One of the side effects of bull markets is an increase in mergers and acquisitions. While investors are focusing heavily on Salesforce's purchase of Slack Technologies, a bigger deal was announced on Monday, when S&P Global (SPGI 0.29%) said it was buying IHS Markit (INFO). This is a big transaction in the financial data space that demonstrates how hot financial data is right now.
S&P Global is acquiring IHS Markit for $44 billion in stock; IHS shareholders will receive 0.2838 shares of S&P Global per share of IHS Markit. The transaction was recommended by both boards of directors and is expected to close in the second half of 2021. The elongated timeline indicates the companies anticipate an extended antitrust review.
What should investors do now? Let's walk through it.
A complementary transaction, but there could be antitrust hurdles
If you run down what each company brings to the table, the transaction appears to be relatively complementary, which means the two businesses are combining different areas of expertise.
- S&P Global provides independent ratings of stock and bond issues, analytics and data, and benchmarks for the capital and commodity markets worldwide. The company has four main lines of businesses: ratings (which most people are familiar with), indices (i.e., the S&P 500), Global Platts (commodity data), and Global Market Intelligence (data and analytics for investors). S&P Global's main customers include investment banks and asset managers, and producers/traders in the commodity markets. In 2019, S&P Global earned $2.1 billion on $6.7 billion in revenue.
- IHS Market delivers software, data, and insight to governments, investors, and financial markets. IHS Markit is known for its purchasing managers indices (PMI), which are similar to the ones put out by the Conference Board. These indices are questionnaires given to companies that are used to take a temperature of the business environment. They discuss hiring plans, pricing, planned capital investments, and more. Economists pay close attention to these reports, and you will often find mention of them in the Fed's meeting minutes. The company also owns CARFAX, which is probably its most visible product. IHS Markit divides itself into four main areas: financial markets, transportation, upstream and downstream (aka commodities), and Consolidated Markets.
There does appear to be some overlap in the commodities area, between S&P's Platts group and IHS Markit's Upstream and Downstream businesses. The commodity overlap might attract added scrutiny from the antitrust regulators, which would explain the seven-plus-month timeline (as opposed to the typical 90-120 day timeframe).
But clearly, synergies are a key driver of the transaction. That's a catch-all term to categorize cost savings and cross-selling opportunities. The companies anticipate $480 million in annual cost synergies, and $390 of those to be realized in the second year after closing. In addition, the companies anticipate $350 million in revenue synergies.
The total impact is expected to improve earnings before interest, taxes, and depreciation & amortization (EBITDA) by $680 million by the fifth year after closing. In 2019, IHS Markit generated $1.8 billion in adjusted EBITDA and S&P Global generated $3.4 billion in EBITDA, so synergies are expected to add about 13% in EBITDA after year five. The companies anticipate increasing EBITDA margins by 2%. The pro forma company will have 76% recurring revenue, and is expected to deliver 6.5% to 8% organic revenue growth.
IHS Markit is trading at a discount to the merger consideration (in mortgage arbitrage terms, a positive "spread"), which indicates that the market doesn't believe a competing bid is likely. S&P Global traded up on the day of announcement, which is a positive sign the market likes the deal. IHS Market initially rose on the deal premium; however, it has given back most of those gains. Holders of IHS Markit should be aware that the stock will generally move with S&P Global going forward.`
Should investors stick around?
What should IHS shareholders do with their stock at this point? As a general rule, i think investors who have been blessed with a takeover are wise to take the money and run. This is almost always the right call when their company gets taken out for cash at a high premium. Sticking around for the last percent or two is usually not worth the risk, as we saw in Simon Property Group's deal with Taubman Centers, which nearly broke before it was renegotiated. In this case, IHS wasn't taken out at a high premium, so the risk is substantially less.
Investors who like the story and are comfortable with owning S&P Global might find holding their stock and taking advantage of the tax-free exchange to be better than selling for cash now. Given the behavior of the stocks, the Street agrees with the strategic rationale. S&P Global shareholders should take comfort in the stock's behavior post-announcement.