Form 6-K Markit Ltd. For: May 10

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of May, 2016

Commission File Number: 001-36495

MARKIT LTD.

(Translation of registrant’s name into English)

4th Floor, Ropemaker Place,

25 Ropemaker Street

London, England

EC2Y 9LY

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F x                 Form 40-F ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 10, 2016

 

 

 

 

 

 

 

 

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EXHIBIT INDEX

 

Exhibit Number		Description
99.1		Markit Ltd. selected financial information as of and for the period ended March 31, 2016
99.2		Markit Ltd. management’s discussion and analysis of financial condition and results of operations
99.3		Markit Ltd. press release dated May 10, 2016 - Markit reports first quarter 2016 financial results
99.4		Markit Ltd. Risk Factors

 

 

 

 

 

 

 

Exhibit 99.1

Markit Ltd.

Consolidated Income Statement (Unaudited)

 

 

 

		Three   months   ended   March 31,   2016   $’m				Three   months   ended   March 31,   2015   $’m
Revenue			287.8				271.5
Operating expenses			(160.5)				(146.8)
Exceptional items			(9.5)				(1.4)
Acquisition related items			(1.6)				-
Amortisation - acquisition related			(18.9)				(14.4)
Depreciation and amortisation - other			(27.9)				(24.9)
Share based compensation and related items			(24.1)				(9.9)
Other gains/(losses) - net			0.9				7.9
Operating profit			46.2				82.0
Finance costs - net			(8.6)				(4.1)
Share of results from joint venture			(2.4)				(2.6)
Profit before income tax			35.2				75.3
Income tax expense			(10.5)				(20.8)
Profit for the period			24.7				54.5
Profit attributable to:
Owners of the parent			24.9				54.8
Non-controlling interests			(0.2)				(0.3)
			24.7				54.5
			$				$
Earnings per share, basic			0.14				0.30
Earnings per share, diluted			0.13				0.29

There were no discontinued operations for either period presented.

 

 

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Markit Ltd.

Consolidated Balance Sheet (Unaudited)

 

 

		March   31, 2016				December   31, 2015
		$’m				$’m
Assets
Non-current assets
Property, plant and equipment			46.4				49.6
Intangible assets			3,066.5				3,076.8
Deferred income tax assets			2.8				2.3
Derivative financial instruments			0.3				0.5
Investment in joint venture			10.1				12.5
Available for sale financial assets			2.8				1.1
Total non-current assets			3,128.9				3,142.8
Current assets
Trade and other receivables			275.7				272.5
Derivative financial instruments			6.9				3.9
Current income tax receivables			0.7				3.1
Cash and cash equivalents			89.7				146.0
Total current assets			373.0				425.5
Total assets			3,501.9				3,568.3
Equity
Capital and reserves
Common shares			1.8				1.7
Share premium			212.6				177.2
Other reserves			(178.3)				(170.0)
Retained earnings			2,128.6				2,067.4
Equity attributable to owners of the parent			2,164.7				2,076.3
Non-controlling interests			36.0				36.2
Total equity			2,200.7				2,112.5
Liabilities
Non-current liabilities
Borrowings			656.6				737.6
Trade and other payables			163.1				157.2
Derivative financial instruments			0.4				0.1
Deferred income tax liabilities			8.0				22.9
Total non-current liabilities			828.1				917.8
Current liabilities
Borrowings			86.4				86.4
Trade and other payables			158.1				213.4
Deferred income			223.8				226.7
Current income tax liabilities			3.4				9.9
Derivative financial instruments			1.4				1.6
Total current liabilities			473.1				538.0
Total liabilities			1,301.2				1,455.8
Total equity and liabilities			3,501.9				3,568.3

 

 

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Markit Ltd.

Consolidated Statement of Cash Flows (Unaudited)

 

 

 

		Three   months   ended   March 31,   2016				Three   months   ended   March 31,   2015
		$’m				$’m
Profit before income tax			35.2				75.3
Adjustment for:
Amortisation - acquisition related			18.9				14.4
Depreciation and amortisation - other			27.9				24.9
Fair value gains on derivative financial instruments			(0.7)				(0.1)
Fair value loss on contingent consideration			0.1				-
Share based compensation			13.2				9.1
Finance costs - net			8.6				4.1
Share of results from joint venture			2.4				2.6
Foreign losses/(gains) and other non-cash charge/(income) in operating activities			0.9				(0.9)
Changes in working capital:
(Increase)/decrease in trade and other receivables			(5.0)				2.5
Decrease in trade and other payables			(39.6)				(56.3)
Cash generated from operations			61.9				75.6
Cash flows from operating activities
Cash generated from operations			61.9				75.6
Interest paid			(1.7)				(1.6)
Income tax paid			(5.8)				(13.1)
Net cash generated from operating activities			54.4				60.9
Cash flows from investing activities
Acquisition of businesses, net of cash acquired			(22.2)				-
Purchases of property, plant and equipment			(2.8)				(5.8)
Purchases of intangible assets			(37.4)				(34.1)
Investment in joint venture			-				(7.6)
Investment in available for sale financial assets			(1.7)				-
Net cash used in investing activities			(64.1)				(47.5)
Cash flows from financing activities
Proceeds from issuance of common shares			35.8				79.9
Payments for shares bought back			(22.2)				(22.0)
Repayments of borrowings			(60.1)				(103.0)
Net cash used in financing activities			(46.5)				(45.1)
Net decrease in cash and cash equivalents			(56.2)				(31.7)
Cash and cash equivalents at beginning of period			146.0				117.7
Net decrease in cash and cash equivalents			(56.2)				(31.7)
Exchange losses on cash and cash equivalents			(0.1)				(1.6)
Cash and cash equivalents at end of period			89.7				84.4

 

 

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Markit Ltd.

