Wednesday, March 23, 2016

IHS to buy data provider Markit, combined company to base in UK

IHS to buy data provider Markit, combined company to base in UK

U.S.-based IHS Inc (IHS.N) agreed to buy Markit Ltd (MRKT.O) to create a $13 billion London-based data and business research provider, in the latest example of a U.S. company moving its domicile overseas where corporate tax rates are lower.
The companies said IHS shareholders will own about 57 percent of the combined company following the close of the all-stock deal, which values Markit at about $5.9 billion.
Englewood, Colorado-based IHS, whose businesses include Jane's Defence Weekly and technology industry research firm iSuppli, will pay the equivalent of $31.13 per Markit share, a premium of 5.6 percent to Markit's Friday close.
Markit's shares were up 10.9 percent at $32.70 at midday. The shares have risen about 23 percent since the company went public in June 2014. IHS's shares, which hit a 3-year low of $92.90 last month, were up 5.6 percent at $116.90.
Markit, founded in 2003 by ex-TD Securities credit trader Lance Uggla in a barn north of London, provides pricing and reference data, index and valuation services.
IHS Chief Executive Jerre Stead will become chairman and chief executive of the combined company, IHS Markit.
Uggla will be president for now and take over the top job after Stead’s retirement on Dec. 31 next year.
IHS shareholders will get 3.5566 shares of the combined company for each share held.
The combined company, while maintaining some "key" operations in Colorado, will be based in London.
So-called tax inversion deals have become the subject of a fierce political debate in the United States as well as a source of concern for the government over the potential loss of tax revenue.
"We don't see this transaction as being implicated by the U.S. anti-inversion rules," IHS Chief Financial Officer Todd Hyatt said on a conference call with analysts.
IHS said the combined company was expected to have a tax rate in the low- to mid-20 percent range. IHS's tax rate for the year ended Nov. 30 was 20.5 percent, while Markit paid taxes at the rate of 31.5 percent for the year ended Dec. 31.
The deal is the latest in a string by IHS, whose energy information business, its biggest, has been hit by the slide in oil prices. Revenue in the division fell almost 1 percent to $215.9 million in the first quarter ended Feb. 29.
IHS said in January it would buy U.S.-based Oil Price Information Service (OPIS) to add real-time pricing information to its energy analytics business.
The company agreed in December to buy Canada-based vehicle data provider Carproof Corp for $460 million to boost its automotive research business.
Markit competes with Thomson Reuters Corp (TRI.TO) and Bloomberg LP in providing financial data to investors.
IHS also reported on Monday a stronger-than-expected 6.7 percent rise revenue to $548.4 million, helped mainly by a jump in non-subscription income, which includes organizing industry events.
M. Klein and Co and Goldman, Sachs & Co were IHS's financial advisers, while Markit was advised by J.P. Morgan Securities. IHS's legal adviser was Weil, Gotshal & Manges LLP, while Davis Polk & Wardwell LLP provided legal advice to Markit.
(Reporting by Abhirup Roy and Supantha Mukherjee in Bengaluru; Editing by Anupama Dwivedi and Ted Kerr)

Monday, March 14, 2016

Negative Interest Rates Less Than Zero

Negative Interest Rates

Less Than Zero


Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it, too. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world’s central banks.

The Situation

The Bank of Japan surprised markets by adopting negative interest rates in January, more than a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. With other options to stimulate the economy limited, more policy makers are willing to test the technique. They acknowledge that sub-zero rates can crimp the ability of banks to make money or lead them to take additional risks in search of profit. The ECB cut rates again March 10, charging banks 0.4 percent to hold their cash overnight. At the same time, it offered a premium to banks that borrow in order to extend more loans. Sweden also has negative rates, Denmark is using them to protect its currency’s peg to the euro and last year Switzerland moved its deposit rate below zero for the first time since the 1970s. Janet Yellen, the U.S. Federal Reserve chair, said in November that a change in economic circumstances could put negative rates “on the table” in the U.S. Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By February, more than $7 trillion of government bonds worldwide offered yields below zero. That means investors buying bonds and holding to maturity won’t get all their money back. While most banks have been reluctant to pass on negative rates for fear of losing customers, a few began to charge large depositors.
Source: Bloomberg


The Background

Negative interest rates are an act of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the euro area. While it’s still too early to tell if they will work, ECB President Mario Draghi said in January 2016 that there are “no limits” on what he will do to meet his mandate. Europe’s central bank chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S. and Japan. Policy makers in both Europe and Japan are trying to prevent a slide back into deflation, or a spiral of falling prices that could derail the economic recovery. The euro zone is also grappling with a shortage of credit and unemployment is only slowly receding from its highest level since the currency bloc was formed in 1999.
Source: European Central Bank
Source: European Central Bank

The Argument

In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there’s a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead, robbing lenders of a crucial source of funding. But there’s mounting concern that when banks absorb the cost of negative rates themselves, that squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend. The Bank for International Settlements warned in a March 2016 report of “great uncertainty” if rates stay negative for a prolonged period. And if more and more central banks use negative rates as a stimulus tool, there’s concern the policy might ultimately lead to a currency war of competitive devaluations.

The Reference Shelf

  • A Bloomberg comic explains how negative interest rates aim to put money to work.
  • The Bank for International Settlements published a March 2016 report on negative rates.
  • An analysis of the impact of negative rates in 2015 from Sweden’s central bank.
  • Blog posts from Francesco Papadia, a former director general for market operations at the ECB, on whether the central bank should have negative rates, and a discussion about where rates could go.
  • A speech by Benoit Coeure, a member of the ECB Executive Board, on monetary policy and the challenges of the zero lower bound.
  • A Bloomberg News article outlining the pros and cons of a deposit rate of zero or below and a QuickTake on the ECB’s debate over quantitative easing.
  • An ECB research paper on non-standard monetary policy and a Bank of England study of negative rates.