Index and data provider S&P Global’s proposed acquisition of data vendor IHS Markit has garnered praise from analysts and investors, but has left clients nervous that the deal will not see cost savings passed on to end-users, and will ultimately result in price increases.

The deal—announced earlier this week, and expected to close in the second quarter of next year, subject to investor approval and clearing any regulatory hurdles—will combine S&P’s famous equities index benchmarks with Markit’s fixed income indexes and other fixed-income data; S&P’s CUSIP identifiers with Markit’s Reference Entity Database; and the wealth of legacy IHS information assets with S&P’s data, analytics, and data distribution mechanisms. S&P also owns energy data provider Platts, while IHS Markit has strengths in ESG (environmental, social, and governance) data. Both energy data and ESG are viewed as high-growth areas that, along with alternative data and other “adjacencies”, offer a $20 billion addressable market that is growing at 10% per year.

“ESG data and insights are increasingly important to the markets and our customers, providing crucial information that investors, risk managers, corporates, and governments need to make decisions every day,” said S&P Global CEO Douglas Peterson on a conference call announcing the deal. “This transaction will make the company a premier resource for ESG insights and transparent, robust, and comprehensive product solutions.”

The acquisition solidifies S&P as the third-largest data provider overall. It also sees it leapfrog Refinitiv and Bloomberg in terms of sales to bank clients, with an estimated $477 million in bank sales, versus Refinitiv with $490 million in sales of data to banks, and Bloomberg with an estimated $419 million in data sales to banks, according to research from Burton-Taylor International Consulting. Burton-Taylor believes the union will “challenge” those market leaders over the next decade and “provide greater market intelligence to offer new trading signals and back-office savings for its customers.”

M&A in this industry is rarely beneficial for customers. The most welcome ones are  … where there is not much crossover, such as a data company buying a technology provider. But when one fish swallows another, it just creates more dominance and less end value for clients.

Market data exec at European asset manager

However, other observers caution against direct comparisons, noting that the combination “does not present as a logical competitor to Bloomberg and Refinitiv” because it lacks a large-scale real-time data business. Rather, they say, the deal presents a new avenue for vendor growth—gaining massive scale in “niche” areas without competing in low-margin business like equity terminal sales.

“I think the S&P-IHS deal is interesting … [and] is a good fit; a better fit than, say, IHS merging with Bloomberg, Refinitiv, or Intercontinental Exchange,” says Mark Hepsworth, CEO of data management software vendor Alveo (formerly Asset Control), who previously ran the Comstock real-time business at S&P, which was sold to Interactive Data (now part of ICE). “I don’t think this is about them really taking on Bloomberg and Refinitiv, as … in many cases data vendors are specialists in particular areas and often dominate those. This is more about what they can do with a huge inventory of data and distribution, and making it easy for clients to consume.”

Burton-Taylor also notes that the vendors’ index businesses are particularly complementary, and that the IHS Markit indexes, which bring in around $61.7 million annually—twice that of S&P’s fixed income indexes, though S&P makes around $1 billion per year from its index business overall—will receive “a significant boost from S&P’s brand, sales distribution, and connections.”

Indeed, S&P has identified $350 million in revenue synergies, which it expects to achieve through new products and cross-selling. The vendor has also identified around $480 million in cost synergies—with business overlap and efficiency accounting for 65% of that target, corporate functions and technology accounting for 25%, and real estate accounting for 10%. Sources say those cost synergy numbers are high. However, nervous employees may be comforted by the lack of overlap, and that Markit already operates a very “lean” model, so any “bloodletting” may be limited.

Pricing Power

Even before the deal was confirmed, Deutsche Bank’s analysis of the acquisition identified “significant” cost and revenue synergies, and gave S&P a “Buy” rating, with a target price of $415 (compared to $341.08 on Friday, November 27, prior to the deal being announced, and $326.61 at market close on Thursday, December 3). But while banks’ analysts were lauding the deal, their colleagues in market data departments were less optimistic.

“M&A in this industry is rarely beneficial for customers,” says one market data manager at a European asset manager. “The most welcome ones are  … where there is not much crossover, such as a data company buying a technology provider. But when one fish swallows another, it just creates more dominance and less end value for clients.”

The data manager says similar mergers among exchanges and index providers that have resulted in dominant positions have seen vendors and services become “more expensive and aggressive.”

Douglas B. Taylor, principal of DouglasBTaylor International Consulting—not to be confused with the Burton-Taylor business that is now owned by TP Icap—says the deal strengthens S&P’s hold on the investment banking space, and is an intelligent move for customers and shareholders. “Their combined tools will allow customers to make better decisions. But they are unlikely to get cheaper, because if you have all this in one place, you have pricing power,” Taylor says.

