S&P-Markit: It’s Not Over Yet

One impact of the Covid-19 pandemic has been to dampen M&A activity in 2020. However, in September, with the virus still raging around the globe, IHS Markit CEO Lance Uggla got a call from S&P CEO Doug Peterson, proposing to acquire the business. The proposition was apparently so compelling that “to build trust as the principals discussed and explored a possible transaction,” according to a spokesperson for IHS Markit, Uggla flew from London to the US and quarantined for two weeks before meeting Peterson and his team in a socially-distanced office space in Connecticut. By the end of November, a deal had been agreed, and unanimously approved by the management and boards of both companies.

I’ve never worked as an investment banker or dealmaker, but given the scale of both companies, the deal seems to have been agreed upon very quickly—especially considering the level of uncertainty created by the ongoing Covid pandemic. Others agree, depending on who you talk to, noting that both companies appear “highly motivated.”

One reason for a quick negotiation may simply be that the deal was so interesting to both sides that little negotiation was needed; that it represented an obvious win-win for both. Perhaps the timing was right for Uggla, who has expressed interest in other unspecified projects, which may be timely in nature to specific market circumstances. But why—if, as sources say, Markit has been on S&P’s radar as a potential acquisition for several years already—act now when Markit’s valuation is high? Possibly both took note of the trend of exchanges acquiring data vendors and index providers (for example, Intercontinental Exchange buying Interactive Data, the London Stock Exchange Group buying FTSE Russell and then Refinitiv) and wanted to act before an exchange snapped one of them up, or to create a business big enough to rival an exchange-vendor combination.

On that basis, the combined S&P-Markit still lacks a trading platform or venue component, which some say could be the next step in its growth plan. Certainly, if I owned a trading platform, for example, specializing in fixed income and maybe credit derivatives, I’d be polishing that up in the hope of receiving one of Doug Peterson’s compelling phone calls.

Bob Iati, director at TP Icap-owned market research firm Burton-Taylor International Consulting, doesn’t see the merged vendor trying to “swim in those waters. S&P and IHS Markit have defined their respective firms as providers of information. Sometimes that does not align well with being a trading system provider.” But while Iati says the combined vendor can compete successfully by “staying in its lanes,” there is a distinct trend underway among vendors and trading venues, and as more of the remaining players choose that route, options will become limited for those left. The question is, do S&P and Markit want to compete head-on, or carve out a space all of their own that—as Burton-Taylor says in its report analyzing the deal—will “challenge” the current hierarchy of data vendors.

Another reason for reaching an agreement so quickly might be that S&P believed other potential buyers might also be sniffing around IHS Markit.

A spokesperson for IHS Markit says the vendor was not looking to sell, adding that the company had a strong organic-growth track record. “However, once S&P approached, it became clear that it would be a very compelling combination,” the spokesperson says. When asked specifically about whether Markit received or solicited other interest, the spokesperson adds that Markit never comments on any potential discussions but “will always conduct a thorough and robust process to review any opportunity.”

Certainly, the scale of the deal means there are few other players who are in a position to exploit that data, or who are even in a position to absorb a company of IHS Markit’s size. Given the missing transactional element, possibly an exchange such as Intercontinental Exchange (which would see it combined with the former Interactive Data business that comprises ICE Data Services) or CME—or possibly a rival index provider concerned about S&P gaining ground through a Markit land-grab, such as MSCI, whose portfolio and risk analytics Markit just integrated into its thinkFolio investment management platform.

And though the companies agree, shareholder approval may be a wild card. The all-share deal is good for S&P because it leaves a healthy balance sheet for more investment and potential acquisitions. But is it good for shareholders, who might entertain a cash bid at a smaller valuation?

The other wild card is how hard regulators and competition authorities will scrutinize the deal, and whether they’ll rubber-stamp it, or throw any roadblocks in the way.

Though the vendors have limited direct overlap, the combination’s complementary nature does create areas that regulators might view with concern, such as its reference data and symbology assets (RED and CUSIPs)—though the companies may be willing to live with spinning off certain areas if needed to seal the deal. If the speed of the agreement reflects an urgent requirement for data to address a specific market need, any significant delays might make the deal less attractive—as might the prospect of being forced to divest any of the assets that make it attractive in the first place.

And while IHS and Markit both grew by acquisition—more than 120 in total between them—they have limited experience with divestments. Certainly, should that happen, there will be plenty of interested parties waiting to snap up any leftovers—possibly even Uggla, himself, once his one-year advisor term expires.