Last week we broke the news that Interactive Data Corporation is contemplating the “strategic alternatives” for its future, including a potential merger or acquisition by a suitable marriage partner or investors. Reference Data Review explores the host of potential candidates likely to buy a majority stake in the number three data vendor and how they might fit together with its business strategically.
The purchase of Pearson’s 61% stake in Interactive Data will depend on a number of important factors, not least of which is how keen the information provider and publishing firm is to get out of the financial services business. If it is willing to stick it out until the perfect candidate turns up rather than cash out quickly, this gives potential suitors more time to negotiate and come up with the considerable funds required to buy Pearson out. After all, the business is estimated to be worth US$2.4 billion.
The is much speculation about what is driving Pearson to relinquish its stake at this particular point in time, given that the firm has been under financial pressure on previous occasions but did not take this step. Furthermore, it seems that the group may also be looking to divest its stake in the Financial Times and is rumoured to be talking to Bloomberg about the sale.
One of the biggest issues with regards to a buy out of Pearson’s stake in Interactive Data, however, is the fact that it does not hold all the assets. “The purchaser would only hold a majority share and would need to negotiate with the other shareholders if it wished to potentially buy them out also,” explains A-Team Group’s new director of research Ian Blance. “Otherwise it would have to live with minority shareholders.”
There are likely a number of providers out there who would be keen to get into the data business but due to the high price tag, the field of suitors is narrowed down considerably. This means that the players with the best fit in terms of compatible business lines may not have the financial wherewithal to complete the deal, agrees Blance.
Recent press coverage seems to have focused on the big players: Thomson Reuters, McGraw Hill and Bloomberg, but are these really the only options and how interested are these big hitters really?
If Bloomberg is, in fact, negotiating with Pearson about the FT, it might not be too much of a stretch for it to extend the deal to include Interactive Data. The purchase of a more back office focused data offering would also fit nicely with Bloomberg’s front office focused business lines, thus completing the end to end data chain. Moreover, Bloomberg is seemingly focusing more on its data offering than it has in recent years and is pitching itself as an open data vendor that is willing to give its proprietary financial instrument codes for free. Adding a back office element to its repertoire may therefore give it the edge over largest rival Thomson Reuters.
However, Bloomberg’s previous reticence to purchase large organisations counts against it, as well as the fact it will face a great deal of anti-trust scrutiny in its home US market if it decides to buy a competitor. There are only three main contenders in the US space and, with another being swallowed up in a merger, that would leave only two, notes Blance. Given that there used to be four competitors before the merger of Thomson Financial and Reuters, this might be a step too far for the regulators and those market participants wishing to have a degree of choice in selecting their providers.
These anti-trust concerns would therefore also be an issue for Thomson Reuters, which is still going the rationalisation process related to its first merger. The purchase of Interactive Data would give the vendor the opportunity of benefitting from further synergies and cost savings, but it seems unlikely that Thomson Reuters would be keen to go through another big merger in so short a space of time.
Acquisition by either Thomson Reuters or Bloomberg would also entail a major rationalisation process because of their overlapping product sets, data and client contracts, adds Blance. This would be less of a problem, however, if one of the ratings agencies were to step into the picture. Their core businesses are fundamentally different to Interactive Data’s, but they do all have subsidiary business lines in the data space. Furthermore, given the tough times being faced by the ratings side of the business in the post-crisis world, these firms are keen to diversify and avoid keeping their eggs in one rather rickety basket.
McGraw Hill, which owns Standard & Poor’s, has certainly been in the frame in the media coverage thus far. Much like the rest of the ratings providers, it hasn’t got a generalist data offering such as that offered by Interactive Data and would likely be keen to buy in these capabilities. Its subsidiary business lines, in particular the Fixed Income Risk Management Services (FIRMS) led by ex-Thomson Financial and Bloomberg heavyweight Lou Ecclestone, would be a good fit for the Interactive Data offering.
The level of investment that has gone into FIRMS over the last couple of years certainly indicates the vendor’s seriousness about the data business. At the end of last year, for instance, the division launched a new enterprise level data feed solution, aiming to provide users with a range of data and analytics to allow them to evaluate and monitor the financial instruments in their portfolios. It is easy to see how such a solution would benefit from input from Interactive Data’s pricing and valuations data feeds.
Earlier in 2009, the FIRMS division also launched a new RatingsDirect Global Credit Portal and added a valuations service for structured assets and complex securities to its portfolio: yet more analytics and data services that could benefit from integration.
In terms of financial capability, McGraw Hill is also the most likely ratings agency candidate to be able to afford the acquisition. However, one cannot discount the other two ratings agencies in the room: Moody’s and Fitch.
After all, Moody’s in particular has a long history with Interactive Data: it was once its owner and may be keen to get back into the space. It has dipped in and out of the data space over recent years and is a relatively acquisitive company: one of its last data related purchases was its acquisition of pricing services vendor BQuotes in January 2008.
Fitch also has an interest in the data business with its Fitch Solutions business, which has continued to invest in the pricing and valuations data space. The Fitch Solutions business has been steadily upping its game over the last couple of years with the addition of new functionality and solutions, under the watchful eye of ex-Thomson Financial director Aubrey.
Early in 2009, the vendor incorporated new risk and pricing benchmarks into its Fitch Risk and Performance Platform, which was launched in June 2008. In September last year, it added yet more functionality to its valuations portfolio with the addition of credit default swaps (CDS) of asset backed securities (ABS) broad market indices for US subprime assets. These are all indicators that it would have a keen interest in a data provider for sale.
However, it is hard to ascertain how much financial capability all of these players have to be able to offer Pearson an attractive proposition. For his part, Blance reckons that a private equity deal would prove to be the least controversial and traumatic option (and thus most preferable) for Pearson if it is keen to get out of the business quickly. “Interactive Data is a classic private equity buy out opportunity: it is a cash generative business that doesn’t have a lot of debt. It would also have the least impact on the vendor’s business as it would be acquired as a going concern,” he contends.
As it stands, the options are on the table, but it will likely be some time before we find out which option Pearson has decided upon.