IHS Markit takeover signifies data is new oil
S&P Global hopes purchase will help it compete with likes of Bloomberg empire
When Standard & Poor's hooked up a Datatron computer to Wall Street's stock ticker machines to launch a continuously calculated index of America's biggest companies in 1957, it arguably signalled the beginning of finance's electronic era.
Monday's announcement by S&P Global that it has agreed to buy IHS Markit — the large London-based financial analytics company — for US$44 billion encapsulated how data is now to the financial industry what oil is to the industrial economy.
Separately, both S&P Global and IHS Markit are major players in the business of collecting, refining and piping information that power chunks of modern finance.
The former is big in the stock market index business, credit ratings and energy analysis. The latter boasts a strong position in debt market and derivatives analytics and a host of corporate research in areas like transportation, aerospace and trade.
Combined, they might hope to compete with the likes of Michael Bloomberg's eponymous empire, whose pricey terminals are ubiquitous on Wall Street; Refinitiv, which is being acquired by the London Stock Exchange for US$27 billion; and newer challengers like Intercontinental Exchange, the acquisitive owner of the New York Stock Exchange that bought Interactive Data for US$5.2 billion in 2015 and Ellie Mae for US$11 billion earlier this year.
“Cleaning, processing and managing data using technology to enhance the speed and processing power, and then putting the tools in the hands of decision makers is what makes an information age powerhouse,” Doug Peterson, S&P Global's chief executive, said in an interview.
Information has always been central to the workings of financial institutions, whether a Swiss private bank, Boston money manager or a City of London investment bank. Jack Treynor, a prominent financial academic in the 1960s, once quipped that “you may not get rich by using all the available information, but you surely will become poor if you don't.”
Former Citicorp CEO Walter Wriston observed that “information about money has become almost as important as money itself.”
The emergence of artificial intelligence techniques, cloud computing and the mounting digitalization of vast tracts of global industry means that more is being done with more data than ever before.
Although data-is-the-new-oil is a cliché, “there's an element of truth to it,” said Robert Iati, a director at Burton-Taylor International Consulting, a unit of TP ICAP that tracks the space. “Data is a bit like crude oil in that it's ubiquitous and cheap to acquire and store. It's more about how smart the analytics are.”
Fees for raw financial data are under pressure almost across the board, but with firms consolidating and moving up the value chain, investors are rewarding the biggest with ever higher valuations. Silicon Valley's tech giants have demonstrated the power of near-oligopolistic, broad “platform” business models, analysts note.
“Defence is the new offence,” said Larry Tabb, head of market structure research at Bloomberg Intelligence, the company's own analysis arm. “Given the fee pressure the industry is under, it will be the bigger players that survive and thrive.”
The deal to buy London-based IHS Markit — the product of a 2016 merger — catapults S&P Global into the ranks of the biggest providers of financial data and analytics. Yet the market is still dominated by Bloomberg and Refinitiv, the latter the result of the US$20-billion spinning off of Thomson Reuters's data and analytics arm in 2018. In 2019 they seized 21 per cent and 33 per cent respectively of the nearly US$32 billion annual revenue pool, according to Burton-Taylor Consulting. Combined, S&P Global and IHS Markit only controlled about eight per cent.
However, Iati argued that their deal was more about building up specific niches rather than taking on Bloomberg and Refinitiv directly. “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,” he said.
Deals are nothing new to either party. Markit has grown aggressively by snapping up rivals since its founding in a Hertfordshire barn in 2001, as had IHS. Meanwhile, S&P Global is the result of a long line of acquisitions by its former parent McGraw Hill stretching over a century. In 2011 it split into two separate businesses, McGraw Hill Education and what is today called S&P Global.
In 2015, S&P Global bought financial data company SNL Financial for US$2.2 billion, and in 2018 it acquired Kensho, a buzzy artificial intelligence-powered analytics service backed by Goldman Sachs and Google Ventures, for US$550 million. The takeover of IHS Markit will reduce the dominance of its namesake ratings business, which accounted for more than half of S&P Global's operating profit last year.
“IHS Markit should fit in nicely with S&P's analytics, infrastructure, data and distribution” businesses, said Tabb.
If the all-stock deal goes through, current S&P Global shareholders will own roughly 68 per cent of the company, while IHS Markit investors will own about 32 per cent. The combined group's annual revenues are roughly US$11 billion, and its adjusted earnings about US$5.3 billion, according to Jefferies.
The combination is expected to face regulatory scrutiny in Europe given its size and the data that both companies harbour. S&P Global will glean some insight into any potential fight with the European Commission in the months ahead, when the commission concludes its investigation of Google's takeover of Fitbit. That review has centred on the data the wearable device maker collects and how Google's ownership of that information could distort competition. It is a question that will probably also be asked of S&P Global.
Jeff Silber, an analyst at BMO Capital Markets, pointed to S&P Global's commodity and energy data provider Platts, as well as IHS's fixed income pricing business, as businesses that dominate their respective niches. “They have these types of data sets that, if you're in the vertical, you need that data to do your work,” he said.
Peterson says the deal will allow S&P Global to go gunning for the next big growth opportunities. These include data around environmental, governance and social standards, one of the hottest topics in finance at the moment; bond market benchmarks, where the two firms were already collaborating; and analytics for private markets such as real estate, private equity, infrastructure and untraded debt.
“These are really large growth markets,” said Lance Uggla, IHS Markit's CEO, who will step down to be a special adviser to the combined company for the next year.
Financial institutions are the biggest customers of S&P Global and its major rivals. Yet some industry executives believe that so-called “alternative” data — the digital exhaust from an increasingly wired global economy, ranging from website scraping to shipping invoices — will become increasingly important beyond the finance industry.
“Traditional financial data relies on information from company filings, investor presentations, media coverage, historical market prices, etc, which are now commoditized and easily accessible on financial databases,” Bank of America noted in a recent report. “Alternative data can come from a plethora of sources, including satellite imagery, GPS tracking, transactional data, sentiment analysis of social media and news feed.”
So far, the investment industry is the primary user of alternative data as well, but monthly mentions of the buzzy phrase “Big Data” on calls with analysts, earnings releases and regulatory filings by public companies have rocketed from about 8,000 a decade ago to nearly 100,000 in the first quarter of 2020, according to Sentieo.
Peterson says his industry's next and possibly most lucrative phase will be to collect, clean and sell this alternative data to more traditional, non-financial companies that are keen to glean insights into consumer spending patterns and the business plans of rivals, or to gauge the health of their own network of suppliers and customers.