Notes to the Consolidated Financial Statements (Unaudited)

 

 

 

1.	Operating expenses

 

The operating expenses above exclude exceptional items, acquisition related items, other gains/(losses) – net, share based compensation and related items, depreciation on property, plant and equipment and amortisation of intangible assets.

 

2.	Exceptional items

 

		Three   months   ended   March 31,   2016				Three   months   ended     March 31,   2015
		$’m				$’m
Merger costs			8.7				-
Legal advisory costs			0.8				1.4
Exceptional items			9.5				1.4

Exceptional items are considered by management to constitute items that are significant either because of their size, nature or incidence of occurrence, and are presented on the face of the income statement. The separate reporting of exceptional items is set out below to provide an understanding of the underlying performance of Markit Ltd and its subsidiaries (the “Group”).

Legal advisory costs represent fees for the consolidated class action lawsuit relating to credit derivative and related markets and the associated ongoing antitrust investigations by both the US Department of Justice and the European Commission. These costs have been classified as exceptional due to the complexity and individual nature of these related cases along with the size of the costs being incurred. These costs represent an industry-wide issue and are consequently not considered part of the Group’s normal course of business.

Merger costs are associated with the preparation work for the proposed merger with IHS. The costs relate to banking, legal, accounting and other advisory fees associated with the merger. This one-off transformational arrangement and associated costs will have a significant impact on the Group and as such is not treated as part of the Group’s normal course of business.

 

 

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EXHIBIT 99.2

Management’s discussion and analysis of financial condition and results of operations

This management’s discussion and analysis is designed to provide you with a narrative explanation of our financial condition and results of operations. We recommend that you read this in conjunction with our unaudited selected consolidated financial information for the three month periods ended March 31, 2015 and 2016. We also recommend that you read our operating and financial review and prospects and our audited consolidated financial statements, and the notes thereto, which appear in our annual report on Form 20-F (our “Annual Report”) (File No. 001-36495), filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 11, 2016.

Unless otherwise indicated or the context otherwise requires, all references to “Markit” or the “company,” “we,” “our,” “ours,” “us” or similar terms refer to Markit Group Holdings Limited and its subsidiaries prior to the completion of our corporate reorganisation in connection with our initial public offering, and Markit Ltd. and its subsidiaries as of the completion of our corporate reorganisation and thereafter.

We prepare and report our consolidated financial statements and financial information in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”). We have made rounding adjustments to some of the figures included in this discussion and analysis. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them. Unless otherwise indicated, all references to currency amounts in this discussions and analysis are in U.S. dollars.

This discussion and analysis also includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Some of these factors include those identified in the section entitled “Cautionary Statement Regarding Forward-Looking Statements”. We also recommend that you read the section entitled “Risk Factors” in our Annual Report.

This discussion and analysis is dated as of May 10, 2016.

Business overview

 

 

Markit is a leading global provider of financial information services. Our offerings enhance transparency, reduce risk and improve operational efficiency in the financial markets. Since we launched our business in 2003, we have become deeply embedded in the systems and workflows of many of our customers and continue to become increasingly important to our customers’ operations. We leverage leading technologies and our industry expertise to create innovative products and services across multiple asset classes and geographies. We provide pricing and reference data, indices, valuation and trading services, trade processing, enterprise software and managed services. Our end users include front- and back-office professionals, such as traders, portfolio managers, risk managers, research professionals, technology companies and other financial markets participants, as well as operations, compliance and enterprise data managers. We anticipate and are highly responsive to evolving industry needs and work closely with market participants to develop new products and services. We have over 3,500 institutional customers globally, including banks, hedge funds, asset managers, accounting firms, regulators, corporations, exchanges, clearing houses, central banks and trading venues. As of March 31, 2016, we had 28 offices in 13 countries.

Our principal executive offices are located at 4th Floor, Ropemaker Place, 25 Ropemaker Street, London, England EC2Y 9LY. Our telephone number at this address is +44 20 7260 2000. We maintain a registered office in Bermuda at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The telephone number of our registered office is +1 441 295 5950.

 

 

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Recent developments

 

 

During April 2016, we and the Competition Directorate General of the European Commission (the “EC”) agreed on a set of proposed commitments that would resolve the EC’s investigation of the credit default swaps information market without any finding of wrongdoing or monetary liability. In the proposed commitments, we have agreed to certain obligations regarding the governance and composition of our index advisory committees for our CDX and iTraxx CDS indices and the licensing of these indices for certain exchange-traded products. We do not expect the proposed commitments to have a material adverse effect on Markit. The proposed commitments will be posted on the EC website for a one month period of comment by interested parties. Upon completion of the comment period, the EC will make a determination as to whether the proposed commitments are suitable and, if so, adopt them. At such time, the commitments will become legally binding on, and constitute a full resolution of the investigation with respect to, us. No assurance can be given that a final set of commitments will be adopted, or, if adopted, that the final commitments will not differ materially from the proposed commitments.

