What's going on?
London Stock Exchange Group (LSE) announced that it was in talks to buy market data provider Refinitiv for $27 billion on Saturday – and unusually, LSE’s stock ticked up 15% on Monday.
What does this mean?
When one company buys another, the buyer’s stock usually falls. That could be because it’s paying more than investors think the firm is worth – or because a difficult integration could stifle profits in the short term.
But that doesn’t seem to be the case here: investors bought up LSE’s stock in droves. That’s likely because Refinitiv – which specializes in data and analytics tools – could help LSE move away from the business of matching stock buyers with sellers and toward a much more lucrative gig: providing information services to data-hungry companies, including those it already deals with.
Why should I care?
For markets: A data with destiny.
LSE’s revenue has seen a big shift in the last decade as trading’s become more computerized. Nearly 40% now comes from information services – roughly double what it makes from “traditional” businesses like stock trading. Big institutional investors are also increasingly looking to lower costs as their customers switch to lower-fee investments. With Refinitiv, LSE hopes it’ll become even less dependent on shrinking revenue sources and in turn grow earnings faster than its rivals – potentially convincing their investors to switch allegiances to LSE and buy its stock instead.
The bigger picture: Go big or go home.
It looks like LSE’s new CEO is following the example set by his predecessor, who spent big on other data deals. But this mammoth new move comes with mammoth risk: Refinitiv has $12 billion worth of debt from being bought out by private equity firm Blackstone (which will make nearly double its money from the sale). LSE has cost-cutting plans for the future – $430 million per year for the next five – but any setbacks to its income could leave it floundering with massive repayments.