DEUTSCHE BANK: Here's what could go wrong with the IHS-Markit deal

Merger two neutron starsNASA’s Goddard Space Flight CenterThe merger of two neutron stars creates a black hole in a new computer simulation from NASA.

Financial data giant IHS on Monday agreed to combine with its UK rival, Markit, in a $13 billion merger of equals.

But while the deal has some definite pros — like lower tax costs — not all analysts are convinced it’s a foolproof plan.

“We understand the medium-term benefits, [but it’s] harder to see the long-term benefits,” wrote Deutsche Bank’s Paul Ginocchio in a note on Monday.

His main concern is that once the merger benefits are realised in a few years, more products will be sold to a larger client base, and that will dilute the company’s sales focus.

“The significant diversification from this merger could potentially harm long-term organic revenue growth versus maintaining or accelerating it, leading to the need to make disposals,” Ginocchio wrote.

In other words, they will wind up with too many products and ultimately have to sell some later.

That said, the deal could mean tax benefits worth about 8% to each company and cost savings worth nearly 8%, Ginocchio noted. IHS plans to redomicile in London, where Markit is based, and where the tax rate is lower.

That’s not all IHS stands to gain from the deal.

“IHS benefits from 1) solving its CEO succession issues with a great leader, 2) diversifies away from oil & gas, 3) reduces leverage, 4) cost & rev synergies,” Ginocchio wrote.

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