On April 18, 2016, the United States District Court in the Southern District of New York granted final approval of the settlement agreement that we reached in September 2015 to settle the consolidated antitrust class action lawsuit relating to our credit default swaps business, which provided for us to pay a settlement amount of $45 million with no injunctive or other significant non-monetary obligations and no admission of any liability. The settlement amount was reflected as an exceptional item in our consolidated financial statements for the year ended December 31, 2015.

On March 21, 2016 we entered into a definitive agreement with IHS Inc. under which the companies will combine in an all-share merger of equals to create a global leader in critical information, analytics and solutions. IHS shareholders will receive 3.5566 common shares of IHS Markit for each share of IHS common stock. Based on the closing prices of IHS and Markit common stock on March 18, 2016, the implied equity value of the transaction was more than $13 billion. The proposed transaction was unanimously approved by the Board of Directors of each company. Upon completion of the merger, the combined company will be renamed IHS Markit Ltd. and will be headquartered in London, with certain key operations based in Englewood, Colorado.

On March 16, 2016 we acquired the credit default swap (CDS) pricing service of Fitch Solutions. This purchase reinforces Markit’s long-standing commitment to and leadership in the credit markets as a premier service provider. Financial results from the transaction will be reported within our Pricing and Reference Data sub-division in the Information segment.

On February 4, 2016, our Board of Directors authorised the repurchase of up to $500 million of our common shares over the next two years, at the discretion of our management. At management’s discretion, we may repurchase our common shares on the open market from time to time, in privately negotiated transactions or block transactions, or through an accelerated repurchase agreement. The timing of such repurchases depends on the availability of common shares, price, market conditions, alternative uses of capital, and applicable regulatory requirements. The program may be modified, suspended or terminated at any time without prior notice. We have suspended this repurchase program in accordance with our agreement with IHS. In connection with the merger, we have announced the combined company’s intention to initiate a $1 billion share repurchase program in each of 2017 and 2018, subject to approval of the combined company, which would include the $500 million repurchase program.

 

 

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On January 21, 2016 we completed the transfer of HSBC’s Asian Bond Index business (ALBI, ADBI and AHBI indices). The indices are operated as part of our iBoxx family of indices, allowing us to provide essential benchmarks for passive and active portfolio management. Revenue will be reported within our Indices sub-division in the Information segment.

On January 11, 2016 we acquired the position reconciliation technology assets of DTCC Loan/SERV LLC (Loan/SERV), a subsidiary of The Depository Trust & Clearing Corporation (DTCC). Nearly 400 asset managers representing approximately 6,000 funds in the global syndicated loan market use the Loan/SERV Loan Position Reconcilement Service to reconcile over one million positions with the records maintained by administrative agent banks. Loan/SERV will be reported in our Processing segment.

Our operating segments

 

 

We organise our business in three segments: Information, Processing and Solutions.

Information segment

Our Information segment, which represented 45.0% of our revenue in the three months ended March 31, 2016, provides enriched content comprising pricing and reference data, indices, and valuation and trading services across multiple asset classes and geographies through both direct and third-party distribution channels. Our Information segment products and services are used for independent valuations, research, trading, and liquidity and risk assessments. These products and services help our customers to price instruments, comply with relevant regulatory reporting and risk management requirements, and analyse financial markets.

Processing segment

Our Processing segment, which represented 21.6% of our revenue in the three months ended March 31, 2016, offers trade processing solutions globally for over-the-counter (“OTC”) derivatives, foreign exchange (“FX”) and syndicated loans. Our trade processing services enable buy side and sell side firms to process transactions rapidly, which increases efficiency by optimising post-trade workflow, reducing risk, complying with reporting regulations and improving connectivity. We believe we are the largest provider of end-to-end multi-asset OTC derivatives trade processing services.

Solutions segment

Our Solutions segment, which represented 33.4% of our revenue in the three months ended March 31, 2016, provides configurable enterprise software platforms, managed services and hosted digital solutions. Our enterprise software delivers customised solutions to automate our customers’ in-house processing and connectivity for trading and post-trading processing, as well as enterprise risk management solutions to enable customers to calculate risk measures. Our managed services and hosted digital solutions offerings, which are targeted at a broad range of financial services industry participants, help our customers capture, organise, process, display and analyse information, manage risk, reduce fixed costs and meet regulatory requirements.

 

 

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Revenue by type

 

 

Revenue by type is how we classify the revenue recognised from the sale of our products and services into three groups as defined below:

 

—

Recurring fixed revenue – Revenue generated from contracts specifying a fixed fee for services delivered over the life of the contract. The fixed fee is typically paid in advance annually, semiannually or quarterly. These contracts are typically subscription contracts where the revenue is recognised across the life of the contract. The initial term of these contracts can range from one to five years and usually includes auto-renewal clauses.

