Last year was a blowout year for mergers and acquisitions, with deals worldwide totaling $5.1 trillion. One of the biggest deals was S&P Global's (SPGI 0.18%) $44 billion acquisition of IHS Markit.
The megadeal is an excellent sign for S&P Global investors as the company expands its product offerings -- including IHS Markit's environmental products and services. The deal also gives S&P Global a stable, recurring revenue source, making it a cash-generating machine.
Capitalizing on a growing investment trend
S&P Global is a leading provider of ratings, benchmarks, analytics, and data for capital and commodities markets. The company serves customers like asset managers, investment banks, commercial banks, and insurance companies.
IHS Markit also provides analytics and solutions to over 50,000 customers globally. By combining the two businesses, S&P strengthens its leading role in information services, offering customers a unique range of solutions.
This move diversifies S&P Global's revenue streams further and increases the percentage of revenue from recurring sources. S&P Global's recurring revenue is 69% of total revenue, and it expects 75% of revenue to be recurring after the merger.
Executives also see the merger as a way to accelerate revenue from high-growth solutions that are becoming more popular. IHS provides insights and analytics into clean-energy technology, climate advisory solutions, and corporate emissions solutions. By 2025, S&P Global forecasts $600 million in revenue from these products, representing a 46% compound annual growth rate from the companies' combined 2020 revenue.
Creating a free-cash-flow-generating machine
S&P Global executives expect revenue to grow 40% from last year, thanks to the merger. By 2023, it expects revenue growth to level out at 6.5% to 8%. The move will also boost S&P Global's diluted earnings per share to $13.40 to $13.60 next year while improving profitability, with operating profit margin to grow another 2% from this deal. S&P Global already has stellar margins, and the deal boosts its cash generation even more.
The company expects free cash flow of $5 billion next year from the combined company, up from $3.5 billion last year. Free cash flow measures how much cash a business generates after paying capital expenses, such as buildings and equipment. The more free cash flow, the better for investors because the company can pay down debt, increase dividends, buy back stock, or make acquisitions.
With this added cash, S&P Global will repurchase as much as $12 billion in stock and raise its regular dividend by 10%, to $0.85 paid quarterly. S&P Global is a stellar company with solid margins, and its merger with IHS should give the business an added boost.