This was the most recent in a string of partnerships between US big tech names and a financial powerhouse, with CME partnering up with Google and Nasdaq with Amazon Web Services.
The alignment of these two firms could be regarded as a watershed moment for cloud computing, as Derren Nathan, head of equity research at Hargreaves Lansdown, said: “The level of trust that such a critical cornerstone of the global financial markets is showing, shows that cloud computing has truly come of age”.
Regarding LSEG and Microsoft, David Schwimmer, CEO of LSEG, said in a statement the deal would focus on using Microsoft Cloud and its AI capabilities to push its mission “towards becoming the leading global financial markets infrastructure and data business.”
He said the deal and its developments would “transform the experience for our customers”.
All experts asked referred to the deal as “interesting”, with Niklas Kammer, equity analyst at Morningstar, arguing it had “great upside potential and limited downside risk”.
Kammer said given LSEG’s prior takeover of financial market data provider Refintiv at the start of last year, the deal with Microsoft “makes a lot of sense”.
LSEG purchased Refintiv at the start of 2021 for $27bn, a deal which has already produced some upsides for the business, boosting the stock’s earnings by 40% so far.
One of the more intriguing elements of the Microsoft deal for Kammer is its plans for the Teams application and how LSEG wants to combine this with Refintiv to challenge the dominance of Bloomberg’s terminals.
These portals are seen as the “gold standard” for financial services information globally, Kammer said, costing $24,000 a year per seat.
Taking on Bloomberg
The firm plans to combine Microsoft 365 with Teams to advance LSEG’s Workspace to create an all-in-one data, analytics, workflow and collaboration solution, specifically designed to help finance and investment professionals improve communications and productivity while maintaining regulatory compliance.
The magnitude of taking on an established player in this space such as Bloomberg’s portal is a mountainous task.
Kammer said that while he thought Refintiv had the data sets to compete medium-term, he was less optimistic on LSEG’s ability to take over this monopoly.
“We think Bloomberg terminals will be hard to replace owed to the network effect and switching costs these terminals enjoy. We do not anticipate that the Microsoft Teams integration will change this competitive landscape materially on the top end of the market,” he said.
The top-line of the deal saw Microsoft agree to buy a £1.5bn stake in the firm, giving the tech giant a 4% share in LSEG.
Scott Guthrie, Microsoft executive vice president, Cloud and AI Group, will take a seat as non-executive director on the board of LSEG, subject to regulatory approval.
Will Howlett, equity research analyst at Quilter Cheviot, which holds LSEG in several of its equity funds, said this could be seen “a slightly unusual move for Microsoft, as it does not usually take stakes in its cloud customers”.
However, he said its competitors are “clearly ahead in this space and as such it will want to leave its mark”.
He added the deal itself leaves LSEG’s valuation now at a small discount to other exchange peers and a larger discount to market data providers generally.
Long-time investor in the stock Nick Train has repeatedly voiced his frustrations that the company is not valued in line with its US peers.
In the October factsheet for his Finsbury Growth & Income trust, Train said he was “bewildered” the stock “was not a cornerstone holding in every UK pension fund”.
Back in August, Train said he expects the London company to join the likes of BP, Shell, RTZ and HSBC as highly valued companies globally, that just happen to domiciled here.
The past 12 months have been undeniably tough for listed and unlisted assets, and business momentum as a whole has been subdued by the macroeconomic tornado that is still ongoing, which has “decimated” the amount of initial public offerings on the LSE this year, Hargreaves Lansdown’s Nathan highlighted.
By contrast, LSEG itself has maintained its course. As Kammer said, it has not struggled so much, recording a 16.2% rise in Q3 income and slightly beating forecasts.
Looking at its returns year to 19 December, the stock has returned 9.1%, ahead of the FTSE 100’s 3% gain and FTSE All Share’s 1.3% loss, according to data from FE fundinfo.
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