 

—

Recurring variable revenue – Revenue derived from contracts that specify a fee for services which is typically not fixed. The variable fee is typically paid monthly in arrears. Recurring variable revenue is based on, among other factors, the number of trades processed, assets under management or the number of positions we value. Many of these contracts do not have a maturity date while the remainder have an initial term ranging from one to five years.

 

—	Non-recurring revenue – Revenue that relates to certain software licence sales and the associated consulting revenue.

Key performance indicators

 

 

We believe that revenue growth, Adjusted EBITDA, Adjusted EBITDA margin and Adjusted Earnings are key measures to assess our financial performance. These measures demonstrate our ability to grow while maintaining profitability and generating strong positive cash flows over time.

Adjusted EBITDA and Adjusted Earnings are not measures defined by IFRS. The most directly comparable IFRS measure for Adjusted EBITDA and Adjusted Earnings is our profit from continuing operations for the relevant period. These measures are not necessarily comparable to similarly referenced measures used by other companies. As a result, investors should not consider these performance measures in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with IFRS. Please see “—Reconciliation to Non-IFRS Financial Measures” for a description of our non-IFRS financial measures, an explanation of why we believe they are useful measures of our performance, including our ability to generate cash flow, and reconciliations of these non-IFRS financial measures to the most directly comparable IFRS financial measures.

Revenue growth

We view period-over-period revenue growth as a key measure of our financial success. We measure revenue growth in terms of organic revenue growth, acquisition related revenue growth, foreign currency impact on revenue growth and constant currency revenue growth.

We define these components as follows:

 

—

Organic – Revenue growth from continuing operations from factors other than acquisitions and foreign currency fluctuations. We derive organic revenue growth from the development of new products and services, increased penetration of existing products and services to new and existing customers, price changes for our products and services and market driven factors such as increased trading volumes or changes in customer assets under management.

 

—

Acquisition related – Revenue growth from acquired businesses from the date of acquisition to the first anniversary date of that acquisition. This growth results from our strategy of making targeted acquisitions that facilitate growth by complementing our existing products and services and addressing market opportunities.

 

—	Foreign currency – The impact on revenue growth resulting from the difference between current revenue at current exchange rates and current revenue at the corresponding prior period exchange rates.

 

 

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—	Constant currency – Total revenue growth, excluding the impact of exchange rate movements from the prior period to the current period. This is equal to the combination of organic and acquisition related revenue growth, as described above.

Adjusted EBITDA and Adjusted EBITDA margin

We believe Adjusted EBITDA, as defined under “Reconciliation to non-IFRS financial measures,” is useful to investors and is used by our management for measuring profitability because it excludes the impact of certain items which have less bearing on our core operating performance. Adjusted EBITDA measures are frequently used by securities analysts, investors and other interested parties in their evaluation of companies comparable to us, many of which present an Adjusted EBITDA-related performance measure when reporting their results. Adjusted EBITDA margin is also defined under “Reconciliation to non-IFRS financial measures.”

Adjusted Earnings and related metrics

We believe Adjusted Earnings, as defined under “Reconciliation to non-IFRS financial measures,” is useful to investors and is used by our management for measuring profitability because it represents a group measure of performance which excludes the impact of certain non-cash charges and other charges not associated with the underlying operating performance of the business, while including the effect of items that we believe affect shareholder value and in-year return, such as income tax expense and net finance costs. Adjusted Earnings measures are frequently used by securities analysts, investors and other interested parties in their evaluation of companies comparable to us, many of which present an Adjusted Earnings-related performance measure when reporting their results. Adjusted earnings per share, diluted and Adjusted Earnings effective tax rate is also defined under “Reconciliation to non-IFRS financial measures.”

 

 

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Results of operations for the three months ended March 31, 2016 and March 31, 2015

The following table summarises our results of operations for the three months ended March 31, 2016 and March 31, 2015:

 

		For the three months ended March 31
($ in millions, except per share amounts, number of shares and percentages)		2016				2015
Revenue			287.8			271.5
Operating expenses			(160.5)			(146.8)
Exceptional items			(9.5)			(1.4)
Acquisition related items			(1.6)			-
Amortisation – acquisition related			(18.9)			(14.4)
Depreciation and amortisation – other			(27.9)			(24.9)
Share based compensation and related items			(24.1)			(9.9)
Other gains / (losses) – net			0.9			7.9
Operating profit			46.2			82.0
Finance costs – net			(8.6)			(4.1)
Share of results from joint ventures			(2.4)			(2.6)
Profit before income tax			35.2			75.3
Income tax expense			(10.5)			(20.8)
Profit after income tax			24.7			54.5
Earnings per share, basic			0.14			0.30
Earnings per share, diluted			0.13			0.29
Weighted average number of shares issued and outstanding, basic			175,677,597			183,259,470
Weighted average number of shares issued and outstanding, diluted			186,125,224			191,653,520
Other financial data (1):
Adjusted EBITDA			123.7			120.7
Adjusted EBITDA margin			43.3%			44.8%
Adjusted Earnings			64.3			68.5
Adjusted Earnings per share, diluted (2)			0.35			0.36

 

(1)

See “Reconciliation to non-IFRS financial measures” for definitions and descriptions of Adjusted EBITDA, Adjusted EBITDA margin and Adjusted Earnings and for reconciliations of Adjusted EBITDA and Adjusted Earnings to profit for the period from continuing operations.

