September 24, 2010

Inside Market Data - Special Report

Opening Cross: The Facts of Life: Consolidation and Contractions

 

There comes that awkward moment in everyone's life when an inquisitive young mind asks "Where do data vendors come from?"  And, the answer is often "From other data vendors who love each other very much and did a merger," - like when you had to tell the same inquisitive mind that Dow Jones and Telerate "don't love each other anymore," or that Bridge "got sent to a nice farm upstate."

 

While the startups of today may become the giants of tomorrow (remember Innovative Market Systems?), these are often overshadowed by the larger vendors.  And if you aren't Bloomberg, how do you become a large vendor?  Typically by merging with other vendors - a strategy used by Thomson Reuters, Interactive Data and Morningstar, to name a few.

To name another, let's take a look at Capital IQ, which last week acquired broker research consortium TheMarkets.com for a rumored $300 million.  Standard & Poor's bought Capital IQ for $200 million in 2004 and has since been building out the service, adding functionality and plugging in lots of valuable S&P content.  The vendor later combined its Compustat and ClariFi businesses with Capital IQ, building both its overall worth and its value to clients, and when the opportunity arose snapped up a copy of Reuters' research and estimates databases - which, ironically, Reuters was forced to sell to gain approval for its merger with Thomson Corp.
Inevitably, when companies consolidate there is also a contraction in the market, creating a void that large vendors absorb or agile, ambitious players leap to fill.  But in some cases, a consolidated vendor can address a gap that already existed.  And it seems that Capital IQ may be seeking to make a play for buy-side business against larger vendors.  TheMarkets chief executive David Eisner says its bank backers recognized the value of the platform's research, but also realized that the market for these services was gravitating towards full-function desktop research workstations, and decided to combine its value with someone who could provide the yin to their yang.  Thus, Capital IQ will incorporate TheMarkets into an integrated research platform that combines the data assets of both businesses.  And unlike many mega-mergers, the process looks less likely to be distracted or derailed by technology issues, since officials say the vendors use very similar underlying technology, making it easy for their development teams to become familiar with both solutions.

In the best-case scenario, a vendor going through a growth spurt will grow big and strong-possibly with other acquisitions along the way - and stimulate competition among service providers, benefiting end-users with keener pricing from other vendors and by providing a viable alternative to incumbent suppliers.  Worst case, it becomes bloated and sluggish, as more acquisitions weigh it down, making it even less competitive and more complacent.

But in this case, S&P seems to have an aggressive strategy to nurture its offspring: Douglas B Taylor of Burton-Taylor International Consulting LLC estimates annual spend on financial data by the investment banking sector - Capital IQ's core base - to be around $1.2 billion globally.  "But the investment management industry spends around $4.7 billion on financial information, so for a reported purchase price of only $300 million, Capital IQ has expanded its addressable market by $5 billion," he says.

Finally, speaking of offspring, congratulations to IMD's US reporter Vicki Chan, who gave birth to a daughter last week.  Vicki will be able to report on this breaking news personally when she rejoins us in the New Year. Until then, we offer our best wishes to Vicki, husband Mike and baby Zooey.
by Max Bowie