Safeguarding a legacy: the Refinitiv deal

Following the London Stock Exchange Group’s blockbuster acquisition of Refinitiv earlier this year, Annabel Smith takes a look at what the deal means for the future of the exchange operator. 

Completed in January 2021 after almost 18 months of deliberations, the London Stock Exchange Group’s (LSEG) acquisition of data and analytics giant Refinitiv for $27 billion is a deal set to transform the exchange and the wider market.

With its extensive data businesses across asset classes, Refinitiv gives LSEG a global reach and a multi-asset offering with newfound access to FX markets for the first time in its history. Research from consultancy Burton Taylor in 2019 when the takeover was confirmed predicted the deal would re-value the $2.8 billion exchange to roughly $8.4 billion, nearly 68% bigger than its closest rival, US exchange group ICE, at the time.

“The completion of the acquisition of Refinitiv at the end of January 2021 marked an important milestone in LSEG’s history,” said David Schwimmer, CEO of LSEG, in its fourth-quarter 2020 results earnings call.

The changing role of the exchange

The role of the exchange has evolved dramatically in the last 15 years, facilitated by the growth of electronic trading and technology. Like many other segments of capital markets, consolidation has become rife as the need for scale continues to accelerate. Exchanges have expanded their reach and product offering as focus has drifted away from the buying and selling of shares, which now accounts for a minor portion of total exchange revenues.

“Technology and data have become much more tied in together. The way exchanges communicate to the market has also changed as each of them have developed their own proprietary network that they use to distribute their information,” says Robert Iati, managing director at Burton-Taylor International Consulting. “Exchanges have recognised that they need to expand their revenue streams a little more broadly than just listings and trading.”

In a keynote interview at the International Swaps and Derivatives Association (ISDA) Europe in 2019, LSEG’s Schwimmer told delegates that its proposed mega-deal was driven by the increasing importance of data in the market and the shift towards electronic and multi-asset trading.

“The importance of having multi-asset class capabilities will only increase in financial markets driven by electronic trading and passive investment as customers seek efficiency and simplicity with fewer but deeper partner relationships,” Schwimmer added in LSEG’s earnings call.

The 2019 research from Burton Taylor also suggested that the acquisition would make LSEG the top revenue generating exchange operator, almost doubling the percentage of group revenue accounted for by its Information Services division.

Not limited to the world of exchanges, developing technology has continued to enforce the importance of data, of which exchanges now have an abundance of, and the need to have a broad and global network to pass that data on to. The three elements woven together have reinforced the need for variety in revenue streams.

The Refinitiv acquisition has also greatly expanded the number of avenues LSEG can capitalise on, providing access to several data and analytics businesses, two large FX and fixed income trading platforms, FXall and Tradeweb, a  significant US focused wealth management businesses and an ever-growing footprint in Asia.

Eat or be eaten

As markets continue to abandon trading floors, the importance of data distribution has increased and made scale more important. One key way to achieve this is through acquisitions. It’s unlikely a company will be acquired if it achieves the right economies of scale.

“We’ve seen a lot of exchanges acquire exchanges certainly in the last 10 years or so, and it’s only getting more competitive,” adds Iati. “The LSE acquisition of Refinitiv was a response to many of the other exchanges growing. Things have changed dramatically as scale and reach have become critical and this has been enabled by technology.”

Another notable development in the consolidation trend is SIX’s €2.8 billion takeover of Spanish stock exchange BME in 2019. The Swiss exchange operator entered a bidding war for BME with Euronext, and ultimately came out on top to complete the BME deal in June 2020.

Several bids have been also made for LSEG in the last five years. In 2016, European exchange operator Deutsche Börse bid £21 billion, but this was trumped by Hong Kong Exchanges and Clearing (HKEX) in September 2019 when the group offered £32 billion in a bid to achieve an ‘East to West’ market connection. To safeguard its legacy, LSEG had to grow.

“It is eat or be eaten,” says Iati. “If LSE hadn’t made this acquisition, whether it’s Refinitiv or something similar, then they could have become an acquisition target. If they want to remain independent and strong, it would have to be a similar type or several smaller types.

“The acquisition was a challenge that I think LSE felt it had to undertake to stay relevant. If it wasn’t LSE looking at Refinitiv it would have been another large exchange. When this kind of deal happens, it opens your eyes. LSE has told the market that it is in this to win. It is not going to sit back and let others move. It is not going to be acquired. It is saying we are not going to be second, we are going to be first. You have to admire that.”

Creating a data giant

Refinitiv’s vast cross-asset data offerings will undeniably allow LSEG to capitalise on the market’s growing reliance on data. In the first half of 2021, data and analytics accounted for £1.9 billion of its total revenues exceeding the first half of 2020’s total of £409 million by a country mile.

“The value of exchanges data has skyrocketed, not just because of their ability to trade electronically, but everybody’s data has become more important. Not just in this business, but everywhere in the world. All exchanges if you look historically long before LSE have placed much greater value on their data businesses,” adds Iati.