 

(2)

Adjusted earnings per share, diluted is defined as Adjusted Earnings divided by the weighted average number of shares issued and outstanding, diluted.

 

 

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Revenue

Revenue increased by $16.3 million, or 6.0%, to $287.8 million for the three months ended March 31, 2016, from $271.5 million for the three months ended March 31, 2015. On a constant currency basis, our revenue growth was 7.8%.

Organic revenue growth was $2.7 million, or 1.0%. This was driven by new business wins across our Solutions and Information segments, and increased customer assets under management in products benchmarked to our indices. This was offset by a decrease in our Processing segment mainly as a result of previously announced price reductions in our derivatives processing product and lower primary loan issuance volumes in our loans processing product.

Acquisitions contributed $18.4 million, or 6.8%, to revenue growth. In our Solutions segment, Information Mosaic was acquired in July 2015. In our Processing segment, DealHub was acquired in September 2015, and in our Information and Solutions segments, CoreOne was acquired in October 2015.

We experienced an adverse movement in exchange rates period-over-period, which decreased our revenue growth by $4.8 million, or 1.8%. Our revenue currency exposure for the three months ended March 31, 2016 was 73.2% in US dollars, 21.6% in British pounds and 5.2% in other currencies.

Recurring fixed revenue as a percentage of total revenue increased to 58.1% for the three months ended March 31, 2016, from 53.5% for the three months ended March 31, 2015, and increased to $167.3 million for the three months ended March 31, 2016 from $145.3 million for the three months ended March 31, 2015. This was due to new business wins in our Information and Solutions segments, and the acquisitions of Information Mosaic, DealHub, and CoreOne.

Recurring variable revenue as a percentage of total revenue decreased to 35.8% for the three months ended March 31, 2016, from 40.7% for the three months ended March 31, 2015, and decreased to $103.1 million for the three months ended March 31, 2016, from $110.5 million for the three months ended March 31, 2015. This was largely due to decreased revenue within the Processing segment as described above, partially offset by revenue increases in the Solutions and Information segments associated with new business wins and increased customer assets under management in products benchmarked to our indices.

Non-recurring revenue as a percentage of total revenue increased to 6.1% for the three months ended March 31, 2016, from 5.8% for the three months ended March 31, 2015, and increased to $17.4 million for the three months ended March 31, 2016, from $15.7 million for the three months ended March 31, 2015. This was principally due to the acquisitions of Information Mosaic and CoreOne.

Operating expenses

Operating expenses increased by $13.7 million, or 9.3%, to $160.5 million for the three months ended March 31, 2016, from $146.8 million for the three months ended March 31, 2015. This increase was due to increases in personnel costs and acquisitions. As a percentage of revenue, operating expenses increased to 55.8% for the three months ended March 31, 2016, compared to 54.1% for the three months ended March 31, 2015.

Personnel costs increased by $5.1 million, or 5.5%, to $97.0 million for the three months ended March 31, 2016, from $91.9 million for the three months ended March 31, 2015. This increase was driven by several factors, including the addition of employees due to acquisitions, continued investment in products to facilitate future growth and annual pay rises, partially offset by the impact of favourable movements in foreign exchange rates. Personnel costs as a percentage of total operating expenses decreased to 60.4% for the three months ended March 31, 2016 from 62.6% for the three months ended March 31, 2015.

 

 

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Exceptional items

Exceptional items for the three months ended March 31, 2016 were $9.5 million. These pertain to banking, legal, accounting and other advisory fees associated with the planned merger with IHS and legal advisory fees of $0.8 million associated with the antitrust class action lawsuit, and the related ongoing antitrust investigation by the European Commission regarding credit derivatives and related markets.

Exceptional items for the three months ended March 31, 2015 were $1.4 million and related to legal advisory fees in connection with the ongoing antitrust investigations by the U.S. Department of Justice and the European Commission and the associated consolidated class action lawsuit regarding credit derivatives and related markets.

Acquisition related items

Acquisition related items for the three months ended March 31, 2016 were a net expense of $1.6 million, including $1.3 million of compensation in respect of a number of senior managers in relation to the acquisition of CoreOne, and legal and other advisory fees relating to the purchase of HSBC’s Asian Bond Index series of $0.2 million.

There were no acquisition related items in the three months ended March 31, 2015.

Amortisation – acquisition related

Acquisition related amortisation increased by $4.5 million, or 31.3%, to $18.9 million for the three months ended March 31, 2016, compared to $14.4 million for the three months ended March 31, 2015, reflecting the impact of the acquisitions of Information Mosaic, DealHub and CoreOne during the course of 2015.

Depreciation and amortisation – other

Depreciation and amortisation – other increased by $3.0 million, or 12.0%, to $27.9 million for the three months ended March 31, 2016 as compared to $24.9 million for the three months ended March 31, 2015. This increase reflects the continued investment in developing new products and services and enhancing existing products and services, including a $2.9 million increase in the amortisation of internally generated intangibles.

