The stock markets offer a direct measure of buyer’s remorse. Nothing more than the London Stock Exchange Group, whose shares fell more than 25 percent after a record high in February.
A month earlier, LSE closed the $ 27 billion purchase of Refinitiv, a deal that was sold to investors as transformational. It was a speech familiar to all finance professionals – that automation and big data were making their way into all levels of decision-making.
Combining Refinitiv’s 150,000 data sources with essential market plumbing owned by LSE would create a data-driven financial operator, breaking the link between trade volumes and revenue. Data and analytics accounted for roughly three-quarters of the pro forma group’s revenue for 2020, with capital markets and post-trade services providing the rest.
But by the time of LSE’s annual results in March, it was clear that to keep its promise, Refinitiv needed major surgery. Shareholders balked at LSE’s larger-than-expected £ 1bn budget to integrate Refinitiv in year one.
The slowing down of LSE’s data and analysis operations didn’t help, most dramatically to the FTSE Russell index compiler. Then last week came a sale by Thomson Reuters and Refinitiv management of nearly 2 percent of LSE’s stock, apparently to settle tax debts. There were many reasons to feel uncomfortable about what exactly LSE had bought.
Initial hype and bullish analysts’ forecasts pushed LSE’s market value beyond £ 55bn in February, placing it among the top 10 most valuable companies on the FTSE 100. Concerns have grown since then that LSE lacks the boardroom experience necessary to tackle a complex, imperfect, and very heavy business that, in terms of revenue, is twice its size.
As Warren Buffett put it, “When a management known for its brilliance attacks a company known for its poor fundamental economics, it is the reputation of the company that remains intact.” Refinitiv’s poor economy had repelled potential suitors for at least five years before LSE took the plunge. And although LSE bosses have shown ambition, their brilliance awaits proof.
David Schwimmer, Managing Director, and Don Robert, President, have little experience with merger integration. Plus, Refinitiv’s long-standing problems don’t have an easy fix. Trading screens, in terms of income, its largest data market, are also the most difficult. Refinitiv’s Eikon platform lags far behind Bloomberg’s ubiquitous terminal, which took part in a shrinking market. Cash has been spent on modernizing and improving Eikon since the acquisition of Refinitiv by Blackstone in 2018. However, its share continues to be squeezed by both high-end product companies at will. Bloomberg and selection options, such as FactSet and Capital IQ.
LSE’s solution is to remove the Eikon brand, which analysts interpreted as a tacit cession of traders’ office space to Bloomberg. Its replacement, Workspace, is built around open source software that mimics the modular flexibility of smaller competitors.
The hope is to make the trading platforms more like Enterprise, Refinitiv’s second data division. Enterprise takes an open access approach to the massive data collection and distribution network that is the backbone of Refinitiv’s many services. Foreign exchange and fixed income products will likely adopt the same modular model, inviting subscribers to shop at a data supermarket rather than buying access to the buffet.
LSE brings expertise to the project. The number of customers for its real-time data services has been steadily declining since 2015. Yet, because subscribers added more streams and purchased larger licenses, the division’s revenue increased.
Reasons for the optimism can be found in the transactions side of LSE’s business, including its controlling stake in Tradeweb for rates and credit markets. Having been relatively slow to embrace electronization, these markets now offer top notch growth, and Tradeweb offers the kind of proprietary critical content that is only occasionally found in other Refinitiv silos.
The media industry provides a parallel. In a world already drowned in data, must-have content gets the highest ratings. Having the delivery pipes is not enough. LSE has yet to prove whether the transformation will create a Netflix in financial markets or a National Grid.
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