Major acquisitions can make or break a business. On the one hand, they can prompt an improving financial performance if expansion into new markets or a stronger position in existing segments is the long-term result.
However, on the other hand, the cost of acquisitions, which often results in a larger debt pile, and challenges associated with integration, can cause a weaker financial outlook to become the reality.
So far, London Stock Exchange Group’s (LSEG) £20bn acquisition of data and analytics firm Refinitiv has proven to be far from straightforward.
Since completing the purchase in the first quarter of last year, LSEG’s share price has dropped by over a third as investors have become less optimistic about its future prospects.
Indeed, the acquisition represents a significant shift in focus. Alongside its disposal of Borsa Italiana last year, it means that the company now generates a large majority of revenue from data and analytics services provided to professional and retail investors.
In Questor’s view, the outlook for those services is relatively attractive. An evolving investment industry, where trends such as environmental, social and governance (ESG) investing, multi-asset strategies and greater automation are becoming more prominent, is likely to demand increasingly innovative solutions.
LSEG’s large scale and capacity to commit to vast capital expenditure could allow it to retain a relatively dominant market position as the industry develops.
In addition, the company’s proportion of recurring revenues has increased following the acquisition. They now amount to around two-thirds of sales and could offer greater stability, and margin expansion opportunities, over the long run.
The acquisition also diversified the company’s geographic exposure, which could reduce risk and enable it to capitalise on a wider range of long-term growth opportunities.
Despite its share price fall following the Refinitiv acquisition, LSEG’s latest quarterly update highlighted that it is making good progress on integration.
