S&P Global Inc.'s (SPGI) acquisition of IHS Markit Ltd. (INFO) will likely go down as one of the biggest deals announced in 2020. In addition to being a mega-deal of $44 billion proposed as an all all-stock buyout in which IHS Markit shareholders would be paid in SPGI shares, the merging of these two financial data rivals makes a lot of sense on paper. We'll look at the S&P Global and IHS Markit deal and what it means for the markets.
- S&P Global is continuing to invest in its subscription data capacity by acquiring a rival in the sector.
- The companies match up well, with IHS Markit opening the door to deeper service relationships by adding more analytical services to data access packages.
- The combined entity will be better positioned to compete with Bloomberg for a larger share of the financial data market.
The Lucky Couple
Both S&P Global and IHS Markit will be very familiar to investors. For many investors, S&P Global is most closely associated with the S&P Dow Jones Indices – which is majority owned by S&P Global – that compiles and maintains indices like the S&P 500 and collects data and subscription fees from funds creating products off of them. However, the indices business is actually smaller than S&P Global's ratings business, which generated $894 million for the company in the third quarter alone, compared to $234 million from revenue related to indices.
S&P Global has been looking to build out its data and subscription services, as these provide more stable income than the credit rating business, which ebbs and flows on bond issuance levels. And this brings us to IHS Markit, which is a data and analytics solution provider that sees the bulk of its revenue from the financial services sector. Although the two companies do have some points of competition, this merger will be largely complementary, helping S&P Global expand the service mix to established customers to increase recurring revenue unrelated to ratings.
Financial Data Is King
S&P Global may one day be a case study in growing your business by focusing. Throughout the '90s and early 2000s, S&P Global was part of a collection of business lines under McGraw-Hill Companies, which purchased S&P back in the 1960s. McGraw-Hill had a core business in publishing books and textbooks (including this site's only attempts at traditional media), but the S&P segment slowly outgrew the arrangement. McGraw-Hill spun out unrelated business lines and added more data services over time, eventually renaming itself S&P Global in 2016.
The focus on data and expanding subscription services has served the company well as we see more and more data-hungry applications being unleashed on the market. There are obviously the index-tracking investments, including exchange-traded funds (ETFs). There is a lot of stability in being an index provider, and it has served the company well in times when the credit rating business slows – or, as in the fallout of 2008, the credit rating business ends up paying out to settle cases and being timed out of rating certain products.
Thankfully for S&P Global, there is a premium, data-hungry market that will continue to grow in the future. The market is seeing more data-intense trading algorithms and models coming online. Many of these are driven by the growth in quantitative trading, but some are also serving passive investors through robo-advisories and related funds. IHS Markit has the potential to make some of these subscription relationships much deeper, as it will presumably bring its experience to bear in packaging S&P Global's expansive market and rating data into custom solutions for financial services clients.
Moreover, the combined entity will already have analytics and market intelligence solutions tooled to a range of sectors outside of financial services, including transportation, government services, energy, life sciences, chemicals, agriculture, and so on. That being said, the financial services sector will still be the bread and butter of the combined entity for the foreseeable future.
The acquisition of IHS Markit by S&P Global looks very good on paper. If it passes regulatory scrutiny, the deal can be expected to close sometime in 2021. The companies are largely complementary, so a combined entity will be better positioned to compete with the likes of Bloomberg for a bigger share of financial data services. This is important because, as discussed, the appetite for financial data is growing as more data-intensive applications are being unleashed in search of better returns.
In addition to deepening the services offering in the core financial data business lines, a combined S&P Global/IHS Markit has a broader spread of bets in other sectors where their data and analytics expertise can be brought to bear. So, although this deal is huge as far as size and big deals tend to come with outsized expectations, there is a very real chance that this one will live up to the hype.