LONDON, Dec. 12 (Reuters) – Microsoft (MSFT.O) It will buy a 4% stake worth $2 billion in the London Stock Exchange Group (LSEG.L)in the latest sign of a blurring of boundaries between big tech and financial firms that has sparked some concerns among regulators.
LSEG said Monday the deal would bring a “meaningful” increase in revenue after 2025 from selling more of its existing products via Microsoft Apps to expand the customer base, along with better product pricing, but declined to give any specific estimates.
Deepening ties between a handful of major global cloud companies such as Microsoft and Google (GOOGL.O)Amazon (AMZN.O) and IBM (IBM.N)and financial firms such as banks and stock exchanges, have prompted regulators to scrutinize the links more closely.
Microsoft has a longstanding relationship with LSEG, and Exchange Group CEO David Schwimmer said they began talks about a year ago about a more strategic relationship.
“It’s a long-term partnership. In terms of the products we’ll build together, I expect our customers to start seeing benefits in 18 to 24 months, and we’ll continue to build from there,” Schwimmer told Reuters.
In November 2021, Google said it would invest $1 billion in CME Group to move the US derivatives exchange trading systems to the cloud. In the same month, the US Nasdaq and Amazon announced a similar multi-year partnership.
Regulators have expressed concern about financial firms’ overreliance on too few cloud service providers, given the disruption this could cause if a provider serving many customers goes down.
The European Union has just approved a law offering safeguards to cloud providers in financial services, with Britain poised to follow suit.
“You have to assume we don’t like to surprise our regulators,” said Schwimmer, when asked if LSEG has ensured that regulators are on board.
LSEG said the tie-up with Microsoft, which gives the software group a seat on LSEG’s board, is a partnership to reap the benefits of “consumption-based pricing,” rather than a traditional cloud deal.
“We will continue to maintain our multi-cloud strategy and work with other cloud service providers,” Schwimmer said.
Additional costs would total £250-300m over the period 2023-2025, with an impact of 50-100 basis points on the EBITDA margin over that two-year period.
Analysts asked Schwimmer to clarify his comment about a “meaningful” rise in proceeds from the deal, but he declined to do so.
“This appears to be a major milestone in LSEG’s journey toward being information solutions-centric, even if details of ‘meaningful’ revenue growth are lacking,” said analysts at Jefferies.
Jefferies analysts said the deal could “transformatively” expand the appeal of the LSEG workspace, with a potentially compelling alternative to Instant Bloomberg available for the first time.
LSEG shares rose about 3% and were the best performers on the leading FTSE 100 index (.FTSE) And they are on their way to their strongest day since mid-August.
Frankfurt-listed Microsoft shares fell 0.4 percent.
As part of the deal, LSEG made a contractual commitment to a minimum cloud-related spend with Microsoft of $2.8 billion over the life of the partnership.
Microsoft said the initial focus will be on offering “interoperability” between LSEG Workspace, Microsoft Teams, Excel, and PowerPoint with other Microsoft applications, and a new version of LSEG Workspace.
LSEG and Microsoft will look at how they can work together to shift their trading or clearing activities to the cloud
“It’s in a more exploratory phase at this point, but we’ll update the market as that continues to evolve,” Schwimmer said.
LSEG bought Refinitiv for $27 billion from the Blackstone and Thomson Reuters consortium, which turned the exchange into the second largest financial data company after Bloomberg LP.
Microsoft will purchase LSEG shares from Blackstone (BX.N)/Thomson Reuters (TRI.TO), a consortium, the exchange operator said. The deal would make Microsoft the seventh largest shareholder in LSEG, based on Refinitiv data.
Thomson Reuters, which owns Reuters News, has a minority stake in LSEG after the Refinitiv deal. LSEG also pays Reuters for news.
The Microsoft acquisition is expected to complete in the first quarter of 2023.
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Additional reporting by Yadarissa Chapong in Bengaluru. Editing by Nivedita Bhattacharjee, Jane Merriman and Louise Heavens
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