If you are not familiar with business research companies, then IHS Inc. (NYSE:IHS) stock might not be on your watch list. And it would be okay for the most part, because the stock is basically trading at where it was 12 months ago. However, on Monday morning, IHS stock shot up more than six percent. Why? The company just bought a major financial information and services company: Markit Ltd (NASDAQ:MRKT).
IHS Buys Markit for $5.9 Billion
On Monday, March 21, IHS announced that it would buy Markit for about $5.9 billion in an all-stock deal. After the merger, shareholders of IHS would own approximately 57% of the combined company. (Source: “IHS and Markit to Merge, Creating a Global Leader in Critical Information, Analytics and Solutions,” IHS Ltd, March 21, 2016.)
IHS will pay the equivalent of $31.13 per Markit share, which would imply a 5.6% premium over the company’s closing price of $29.49 last Friday. The total value of the combined company would exceed $13.0 billion.
The news turned out to be huge for both companies. IHS stock surged 6.3% to $117.68 at around 10:00 a.m., while shares of Markit climbed a more impressive 8.8% to $32.08.
The deal is another example of a U.S. company moving its operations overseas because corporate tax rates are lower. IHS is based in Douglas County, Colorado, while Markit is headquartered in London, England. After the deal, the combined company will be renamed IHS Markit and will be headquartered in London.
IHS Markit is going to be quite a dominant player when it comes to information, business analytics, and solutions. The combined company will have more than 50,000 key customers, including 75% of the Fortune Global 500 companies.
While HIS and Markit are in similar businesses, they do offer different products and have non-overlapping customers. The merger would give them opportunities to cross-sell their products and services across different commercial industries and governments.
The combined company has a solid financial profile. Put them together and you’ll see that in fiscal year 2015, the companies generated $3.3 billion in revenue, $1.2 billion in EBITDA, and $800 million in free cash flow. Balance sheet-wise, the companies are also solid. Going forward, IHS Markit will have a capital policy with a target leverage ratio between two and three times.
Of course, what investors really care about is how much growth the combined company will be able to generate. Well, due to the significant amount of commercial, operational, and structural synergies, the deal should result in 20% growth in adjusted earnings per share (EPS) in 2017.
Moreover, IHS Markit is expected to realize cost synergies of $125 million by the end of 2019. The combined company expects its adjusted effective tax rate to be in the low to mid-20% range.
Last but not least, investors of IHS stock and MRKT stock will have share buybacks to look forward to. According to the merger announcement, IHS Markit will repurchase $1.0 billion of shares in each of 2017 and 2018.
The Bottom Line on IHS Stock
The board of directors of each company has approved the merger. The transaction is expected to close in the second half of 2016. Now, it is pending regulatory approvals and approval by both IHS and Markit shareholders.
One thing is for sure: the deal is going to be great for both IHS stock and MRKT stock investors.