The biggest acquisition of 2020 has put a spotlight on the business of collecting data about money. How much is that information worth?
This week’s deal was a biggie: S&P Global’s $44 billion purchase of IHS Markit combines an old company with a relative newcomer, which, if approved by regulators, will create a data powerhouse. The former has its roots in the railroad age and is one of the world’s biggest credit-rating companies. The New York-based firm also sells market analytics and runs stock and energy indices. The latter, formed through a merger in 2016, is headquartered in London and operates fixed-income benchmarks, captures bond and derivatives prices, and has information on a range of industries.
Some thinkers, like the editors at The Economist, have suggested that data is the oil of the 21st century. The idea is that digital information is the raw material for the modern economy, a resource global corporations will battle to control and refine for new products. “The valuations are focused around the idea that these market data venders—it’s an infinitely producible asset,” said Octavio Marenzi, CEO of capital markets management consultancy Opimas. “You can fill it a million times without any real additional cost. With banks and oil companies, that’s not the case. An oil company cannot sell the same barrel of oil more than once.”
By several metrics, investors tend to value financial data companies more highly than other types of best-in-class companies in that sector, from trading firms and banks to money managers. Data companies usually come out ahead when you look at ratios of market value to sales (price to sales) and earnings (price to earnings). This suggests investors are more keen on firms like London Stock Exchange Group, the British market infrastructure company that’s acquiring data provider Refinitiv, and MSCI, an index operator. Put another way, stock buyers are more willing to buy companies that collect financial data than the ones that generate it. (Stock exchanges tend to make a large chunk of their money by selling trading data.)
“S&P Global can sell its ratings data as many times as they would like,” Marenzi said. “It’s infinitely scalable at very low variable cost.”
Market data companies have several advantages versus banks and other institutions. Companies that run a stock index or data terminal for traders attract less attention from government regulators than a systemically important bank does. Compliance with those rules can sap profits. While shares of BlackRock, the world’s largest asset manager, have soared this year, the company faces fierce competition as money-management fees race to zero, causing margins to implode.
At the same time, financial data companies like FactSet and IHS Markit don’t command the kind of sky-high valuations that tech giants like Amazon (with a PE ratio of about 93) do. Market-data vendors are relatively unsexy, and their revenues aren’t growing at nearly the rate of some of the consumer tech firms. Some companies, like Bloomberg, make a large chunk of their money providing data terminals to human traders, and those roles are increasingly being replaced by algorithms. If the data companies’ customers—the rest of the financial services industry—are under pressure, that makes it tough for the data providers to hike prices and find new clients.
That may partly explain why data vendors have been on an acquisition spree in recent years. Intercontinental Exchange, the owner of the New York Stock Exchange, bought mortgage software company Ellie Mae this year and snapped up Interactive Data, a financial data and analytics company, in 2015. Marenzi doesn’t think there’s much overlap between S&P Global and IHS Markit that could concern antitrust watchdogs. That may not be the case for other deals, especially as these types of companies continue using buyouts to become a one-stop shop for the most important financial information.
“You’re not getting the kind of growth rates that the sexy internet companies are getting,” Marenzi said in a phone interview. “These companies haven’t got the growth that you might have expected, and they’re looking to merge with each other to achieve that.”