Elliott Piles On as LSEG Faces AI Questions and Margin Pressure

By Charlie Conchie

LONDON, Feb 25 (Reuters) - With its stock price down about 30% in the past year and an activist investor pushing for change, LSEG CEO David Schwimmer is under pressure to show how he can lift the exchange and data group's fortunes when it reports 2025 results on Thursday.

None of the options available to the former Goldman Sachs banker to improve performance are straightforward, or guaranteed to work, according to four analysts, three investors and three people who have worked with the company. These include buying back billions of pounds worth of shares, persuading investors of the strength of LSEG's data in an AI-driven future, cutting costs to lift margins, and selling assets, they said.

Elliott’s Demands and LSEG’s Strategic Response

ELLIOTT MOVES IN

Schwimmer, who took charge in 2018, led the $27 billion takeover of Refinitiv the following year to expand LSEG from the home of London's stock exchange into a diversified data and markets business. Then in 2022, he struck a 10-year AI and cloud computing partnership with Microsoft. 

AI Risk and Investor Concerns

But despite such bets, LSEG's shares have lagged some rival exchanges and data providers. And in recent weeks, the company has faced a selloff fuelled by fears that AI would disrupt its business model as well. Earlier this month, activist investor Elliott Management emerged as a shareholder seeking improvements in performance.

Investor and Analyst Views

"The management team needs to demonstrate that they have the credibility to take LSEG to the next stage," said Stephen Yiu, chief investment officer of the Blue Whale growth fund, an LSEG shareholder. He said he was holding his position which he took in December 2023, while watching for signs of progress and any response to Elliott.

In a statement, the London-based company said, "LSEG maintains an active and open dialogue with our investors, while remaining focused on executing our strategy."  Elliott, known as a relentless activist, declined to comment on what requests it has made to LSEG or on whether it has acquired shares in the company. 

LSEG is the largest customer of Reuters, which provides news for LSEG's Workspace terminals and other products.

Some big shareholders back Schwimmer's strategy. Top-5 investor Lindsell Train said in a February memo that a slump in LSEG's share at the time reflected a wider selloff in software and data stocks, adding it could "point to no operational failings to account for the recent share price falls." All 16 analysts that track LSEG recommend buying the stock, with some saying that AI fears are overstated.

Last October, Schwimmer suggested that LSEG cannot be disintermediated by AI. "For those who think AI models can scoop up so-called public data from the internet and displace us, that just does not reflect how this industry works and fundamentally ignores the non-replicable nature of the vast majority of our data." 

Analysts expect LSEG to post adjusted pretax profit of 3.3 billion pounds, up from 2.97 billion pounds in 2024, according to a company-compiled consensus.

Margin Targets and ASV Trends

ELLIOTT WANTS HIGHER PROFIT MARGINS

LSEG's growth in terms of annual subscription value (ASV) - a measure of subscription revenue growth across its key business lines - has plateaued in recent years.

LSEG was able to provide an early boost in ASV by slashing the rate of attrition in its customer base, according to one analyst. Between 2021 and 2022, ASV jumped from 4.6% to 6.2% but has since dipped to 5.6% in its most recent quarterly results, due in part to the one-off hit from the consolidation of Credit Suisse's historic accounts. 

Elliott believes that LSEG's profit margin lags rivals and has made improving that a core focus of its demands, according to a source familiar with the matter. Reuters could not determine what steps Elliott is pushing for, but internal use of AI to drive efficiency is one option, the source said. 

Microsoft Partnership and AI Strategy

Elliott is also pressing Schwimmer to more forcefully combat the suggestion that AI threatens LSEG’s business model and more clearly lay out the benefits of its partnership with Microsoft, the source said.

Schwimmer has called the Microsoft deal "transformative" and said "meaningful" revenue impact will start in 2025. 

But that has yet to show through for some analysts and investors. "The partnership has failed to deliver so far and other companies are moving much faster," Blue Whale growth fund's Yiu said.

Microsoft Declines to Comment

Microsoft declined to comment.

Asset Sales and Buybacks

ASSET SALES AND BUYBACKS

Elliott, which manages about $80 billion, is urging LSEG to review its portfolio and believes it has capacity to launch a 5 billion pound buyback, the source said. LSEG didn't respond to a Reuters question on this point. 

If valued on a similar basis to peers, UBS analysts estimate that LSEG could be worth around 47 billion pounds. Its market value at Wednesday's close was 39 billion pounds.

FTSE Russell and LCH Valuation

FTSE Russell, LSEG's indexing arm, and LCH, its clearing business, are seen by Elliott as undervalued within the broader group, the source said. LSEG could also sell part or all of its 51% stake in Tradeweb, worth nearly $13 billion at current market prices, the person added.

Tradeweb Stake Review

But carving up the company would amount to Schwimmer admitting that his strategy has fallen short, one person who has worked with him said. Schwimmer has described LSEG's units as "great trophy assets on their own" that gain more value when integrated, and said LSEG is linking its products more tightly.

Several analysts and a shareholder told Reuters they supported more buybacks but were wary of large disposals.

"We think it would be the wrong decision," said Ben Needham, a portfolio manager at Ninety One, a top-20 LSEG shareholder. "You get a higher share price because of it; it would no doubt be accretive to where the market is today. But instant gratification isn't a way of creating long-term value."   

FX Rate Context ($1 = £0.7406)

($1 = 0.7406 pounds)

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(Reporting by Charlie Conchie. Additional reporting by Iain Withers. Editing by Anousha Sakoui, Paritosh Bansal and Mark Potter)