“Markit brings S&P size and pricing power, because it owns a significant piece of the market—and not just in the index space. There is not much overlap, so it’s pretty complementary, and creates more value for customers with a broader offering. But, it also gives them a dominant position, so they can maintain or raise prices,” says Tobias Sproehnle, CEO of index startup Moorgate Benchmarks, who spent almost eight years at Markit between 2006 and 2014 as head of credit indexes and head of cash bond indexes, and whose business partners Gareth Parker and Mark Pralle held senior index roles at S&P and Markit, respectively.

“Where index providers should have put money into creating new products, they’ve instead put effort into refining their commercial models to get more money out of existing products,” Sproehnle says, adding that index consumers are demanding greater customization as strategies such as ESG gain popularity, but also become more subjective and user-driven. “Customers are demanding more flexibility, and that will require innovation.”

Another long-term bank market data management professional expects the combined vendor’s commercial terms to become more rigidly dependent on enterprise licensing models, rather than offering more flexible, metered consumption models.

And a data executive at a European exchange says that the added breadth of content creates a one-stop shop for some data types, which could be beneficial to clients, but acknowledges that the merged vendor’s control of identifiers and classifications and pricing power over certain datasets could prove “problematic.” Since both providers fall under multiple forms of regulation, gaining regulatory approval may also be problematic, this source adds, with the sheer size of the deal potentially attracting regulatory scrutiny.

“I anticipate it will receive more scrutiny than a usual year because of the intense focus of regulators on concentration risk and competition within the market data space,” says Virginie O’Shea, founder and CEO of Firebrand Research, who adds that the vendors may be forced to divest some of these “problematic” assets.

Opportunities

But despite Sproehnle’s concerns about the combined vendor’s ability to innovate in the index space, S&P officials believe its analytical tools, including the technology acquired via its purchase of Kensho—which tags unstructured data to make it easier to cross-reference companies and people for use by trading strategies—will help to create valuable alternative datasets from the Data Lake being built by IHS Markit from the wealth of legacy IHS reports and information services.

“There are a lot of complementary assets, and ways we can get data into our Market Intelligence platform, and ways we can leverage [Markit’s] Data Lake,” said S&P’s Peterson.

There is a massive land grab to become the central platform. It’s all about scale and being the platform for full front-to-back trading.

Brad Bailey, Celent

IHS Markit has already had some success creating new datasets from content within its Data Lake, such as a dataset of auto sales and production data, released in December 2018. “Post the IHS Markit merger, we started a journey to build out a Data Lake with infrastructure provided by Amazon Web Services. That journey has been three years, and the Data Lake is in top shape for this integration. It’s one of the things our teams are very excited about,” said IHS Markit CEO Lance Uggla on the announcement call. Ugglawill serve as an advisor to the company for one year after the deal closes.

“When you combine content in an organized way—structured and unstructured content—and add the data science capabilities of Kensho and our teams, you end up with combinations and decision-making tools that are really unparalleled, and it’s exactly what our customers want in this information period, where content is proving so important,” Uggla added.

Taylor highlights the combination of Kensho with IHS Markit’s data. “With Kensho, S&P has that intelligent data-mining capability, and now it has more data and a tool to help utilize that,” he says. “Beyond the obvious asset that the Kensho acquisition brought, I think the real asset was its talent. That acquisition brought some of the smartest minds in the field onto the S&P staff … so now S&P can use them to do all sorts of other things, and now they’ll have all that new data from IHS Markit to play with.”

Final Piece of the Puzzle?

Despite emphasizing how the deal rounds out S&P’s breadth of coverage, the vendor also hinted at more acquisitions in the future. Announcing the deal, Peterson said the all-share deal allowed S&P to maintain a strong balance sheet and credit profile to allow for “future capital deployment,” while CFO Ewout Steenbergen said the new company will generate annual free cash flow in excess of $5 billion by 2023 to use to accelerate organic growth or to pursue strategic M&A.

One area the vendor might consider for its next acquisition could be an execution venue specializing in the data areas it serves, sources say, which could add transaction revenues, create lock-in to data products, and generate new data and index products.

“Looking at the combined business and who they’re going up against—LSE/Refinitiv, Bloomberg, Intercontinental Exchange—one of the things that’s different is that they don’t have any sort of trading platform. So maybe the next step would be to close that gap … if they wanted a more complete value chain,” Sproehnle says.

And while currently just speculation, it’s speculation that fits a trend observed by others.

“There is a massive land grab to become the central platform. It’s all about scale and being the platform for full front-to-back trading, from idea generation, to portfolio construction implementation, to trading and execution, to middle-office processing, to back-office regulatory reporting—all of these services combined,” says Brad Bailey, research director, capital markets at Celent. “If buy-side firms are comfortable with a single vendor and getting everything they want for security and knowing that these platforms will be open enough if they want to integrate with other applications, this front-to-back perspective will be huge for serving the buy side over the next decade.”