Share based compensation and related items

Share based compensation and related items increased by $14.2 million to $24.1 million for the three months ended March 31, 2016, from $9.9 million for the three months ended March 31, 2015. Underlying share based compensation increased from $9.1 million for the three months end March 31, 2015 to $11.9 million for the three months ended March 31, 2016. This reflects the cumulative impact of 2015 and 2016 equity awards where the fair values on grant date and associated share based compensation charges have been impacted by the removal of the illiquidity discount we had as a private company. In addition, a charge of $12.2 million was incurred in the three months ended March 31, 2016 to recognise the increase in the fair value of social security liability in respect of future expected equity exercises. This compared to a charge of $0.8 million for the three months ended March 31, 2015. The change in the fair value of the social security liability in both 2015 and 2016 was impacted principally by increases in Markit’s share price.

Other gains / (losses) – net

For the three months ended March 31, 2016, total net other gains were $0.9 million compared to $7.9 million for the three months ended March 31, 2015. The movement reflects, in part, net foreign exchange gains of $0.8 million for the three months ended March 31, 2016, compared with net foreign exchange gains of $6.4 million for the three months ended March 31, 2015, representing the non-cash impact of the retranslation of foreign exchange exposures on monetary balances.

 

 

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Net gains on foreign exchange forward contracts were $0.1 million in the three months ended March 31, 2016 compared to net gains on foreign exchange forward contracts of $1.5 million in the three months ended March 31, 2015.

Finance costs – net

Net finance costs increased by $4.5 million to $8.6 million for the three months ended March 31, 2016, from $4.1 million for the three months ended March 31, 2015. This was primarily as a result of an increase in interest payable following the November 2015 issuance of $500.0 million in senior unsecured notes and was partially offset by a reduction in the charge from the unwind of discounts following settlement of contingent acquisition consideration.

Share of results from joint ventures

This represents our share of the result of Markit Genpact KYC Limited, a joint venture established with Genpact to provide KYC services. Our share of the loss incurred for the three months ended March 31, 2016 was $2.4 million, compared to $2.6 million for the three months ended March 31, 2015, and represents the ongoing investment of the joint venture in establishing its service.

Income tax expense

Income tax expense was $10.5 million for the three months ended March 31, 2016 compared to $20.8 million for the three months ended March 31, 2015, a decrease of $10.3 million, or 49.5%, which is primarily due to decreased profitability from higher exceptional and acquisition related items and higher share based compensation in the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Our reported effective tax rate was 29.8% for the three months ended March 31, 2016 compared to 27.6% for the three months ended March 31, 2015.

The increase in effective tax rate in the three months ended March 31, 2016 is primarily the result of non-deductible exceptional expenses related to the merger incurred during this period.

The Adjusted Earnings effective tax rate was 27.6% for the three months ended March 31, 2016, compared to 27.1% for the three months ended March 31, 2015.

Profit after income tax

Profit for the period was $24.7 million for the three months ended March 31, 2016, compared to $54.5 million for the three months ended March 31, 2015, a reduction of $29.8 million, or 54.7%. This principally reflects the operating performance discussed above, an increase in exceptional items, acquisition related items, and share based compensation expenses, offset by lower income tax expense.

Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA of $123.7 million for the three months ended March 31, 2016 increased by $3.0 million, or 2.5%, from $120.7 million for the three months ended March 31, 2015. This increase was driven by the Information and Solutions segments, partially offset by a decrease in the Processing segment and reflects the operating performance as described above. Adjusted EBITDA includes a $3.0 million loss in the three months ended March 31, 2016 associated with our share of the KYC joint venture, which is included in our Solutions segment. The loss associated with our share of the KYC joint venture in the three months ended March 31, 2015 was $3.3 million.

 

 

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Adjusted EBITDA margin decreased to 43.3% for the three months ended March 31, 2016, compared to 44.8% for the three months ended March 31, 2015, largely as a result of reduced revenue in the Processing segment, and the dilutive impact of acquisitions completed in 2015.

Adjusted Earnings and Adjusted Earnings per share, diluted

Adjusted earnings for the three months ended March 31, 2016, decreased $4.2 million, or 6.1%, to $64.3 million from $68.5 million for the three months ended March 31, 2015. This reflects an increase in the depreciation and amortisation charge and interest expense for the period.

Adjusted earnings per share, diluted for the three months ended March 31, 2016 was $0.35 compared to $0.36 for the three months ended March 31, 2015.

 

 

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Segmental analysis

 

 

 

		For the three months ended March 31
($ in millions, except percent)		2016		2015
Information		129.5		120.6
Processing		62.3		67.4
Solutions		96.0		83.5
Total revenue		287.8		271.5
Information		63.2		58.2
Processing		31.7		35.4
Solutions		29.4		27.8
Non-controlling interest		(0.6)		(0.7)
Total Adjusted EBITDA		123.7		120.7
Information		48.8%		48.3%
Processing		50.9%		52.5%
Solutions		30.6%		33.3%
Total Adjusted EBITDA margin(1)		43.3%		44.8%

 

(1)	Adjusted EBITDA margin is total Adjusted EBITDA divided by total revenue, excluding revenue attributable to non-controlling interests.

