority and European Commission have to make a decision on whether an exchange can offer services that connect to competitors’ data. This is going to be a bit of an awkward thing to deal with. The LSEG would have to [put a] Chinese wall [around] the enterprise platform business as a separate unit,” she says.

Dollars and Sense

While the deal came out of nowhere—leaving sources at competing tech companies “trying to get their heads around it right now,”—it also makes sense.

With this deal, the LSEG is announcing its bid to become a definitive player in the data provision and distribution world, but the acquisition would also see the bourse take over other functions in trading, risk management and regulatory reporting.

The deal would bring together under one roof a set of world-class platforms for trading different asset classes, Gill says.

“What we are seeing in financial markets is much more of a need and an appetite for integrated cross-asset trading and with technology that can manage cross-asset trading much more efficiently,” he says. “What I mean by that is being able to share margins, share collateral and manage your risk across all your trading operations, so not just equities but fixed income and derivatives and foreign exchange. That is increasingly what market participants want to see.”

The industry is consolidating as companies—exchanges, vendors, financial institutions and other players—seek to offer one-stop-shop services. On the exchange front, one only needs to look at the Intercontinental Exchange’s acquisition of Interactive Data, Nasdaq’s purchase of eSpeed, and the CME Group’s deal for NEX, to name a few, as examples. One could also look at LSEG’s acquisition of fixed-income platform MTS as an example, and sources say that Refinitiv’s FXall platform and its links to Tradeweb are major attractions in this deal for LSEG as it tries to expand its offering.

In the past, the old competition was between the data stalwarts—Bloomberg versus then-Thomson Reuters, IHS Markit, FactSet and others—but meanwhile, exchanges have been involved in an intensifying arms race centered around building value through OTC execution and proprietary data (especially indexes) and distribution channels.

Additionally, the fact that it was the LSEG making this move should not come as a surprise, Gill says, as CEO David Schwimmer, who was brought on in 2018 after a 20-year career at Goldman Sachs, has made a living in the M&A space.

“When the LSEG brought in David Schwimmer, I think there was an expectation that his main focus was going to be deal-making,” Gill says. “When you bring in a Goldman M&A banker to be CEO, that is clearly part of the game plan. He was very clear in public statements earlier in the summer that doing M&A in the exchange space was challenging—so, in hindsight, this… is logical in the sense that the LSEG has been diversifying out of its core exchange business for some time.”

Another question raised after the deal was announced was why Blackstone would flip Refinitiv so soon—the spinoff from Thomson Reuters only closed in October 2018. Dan Connell, managing director of market structure and technology at Greenwich Associates, says the deal looks like easy money for Blackstone.

“I remember Blackstone valued Refinitiv at $20 billion at the time of their acquisition. Since then, Tradeweb has gone public, so that was positive for Blackstone. Blackstone’s business is not market data—it’s financial transactions. If you look at the valuation here—$27 billion—plus the Tradeweb activity, that seems to be a good financial position for Blackstone,” Connell says.

Ultimately, though, what often gets forgotten after these types of big acquisitions is the people. Yes, there are new technologies, services, integrations and tools to be offered, but managing culture and making sure to both retain talent and create an environment that will be inviting for new prospects will ultimately decide if the acquisition is a success or not.

Connell believes that on this front, Blackstone has had a positive influence on Refinitiv that can carry forward.

“Refinitiv itself has undergone a bit of a cultural evolution ever since the Blackstone deal,” he says. ”We have seen them become a bit more entrepreneurial, there has been more of a call to action within Refinitiv that I think both employees and the market have found to be exciting. Can that continue in what will now be a much bigger and broader organization within the combined entity? When you have a lot of pieces up in the air and teams are being required to fit together, that can spark more innovation among new organizations.”

With additional reporting by Max Bowie and Anthony Malakian.