The S&P 500 and the Dow Jones industrial average will be united under the same ownership umbrella, bringing together two of the biggest names in indexing in an entity that generates more than US$400 million in annual revenue.
The new entity, S&P/Dow Jones Indices, will be 73 percent owned by McGraw-Hill, the parent of Standard & Poor’s, the companies said in a joint press release. CME Group, which owns most of Dow Jones indexes, will hold a 24.4 percent stake in the venture, while Dow Jones & Co. Inc. will hold a 2.6 percent stake. The transaction has the approval of both companies’ boards.
The two widely used benchmarks in the world of investing having the same owners potentially means they would have a clear edge over other indexing-industry competitors, notably MSCI, which was outbid by CME Group last year in its attempt to acquire Dow Jones Indexes from Dow Jones & Company Inc. CME Group now owns 90 percent of Dow Jones Indexes, while Dow Jones & Co., the News Corp. unit, currently holds a 10 percent stake.
The transaction could unleash a wave of mergers and acquisitions in a growing industry that is now turning its attention to expanding in fast-growing, emerging-market countries. The popularity of indexing, which affords investors broad access to different slices of the financial markets—whether through funds like ETFs or futures—has grown rapidly in the past decade.
“S&P/Dow Jones Indices is expected to be operational in the first half of 2012, subject to regulatory approval and customary closing conditions,” the companies said in the press release.
The possibility of a joint venture involving S&P Indexes and Dow Jones Indexes was first raised in a Wall Street Journal story on September 30, which we reported on at that time.
The new indexing company will become part of the new McGraw-Hill Markets, which will come out of the separation of McGraw-Hill into two public companies. McGraw-Hill announced plans for that separation on September 12.
At that time, McGraw-Hill said the markets unit should have US$4 billion in revenues this year, 40 percent of which comes from international markets. The other unit to come out of the planned split, McGraw-Hill Education, is expected to pull in revenue of US$2.4 billion this year, the company said.
McGraw-Hill said then that it expects to complete its separation into two companies by the end of 2012 through a tax-free spinoff of the education business to McGraw-Hill shareholders.
The companies said that under their agreement, S&P/Dow Jones Indices joint venture will enter into a new licence agreement under which the CME Group will pay S&P Indices a share of profits from the CME Group equity products lineup.
Those profits come from CME’s trading and clearing business for futures, swaps options and futures.
That new license agreement also expands products covered under the license to include swaps, and extends CME Group’s currently exclusive rights to E-mini futures and other indexed S&P indexed futures. That exclusive agreement is in place until the end of 2017, the companies said.
McGraw-Hill expects that the transaction will increase its earnings immediately, and cited three reasons why the S&P/Dow Jones Indices will drive its future profit growth:
- Increasing revenue through international and asset-class expansion, new product development, enhanced market data offerings and increased cross-selling opportunities;
- Achieving cost savings and accelerating time to market by leveraging technology, data procurement, other back-office functions and McGraw-Hill Markets’ infrastructure;
- Reducing capital requirements and generating free cash flow for parent companies.
Alexander Matturri, executive managing director of S&P Indices, will be the chief executive officer of S&P/Dow Jones Indices.
“Those who rely on indices worldwide—from product issuers to exchanges to investors—will benefit from a deeper lineup of indices as well as a business model focused on innovation, performance and impact,” Matturri said in the press release.