Segmental analysis for the three months ended March 31, 2016 and March 31, 2015

Information

Revenue in our Information segment increased by $8.9 million, or 7.4%, to $129.5 million for the three months ended March 31, 2016, compared to $120.6 million for the three months ended March 31, 2015. Organic revenue growth was 4.9%. Acquired revenue growth was 4.1%, driven by the acquisition of CoreOne in October 2015, which is reported across the Information and Solutions segments. Adverse movements in exchange rates period-over-period offset this growth, reducing Information revenue growth by 1.6%.

Organic revenue growth was largely driven by new business wins within the Pricing and Reference Data and Indices sub-divisions, as well as increased customer assets under management in products benchmarked to our indices.

Adjusted EBITDA in our Information segment increased by $5.0 million, or 8.6%, to $63.2 million for the three months ended March 31, 2016, compared to $58.2 million for the three months ended March 31, 2015. This increase was largely attributable to the revenue growth described above. Adjusted EBITDA margin was 48.8% for the three months ended March 31, 2016, compared to 48.3% for the three months ended March 31, 2015.

Processing

Revenue in our Processing segment decreased by $5.1 million, or 7.6%, to $62.3 million for the three months ended March 31, 2016, from $67.4 million for the three months ended March 31, 2015. Organic revenues decreased 9.6%. Adverse movements in exchange rates period-over-period contributed 2.6% of the decrease in revenue. Partially offsetting this was the acquisition of DealHub in September 2015, which contributed an increase of 4.6% to Processing revenue.

 

 

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The decrease in organic revenue reflects reduced revenue in our derivatives processing product due to price reductions introduced on April 1, 2015 and slightly lower volumes in the credit and rates asset classes. In addition, we saw lower revenues in our loans processing product associated with reduced primary loan issuance volumes period over period.

Adjusted EBITDA in our Processing segment decreased by $3.7 million, or 10.5%, to $31.7 million for the three months ended March 31, 2016, from $35.4 million for the three months ended March 31, 2015. This decrease was largely attributable to the revenue decrease described above, partially offset by cost savings. Adjusted EBITDA margin decreased to 50.9% for the three months ended March 31, 2016, from 52.5% for the three months ended March 31, 2015.

Solutions

Revenue in our Solutions segment increased by $12.5 million, or 15.0%, to $96.0 million for the three months ended March 31, 2016, from $83.5 million for the three months ended March 31, 2015. Organic revenue growth was 4.0%. Acquired revenue growth was 12.5%, driven by the acquisitions of Information Mosaic and CoreOne in July 2015 and October 2015, respectively. Adverse movements in exchange rates period-over-period reduced Solutions revenue by 1.5%.

Organic revenue growth was driven by new business wins particularly in our Managed Services sub-division, partially offset by the timing of some large one-off software licence revenues recognised in Enterprise Software in the prior year. Additionally, lower relative growth rates in loan assets under management impacted revenue growth in Managed Services.

Adjusted EBITDA in our Solutions segment increased by $1.6 million, or 5.8%, to $29.4 million for the three months ended March 31, 2016, from $27.8 million for the three months ended March 31, 2015. Adjusted EBITDA in our Solutions segment includes Markit’s share of the Adjusted EBITDA loss associated with the KYC joint venture established in 2014. The increase in Adjusted EBITDA was a result of the revenue growth described above, partially offset by investment in new product offerings in the Managed Services sub-division. Adjusted EBITDA margin decreased to 30.6% for the three months ended March 31, 2016, from 33.3% for the three months ended March 31, 2015. Underlying Solutions adjusted EBITDA margin increased, but was offset by the timing of one-off software licence revenue recognised in the prior year and increased investment in new initiatives.

Liquidity and capital resources

 

 

At March 31, 2016, we had $999.7 million of total liquidity, comprising $89.7 million in cash and cash equivalents, and $910.0 million of available borrowings under our multi-currency revolving credit facility. In addition, we have historically generated strong cash flows from operations.

At March 31, 2016, cash and cash equivalents of $39.4 million and $37.3 million were held in the United Kingdom and United States, respectively. All material cash and cash equivalents are available for use in the United Kingdom if required without ramification. Only independently rated parties with a minimum short term investment grade rating of “A1” are accepted as investment counterparties. As of March 31, 2016, all cash and cash equivalents were held in accounts with banks such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months.

In November 2015, we issued two series of senior unsecured notes having an aggregate principal amount of $500 million to certain institutional investors. One series of the notes was issued in an aggregate principal amount of $210 million, bears interest at a fixed rate of 3.73% and matures on November 4, 2022. The other series of the notes was issued in an aggregate principal amount of $290 million, bears interest at a fixed rate of 4.05% and matures on November 4, 2025. The proceeds from the notes were used to pay down debt drawn on our existing revolving credit facility.

 

 

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In March 2014, we amended and restated our existing credit agreement to provide a $1,050.0 million unsecured multi-currency revolving credit facility with accordion capacity to $1,450.0 million. The amended and restated facility is for a term of five years, ending on March 21, 2019, and carries interest on drawn amounts of between 0.75% and 1.75% over LIBOR, or, for amounts drawn in euro, over EURIBOR, and a commitment fee of 35% of the margin on the undrawn balance.

