Deutsche Börse/ISS: saints go marching in
Deal will help group capitalise on rising investor demand for recommendations on ethical investment
If data is the new oil, then stock exchange groups are fast becoming petrol stations for financial services. Deutsche Börse picked up a fresh set of pumps with attached convenience store this week after agreeing to buy a majority stake in shareholder advisory group Institutional Shareholder Services for €1.9bn.
ISS is a powerful supplier of advice on how shareholders should vote on everything from takeovers to executive pay. Buying the US-based business should help Deutsche Börse capitalise on growing demand from investors for recommendations on ethical investment, marshalled under the banner of “environmental, social and governance” or ESG. ISS should mesh with other ancillary services sold by the German group’s Clearstream subsidiary.
Data, analytics and research are becoming an important business for exchange operators. They yield reliable subscriptions revenues in contrast to volatile income from listings and securities trading. London Stock Exchange Group’s ambitious purchase of analytics and data platform Refinitiv for $27bn reflected the same trend.
LSE, which Deutsche Börse failed to buy in 2017, has outpaced and outgrown its erstwhile suitor by acquiring data assets, notably index compilers. ISS is too small to redress the balance for Deutsche Börse, but does operate in an interesting niche. It leads an effective global duopoly in governance-related matters with a 63 per cent market share, far ahead of rival Glass Lewis.
This duopoly, combined with the rapid growth of three large US passive managers, raises questions concerning a concentration of voting power. These may eventually apply in the expanding field of ESG too. However, ethical investment badly needs greater standardisation. That gives groups such as ISS a substantial growth opportunity.
Scarcity value is another reason Deutsche Börse is paying a full price for ISS. This equates to 23 times this year’s ebitda, a premium to an information services sector trading closer to 20 times.
Deutsche Börse’s own shares trade at a steep discount to those of LSE. The German group would need to do a lot of bolt-on deals to energise its stock as comprehensively as the UK group’s transformative purchase of Refinitiv assets has done.