LSE-Refinitiv deal talk highlights how hungry exchanges are for data, and experts say FactSet could be the next target

• LSE is in talks to acquire data provider Refinitiv, and industry experts suggest that FactSet makes sense as exchanges' next focus for a deal.
• Acquisitions have proved a viable way for trading venues to add data that they can then sell on to clients.
• Of the five large data providers, experts say FactSet appears most likely to be snapped up next: it is public, has a manageable price tag, and could be easily merged into an exchange.
• ICE would be the most likely exchange to look to strike a data deal because of its size and acquisitive nature, experts suggested.
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On Saturday, the London Stock Exchange Group confirmed reports it's in talks to acquire Refinitiv, the financial data company behind Eikon terminals that's owned by Blackstone and Thomson Reuters.

The deal, valued at approximately $27 billion, highlights trading venues' desire to move beyond trading and clearing into the profitable business of selling data.

That has industry watchers speculating about which data company might be bought next, as exchanges look to quench clients' seemingly endless thirst for financial data while also generating new streams of revenue for themselves. The verdict, according to consultants and executives: FactSet.

M&A has proven a viable route for exchanges looking to add more data. In 2015, Intercontinental Exchange, which owns the New York Stock Exchange, shelled out $5.2 billion for Interactive Data. New York-based rival Nasdaq purchased data provider eVestment for $700 million in 2017. That deal was followed by its purchase of alternative-data company Quandl for an undisclosed amount in late 2018 as the exchange looked to tap into Wall Street's interest in unique data sets.

But when it comes to large data providers like Refinitiv, exchanges' options are limited. Rachel Carpenter, founder and CEO of Intrinio, a startup that offers a la carte access to data, told Business Insider that five companies control roughly 75% of the market in financial data. In addition to Refinitiv, there is market leader Bloomberg, along with S&P Global, FactSet, and Morningstar.

Of the group, Carpenter said FactSet seems the most likely candidate to be acquired next. Dan Connell, managing director for market structure and technology at Greenwich Associates, came to a similar conclusion.

"If someone said to me, who would be the most likely, then [FactSet] would come to mind," Connell told Business Insider. "Just because of the public nature of the organization, the standalone nature of the organization, and the fact that it has been such a high-quality business."

Read more: Exchanges made nearly $30 billion in 2018, but a new report suggests their business could be at risk if they don't innovate in 3 ways

A spokesperson for FactSet declined to comment.

In many ways, what makes FactSet such a viable option is a process of elimination. Bloomberg is privately held and seems unlikely to be sold anytime soon. S&P Global, while public, is also a stretch due to its potential price tag. The company had a market cap of nearly $60 billion as of Tuesday. Meanwhile, FactSet, which is also public, had a market cap of about $10.6 billion.

As for Morningstar, it's the smallest of the group with a market cap around $6.5 billion but more of a niche player, as its focus sits more with mutual funds as opposed to broader financial data, according to Carpenter.

That's not to say FactSet's only value is due to its availability. Carpenter pointed to its Open:FactSet Marketplace, which is part of the company's push into focusing more on APIs. With Wall Street's increased use of data, APIs have taken center stage as they help facilitate the process of tapping into various feeds.

That type of work would make the company a good fit at most exchanges, potentially allowing it to merge easier than some of the larger providers.

"FactSet is probably the most innovative," Carpenter said. "They are doing things that I think would catch the eye of an exchange and be pretty complimentary."

Octavio Marenzi, CEO of consultancy Opimas, told Business Insider another benefit FactSet brings is its expertise in analytical tools that could prove useful for exchanges.

"I think FactSet would be a perfect candidate for an exchange to acquire ... The exchanges provide a lot of the raw, underlying data. What makes sense to do is provide sort of value-added services on top of that data," Marenzi said. "That is sort of moving up the food chain."

As for which exchange would be interested in buying FactSet, or any data provider, one name was referred to by Carpenter, Connell, and Marenzi: ICE. The exchange operator's large size and acquisitive nature makes it a top candidate. In 2016, ICE reportedly attempted to buy the LSE.

"They have an insane history. [ICE CEO] Jeff Sprecher has been buying exchanges left and right, all over the place," Carpenter said. "I think a shoe-in is ICE to start looking for another data play."

A spokesperson for ICE declined to comment.

See more: Large exchanges had a staggering 60% profit margin. We break down how they made their money.

To be sure, exchanges aren't exactly struggling. Since 2012, they've enjoyed a 12% increase in revenue annually and in 2018 trading venues made nearly $30 billion in revenue globally.

And while Connell agrees exchanges are likely to continue looking for more deals for companies related to data and content, he doesn't see any making a rash decision after hearing of the potential LSE-Refinitiv deal.

"I don't think any of those organizations are the type that are reactionary that say, 'Oh geez, we need to do something to stay competitive so let's go out and start looking,'" Connell said.

But there is no doubt exchanges feel some pressure. A recent report from Opimas suggested exchanges eye-popping returns won't continue unless they add revenue streams.

Exchange fees, particularly those around market data, have come under fire in recent years. The issue reached a boiling point earlier this year when Nasdaq, NYSE and Cboe Group all filed lawsuits against the Securities and Exchange Commission, one of their regulators, over a proposed pilot that would analyze their pricing models for transaction fees and rebates.

"They'll be tempted to try and expand out into other data areas while the going is still good," Marenzi said. "The exchanges are afraid that sort of revenue is going to come under great pressure and greater scrutiny, so they'll probably be extra keen to diversify in terms of the data business."