“Refinitiv has a prominent data business and LSE will look at that as a way to monetise and create a synergy around things like their indexes. You have all the Refinitiv data that can be combined with the data that LSE already had to improve the index space. Refinitiv has all that fixed income data and LSE is also strong, with its Mergent research business, which is strong in fixed income.”

Refinitiv provides consolidated real-time data to traders through its Elektron platform and its desktop solution Eikon, which is currently being rebranded as ‘Workspace’. It also controls trading platforms Tradeweb and FXall, both of which have a monopoly over the transaction data they collect. As an exchange, LSEG also controls the data collected from transactions that take place within it. This trading data is commercialised alongside the data collated on its FTSE Russell index.

LSEG’s new data and analytics division encompasses most of Refinitiv’s data businesses and the exchange’s information services businesses under one umbrella including its services across data collection, aggregation and management. The exchange has laid out plans since the completion of the acquisition to offer packaged and tailored solutions to specific customer segments.

The alternative perspective to data that LSEG has gained through the acquisition is perhaps even more valuable. While it commercialises data accumulated from transactions that take place on its platforms, it now also has access to how institutions use the data through Refinitiv’s various applications. More valuable still, LSEG has access to how institutions process and deploy its competitor’s data.

“The acquisition could provide insight into how data flow around Eikon, Tradeweb, FXall is integrated with other systems within an institution,” explains Vinod Jain, senior analyst for capital markets at Aite-Novarica Group.  “The data flow may include LSEG data or LSEG competitor data. By its nature, the majority of Refinitiv products suites offer more customisation than LSEG products suite to firms. Before LSEG provided consolidated data to institutions but now it has the view from inside on how it is being used. That is the biggest access this venture has provided LSEG with.”

Acquiring Refinitiv has added more than one string to LSEG’s bow, also expanding the breadth of asset classes it engages with. The deal provided a gateway into FX and expanded its presence in fixed income, two of the largest traded assets globally. With the addition of Refinitiv’s FXall and Matching platforms and fixed income platform, Tradeweb, of which Refinitiv was a majority shareholder, LSEG has fortified itself as a multi-asset entity.

Having not previously been involved in FX, acquiring FXall and FX Matching were a good place to start. During the peak of the pandemic FXall trading volumes were reported to have increased by a quarter year-on-year, driven by buy-side users. LSEG also confirmed in early 2021 that it is was well underway re-platforming the newly acquired FX business to reflect its own technology.

“To be a much larger FX player they would have to supplement their new offering with more investment or with other trading systems that they may want to bolt onto it, but certainly the acquisition has started the process. It has gotten LSE in the game and given them more data in that space,” adds Iati.

A financial ecosystem

Since the completion of the acquisition, LSEG has been clear that it intends to intertwine its various services to create a scalable platform that connects participants from all parts of the trading lifecycle. The combination of the pair’s now colossal data offering aligned with LSEG’s existing post-trade and multi-asset capital markets businesses have the potential to create an irreplaceable financial ecosystem for the market.

In its H1 interim report, the exchange set out several changes intended to reduce fragmentation as part of the integration. The Workspace platform is set to be extended to cover several of LSEG’s data and analytics businesses and a continued cloud migration would also simplify its data platform by consolidating the offering with a single point of access. LCH’s RepoClear service is also being moved to share the same platform as EquityClear to drive further efficiencies.

“We believe that real strength and additional opportunities exist in connecting or creating linkages among the three divisions [post-trade, data and analytics, capital markets]. For example, how can post-trade data be used to help inform customers’ pre-trade decisions,” said Schwimmer in LSEG’s fourth quarter 2020 results earnings call.

The exchange confirmed in June 2021 that it will connect Refinitiv FXall to LCH’s ForexClear to give users a quicker way of clearing non-deliverable forwards (NDFs) trades. The connection will offer market participants a choice on which trades get cleared based on the liquidity provider, currency pair, or account they are trading for.

“In the near-term, priorities also include offering transaction execution and cost optimisation data from our post-trade businesses through Workspace and providing connectivity between the group’s FX venues and ForexClear to provide additional clearing optionality for customers,” added LSEG in its H1 2021 interim results.

Spider’s web

The Refinitiv acquisition has not come without its hurdles for LSEG. To alleviate competition concerns from the European Commission, the exchange was forced to sell its Milan-based stock exchange, Borsa Italiana, to Euronext for €4.4 billion to push the deal through.

LSEG’s spider web of intertwined products and services cover the scope of the financial markets value chain. Its growing multi-asset financial ecosystem has safeguarded its legacy and set a precedent for market that will no doubt in time encourage further consolidation and acquisitions across other venues.

“It does create that constant level of elevating competition. They are now a stronger competitor in the top tier and therefore others in the top tier have to re-assess their strategy. Maybe those in the second tier might put themselves out there to be acquired by someone like LSE to grow their business. It’s changed the competitive dynamic,” concludes Iati. “LSE is now off the table, at least for the time being, and while they have challenges to face, it’s better than trying to fend off an acquisition.”