IHS-Markit $13 bln merger is long on hope

March 21, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

If data is good, more must be better. This seems to be the logic behind the $13 billion all-share merger of IHS and Markit that seeks to unite the resources and transportation expertise of the former with the financial nous of the latter. But things aren’t quite so cut and dried.

Granted, the merger would create a more diverse data and analytics company that might prove better insulated against the vagaries of either the energy or banking sector. And Markit’s shareholders probably can be reasonably pleased with a deal that could leave them roughly 10 percent better off if cost synergies of $125 million from 2019 work out as planned. With 43 percent of the merged company, their share of those spoils would be worth roughly $278 million after being taxed, capitalised and discounted to reflect the time it would take to realise the savings.

There might be other financial benefits. Markit’s UK headquarters may also help IHS free up $266 million of cash trapped in its overseas divisions as of the end of November. But the two companies are also counting on $100 million of extra revenue from cross-selling that looks distinctly aspirational.

IHS counts governments, automobile companies and 24 of the 25 largest global oil companies among its clients. Markit’s customers include most of the largest U.S. banks, global asset managers, hedge funds and global custodians. In theory, IHS oil and gas insight could be sold to Markit’s financial customers while Markit data and services could be offered to IHS ones. But it’s unclear whether either set of clients will snap up such information and analytics if they don’t already need or use them.

There’s always scope to develop new products. Those take investment though, and IHS and Markit seem to have other ideas for their cash. There is $1 billion of share buybacks planned in 2017 and again in 2018. This may be what it takes to keep IHS shareholders happy but sits less well with the merged IHS Markit’s gross leverage, which the companies say will be three times EBITDA. Shareholders may come out a bit better off, but it’s hard to see how the companies will be strategically any richer.

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