US tech giants have a penchant for taking stakes in start-ups they do business with. Microsoft, valued at $1.83tn, qualifies as the former. The London Stock Exchange Group, established in 1698, hardly resembles the latter. So the purchase of a 4 per cent stake in LSEG worth about £1.5bn ($1.8bn) by the software leviathan requires scrutiny.
On one level, it has become normal for cloud computing companies to extend stake-taking to larger customers. The extra dimension is that LSEG is itself now primarily a data company. Indices and price data matter more to it than stuffy old share trading.
The tie-in should therefore provoke greater interest among regulators than other incremental selldowns by investment consortiums — in this case Blackstone and Thomson Reuters. The more data that giants such as Microsoft can aggregate, the greater its value.
With $107bn of cash and short-term investments to hand this is an affordable deal for Microsoft. LSE has agreed to a minimum cloud-related spend of $2.8bn over 10 years. Microsoft sees a $5bn opportunity.
Cloud computing should attract resilient spending. By 2026, Gartner predicts it will exceed $1tn. Microsoft’s cloud revenue was close to $26bn in the last quarter — up more than two-thirds in two years.
Exchanges are lucrative but demanding customers. Financial markets data is perfect for bulk storage and rapid analytics. Google set the scene last year with a 10-year cloud deal with derivatives exchange operator CME, investing $1bn in the business. AWS has a tie-in with Nasdaq.
Both Microsoft and LSEG say the cloud computing deal is not exclusive. They are aware regulatory concerns have slowed dealmaking. The Financial Conduct Authority, a UK watchdog, has launched a “discussion” on the competitive impact of Big Tech in financial services.
Data aggregation has impelled exchange transactions including LSEG’s purchase of Refinitiv data businesses and FTSE International. Tie-ups with cloud giants are a natural next step. Professional investors should keep a close eye on the trade-off between improved services and cost.