FactSet in takeover spotlight amid consolidating financial data market, sector advisors say

FactSet Research Systems [NYSE:FDS] is among financial data and information services players expected to attract takeover interest from its wider peer group as the industry continues to consolidate, a source familiar with the matter and five sector advisors said.
 
At least one major player has FactSet on its radar as a potential target, the source familiar added.
 
Following S&P Global’s [NYSE:SPGI] GBP 33bn (USD 44bn) proposed merger with IHS Markit [NYSE:INFO] and the London Stock Exchange’s (LSE) [LON:LSEG] acquisition of Refinitiv, other ratings agencies, exchange groups and capital markets technology companies are having to react by seeking partners to add further scale and complementary products, they said. 
 
FactSet stands out as a target due to its recurring revenue streams, penetration into buyside firms and the scarcity of established data vendors of a similar size, the advisers said. S&P considered acquiring FactSet before swooping in on IHS, the first adviser said.
 
S&P remains a logical bidder as its Capital IQ platform would have synergies with FactSet, the second adviser said, though the group is distracted completing the IHS deal. The acquisition, which has been approved by IHS Markit shareholders, is expected to close in the second half of this year, according to a press release.
 
With a market capitalization of USD 12bn, FactSet's size is a driving factor in its appeal, the source familiar and three of the advisers said. Its size makes it more feasible to manoeuvre a deal compared to its larger competitor Bloomberg LP or exchange group Intercontinental Exchange (ICE) [NYSE:ICE], which has a USD 67.6bn market capitalizationthe first adviser added.
 
Factset’s core market will struggle to continue growing at its current rate of 5%-6%, having reached saturation point and taken customers away from Bloomberg and Refintiv, one of the advisers said, adding that it is too small to survive on its own. Factset’s potential to grow its accounts is limited given the financial industry’s expansion via automation, restricting the pool of new – human – users, the second adviser agreed.
 
Nonetheless, it can grow through more sales of data analytics and other technology capabilities, this adviser conceded. FactSet posted earnings per share of USD 2.72 per share for the quarter ending in February 2021, climbing 6.7% YoY though marginally missing Thomson Reuters consensus estimates of USD 2.74. 
 
The second adviser noted that FactSet is doing fairly well as a standalone business with sticky revenues and growth in the buyside market. 
 
Financial firms use FactSet’s market data, analytical tools and workflow software to make decisions and manage the investment process. About 84% of its annual subscription value comes from the buyside, including asset managers, wealth advisors, corporations and hedge funds, with the remainder from sellside firms including investment banks, private equity and research analysts, according to its most recent 10-Q. 
 
Valuation 
 
FactSet’s enterprise value in the event of a sale will largely depend on a buyer’s ability to extract cost synergies, one of these added.
 
Its comparables include S&P Global, MSCI [NYSE:MSCI] and the LSE, the third advisor said. FactSet trades at a lower valuation than the two US-listed peers, at 21.9x TTM EBITDA versus S&P at 23.7x and MSCI at 42.3x, according to Dealreporter analytics. LSE is valued at 14.5x TTM EBITDA, pro-forma for the acquisition of Refinitiv.
 
Exchanges such as ICE and Nasdaq [NASDAQ:NSDQ] could acquire FactSet to step up their data offering, especially now that LSE owns Refinitiv, three of the advisers said. ICE is experienced in extracting cost synergies with data players or technology vendors around data cleaning and aggregation, one of them added.
 
However, the fifth adviser questioned whether ICE would view FactSet as a strategic fit, given ICE’s core strength being distribution, as opposed to operating single products. ICE has also indicated its focus on real estate and financial assets with its USD 11bn acquisition of Ellie Mae, he noted.
 
Consolidation between pure-play exchanges in different regions has triggered antitrust alerts in the past, and exchanges have shown strong appetite in data assets to grow recurring revenue, the first adviser added.
 
Deutsche Boerse [FRA:DB1] is another likely suitor, and the exchange could continue its M&A spree of data analytics firms, two of the sources said. In February, it completed the acquisition of an 81% stake of Institutional Shareholder Services for USD 1.8bn. 
 
Other logical suitors include Moody’s [NYSE:MCO], four advisors said, with one adding the ratings agency could fold FactSet with its data and analytics asset Bureau van Dijk, which it acquired for EUR 3bn in 2017. MSCI could also be interestedthree of the advisers said. One of these explained that synergies come from both of the firms’ penetration into the buyside market. 
 
But the second advisor added that MSCI lacks experience integrating large acquisitions, with its focus on index business and risk management also presenting it with fewer synergy than an exchange player.
 
Verisk Analytics [NASDAQ: VRSK] is another logical buyer, two of the sources said. Verisk provides data and risk management solutions for the segments of insurance, energy and transportation, and financial services.
 
S&P, ICE, Deutsche Boerse and Nasdaq declined to comment. FactSet, MSCI, Moody’s and Verisk did not respond to requests for comment. 
 
by Amy-Jo Crowley and Yizhu Wang, with analytics by William Cain