- LSE signs strategic partnership with Microsoft
- Commitment to spend $2.8 billion on cloud services
- Meaningful increase in revenues expected
Shares in the London Stock Exchange Group (LSEG) jumped 4% on Monday after it announced a 10-year strategic partnership with US software giant Microsoft (MSFT:NASDAQ) to co-develop new cloud-based services.
Under the terms of the deal, LSE Group has agreed to a minimum cloud-related spend with Microsoft of $2.8 billion (£2.3 billion), which is expected to be ‘strongly’ weighted towards the second half of the period as consumption builds, while the US software company will purchase 4% of LSEG’s shares.
The UK firm said it expects the partnership to deliver a ‘meaningful’ increase in revenues over the period, while Microsoft said it expects $5 billion of additional revenues.
STEP-CHANGE IN SERVICE OFFERING
LSE Group chief executive David Schwimmer commented: ‘We are delighted to welcome Microsoft as a shareholder. We believe our partnership with Microsoft will transform the way our customers discover, analyse, and trade securities around the world, and create substantial value over time. We look forward to delivering on that potential.’
The group’s 2021 purchase of Refinitiv transformed it into the world’s second-largest financial data company after Bloomberg.
The migration of LSE Group’s data platform and its next generation analytics and workflow solution Workspace into Microsoft’s Azure cloud is expected to provide a ‘seamless’ experience to work across the firm’s analytics and Microsoft’s Teams and 365.
WHAT IS THE FINANCIAL IMPACT?
The product development roadmap sees LSE Group spending an additional £250 million to £300 million a year from 2023 to 2025 of which £100 million will be capital expenditure and the rest one-off operational cash expenditures.
This is expected to result in a 0.5% to 1% reduction in the company's EBITDA (earnings before interest, tax, depreciation, and amortisation) margin over the period.
Additional spending incurred by both companies will be determined by the success of the partnership and demand for the data platform and services.
WHAT DO THE EXPERTS SAY?
Analysts at Jefferies said the deal would enhance LSE Group’s existing strategy while the costs of the partnership look ‘manageable’ and could result in synergies over time.
The bank commented: ‘Azure Machine Learning will allow for more sophisticated cross-asset, sustainable investment-aligned and non-traditional analytics without LSE Group's customers needing to deploy extra hardware and employee resources.
Investment director Russ Mould at AJ Bell said: ‘There is lots of talk about improving capabilities but as with any large technology project it’s easy to talk up the benefits and underestimate the challenges associated with execution.’
‘By owning a chunk of London Stock Exchange Group, Microsoft will share the upside if the project works and also the downside if it cannot deliver on time or to the desired effect.’
Disclaimer: Financial services company AJ bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor (Ian Conway) own shares in AJ Bell.
