Microsoft Buys The London Stock Exchange (Well, 4% Of It)

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Key Takeaways

  • Microsoft will pay almost $2 billion for a 4% share in the London Stock Exchange Group (LSEG).
  • As part of the deal, LSEG will migrate their back office to Microsoft products and implement their Azure cloud service across their business.
  • As part of the deal, LSEG has agreed to spend a minimum of $2.8 billion on cloud computing products over the next 10 years.
  • It will be a major step forward in the modernisation of financial markets, with heavy regulation and complex systems making migration to cloud based systems a slow and challenging process.

We’ve seen a major partnership announced this morning, with Microsoft and the London Stock Exchange Group (LSEG) agreeing on a 10 year deal which will see Microsoft acquire almost 4% of the parent company of the UK’s biggest stock exchange.

The plan will see Microsoft work with LSEG to bring their data infrastructure and analytics capabilities, using Microsoft’s Azure cloud offering, plus their AI capabilities as well as Microsoft Teams.

Not sure if that last one’s worth shouting about, but anyway.

Essentially it means that employees at LSEG are going to see comprehensive changes to their tech stack, with Microsoft products and services being rolled out across the group.

As well as the London Stock Exchange from which it takes its name, LSEG has a number of other subsidiaries including financial data provider Refinitiv and market index provider FTSE Russell (creator of the Russell 1000 and 2000, among many others).

What the deal means

One the fact of it, this seems like a very nice deal for Microsoft.

The announcement stated that Microsoft will be purchasing around 4% of LSEG from the Blackston/Thomas Reuters Consortium. Based on LSEG’s current market cap of around $45 billion, that means an investment in the region of $1.8 billion.

However, LSEG has a contractual agreement to spend a minimum of $2.8 billion with Microsoft on cloud related services. So over the course of the next ten years, Microsoft will get back their initial investment plus an extra billion on top.

Sounds pretty good.

That’s probably why Microsoft’s official release included a section headed “Financial effects for LSEG”. It was a bit light on specifics other than outlining the costs for the transition, but it did state that the deal was “Expected to increase LSEG’s revenue growth meaningfully over time as new products come on-stream.”

What that means remains to be seen, however it is likely that beefing up their data analytics and modeling capabilities will drive new profit centers for LSEG. As a company they hold a central role in the financial sector in the UK, with London considered second only to New York when it comes to the global financial centers.

The data at their disposal is vast, and Microsoft will likely be able to work closely with them to leverage this data in a multitude of ways.

LSEG Chief executive David Schwimmer (no, not that one) stated that: “This strategic partnership is a significant milestone on LSEG’s journey towards becoming the leading global financial markets infrastructure and data business, and will transform the experience for our customers.

This potentially a very strong test case for utilizing cloud technology within the capital markets. While major advancements have been made in the way financial markets operate, there are still many old and outdated processes used across the industry.

Utilizing cloud infrastructure for some of these applications, as well as making sure the regulator is happy with the finished product, could serve as an attractive blueprint for other exchanges and financial markets around the world to follow.

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How the stock has reacted

Microsoft stock was up over 2% in early hours trading on Monday after the news was announced, while LSEG was up over 3%.

It’s a further step for Microsoft who, along with much of big tech, are making major steps to grow their cloud computing division. It’s seen as a major area of growth, and it’s particularly attractive given the diversification away from the advertising model of many of the tech giants such as Google.

Microsoft’s Azure cloud service is currently second in market share to Amazon Web services, and they’re also in competition with Google Cloud, Alibaba Cloud, IBM Cloud and even Salesforce.

It’s a profitable business that is highly resistant to economic fluctuations. With advertising revenue, economic downturns can cause advertisers to pull back and big hits to company revenue. With cloud services required for businesses to maintain their operations, the revenue from them is sustained even during periods of economic uncertainty.

It’s not surprising that it’s an attractive and highly competitive space, and Microsoft will surely be looking to secure a further foothold in the UK and broader European markets with this deal with LSEG.

What does this mean for investors?

For a while now we’ve seen the big push in the cloud computing space. This has been particularly the case over the course of earnings announcements in 2022, with many tech companies highlighting their growth in this area among generally a pretty lackluster outlook.

It’s likely to continue to be the next key battleground for Silicon Valley’s biggest companies. While Amazon Web Services has gotten off to a flying head start, there’s no guarantee that they’ll remain top of the roost forever.

As with anything in tech, there’s also always a chance that an upstart newcomer could come and take the lead ahead of all of the established players. It might seem unlikely, but in the era of multi-billion dollar venture capital funding rounds, startups are often able to compete with the financial muscle of the big incumbents within a narrow service or product offering.

With the pace at which tech moves, it can be hard for investors to stay ahead of the curve. That’s why we created the Emerging Tech Kit. It uses the power of AI to analyze sheer amounts of data that humans just can’t possibly replicate.

In this Kit, our AI looks to invest across four different tech verticals, specifically tech ETFs, large tech companies, growth tech companies and cryptocurrencies via public trusts. It looks at a huge amount of historical data points and then predicts how these verticals are expected to perform in the coming week on a risk adjusted basis.

It then automatically rebalances the Kit to align with these projections, while doing the same thing for the individual securities within each vertical. It gives investors the ability to stay at the cutting edge of this fast paced industry, without having to spend 24 hours a day doing research.

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