In August 2012, we repurchased 2,193,948 shares (before giving effect to our 10-to-1 share split in connection with our corporate reorganisation) for consideration of $495.1 million, payable in quarterly instalments until May 2017. Amounts outstanding under this arrangement carry no coupon but bear an accounting charge for the unwinding of discounts. For accounting purposes, the present value of this liability at March 31, 2016 was $107.6 million.

At March 31, 2016, we had total debt, excluding capital leases and certain other obligations, of $747.6 million which comprised $140.0 million drawn under our long-term multi-currency revolving credit facility, $500.0 million aggregate principal amount of senior unsecured notes and $107.6 million related to our share repurchase in August 2012.

Cash flows

The following table summarises our operating, investing and financing activities for the three months ended March 31, 2016 and 2015:

 

		For the three months ended March 31
($ in millions except ratios)		2016		2015
Net cash generated from / (used in):
Operating activities		54.4		60.9
Investing activities		(64.1)		(47.5)
Financing activities		(46.5)		(45.1)
Net decrease in cash and cash equivalents		(56.2)		(31.7)

Net cash generated from operating activities

Net cash generated from operating activities decreased by $6.5 million, to $54.4 million for the three months ended March 31, 2016, from $60.9 million for the three months ended March 31, 2015.

Cash generated from operating activities for the three months ended March 31, 2016 was impacted by an unfavourable movement in underlying working capital primarily due to bonus payments in the period. This was offset by a reduction in income taxes paid which was driven by exceptional charges taken in the three months ended December 31, 2015 relating to the settlement of the class action lawsuit.

Net cash used in investing activities

Cash flows used in investing activities was $64.1 million for the three months ended March 31, 2016, compared to $47.5 million for the three months ended March 31, 2015.

Cash flows used in investing activities for the three months ended March 31, 2016 consisted primarily of $40.2 million of capital expenditure largely related to internal development costs, and $22.2 million in relation to the transfer of HSBC’s Asian Bond Index business and the payment to DTCC to settle historic contingent consideration liabilities and for the acquisition of Loan/SERV’s position reconciliation assets.

 

 

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Cash flows used in investing activities for the three months ended March 31, 2015 reflected $39.9 million of capital expenditure, and $7.6 million of investment in the KYC joint venture.

Net cash used in financing activities

Net cash used in financing activities was $46.5 million for the three months ended March 31, 2016, compared to $45.1 million for the three months ended March 31, 2015.

Net cash used in financing activities for the three months ended March 31, 2016 principally reflected an inflow of $35.8 million in connection with the issuance of share capital in respect of share option exercises, offset by $22.2 million of transactions with shareholders as part of our share repurchase programme authorised by our board of directors in 2012 and $60.1 million of repayments related to our revolving credit facility.

Net cash used in financing activities for the three months ended March 31, 2015 principally reflected $103.0 million of borrowing repayments and $22.0 million of share buy back, offset by $79.9 million in connection with the issuance of share capital in respect of share option exercises.

 

 

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Reconciliation to non-IFRS financial measures

 

 

Adjusted EBITDA and Adjusted EBITDA margin

In considering the financial performance of the business, management and our chief operating decision maker analyse the primary financial performance measure of Adjusted EBITDA in our business segments and at a company level.

Adjusted EBITDA is defined as profit for the period from continuing operations before income taxes, net finance costs, depreciation and amortisation on fixed assets and intangible assets (including acquisition related intangible assets), acquisition related items, exceptional items, share based compensation and related items, net other gains or losses, including Adjusted EBITDA attributable to joint ventures and excluding Adjusted EBITDA attributable to non-controlling interests. Adjusted EBITDA is not a measure defined by IFRS. The most directly comparable IFRS measure to Adjusted EBITDA is our profit for the period from continuing operations.

Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenue, excluding revenue attributable to non-controlling interests.

We believe Adjusted EBITDA is useful to investors and is used by our management for measuring profitability because it excludes the impact of certain items which have less bearing on our core operating performance. We believe that utilising Adjusted EBITDA allows for a more meaningful comparison of operating fundamentals between companies within our industry by eliminating the impact of capital structure and taxation differences between the companies. We further adjust our profit for the following non-cash items: depreciation, amortisation of intangible fixed assets, share based compensation and related items, and other gains and losses associated with foreign exchange variations.

We have historically incurred significant acquisition related expenses acquiring businesses. These acquisition related expenses include acquisition costs, fair-value adjustments to contingent consideration and amortisation of intangible fixed assets. Adjusted EBITDA is important in illustrating what our core operating results would have been without the impact of non-operational acquisition related expenses.

We also adjust for exceptional items which are determined to be those that in management’s judgment need to be disclosed by virtue of their size, nature or incidence, which include non-cash items and items settled in cash. In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. This is consistent with the way that financial performance is measured by management and reported to our board and assists in providing a meaningful analysis of our operating performance.

Adjusted EBITDA measures are frequently used by securities analysts, investors and other interested parties in their evaluation of companies comparable to us, many of which present an Adjusted EBITDA-related performance measure when reporting their results.

Adjusted EBITDA has limitations as an analytical tool. It is not a presentation made in accordance with IFRS, nor is it a measure of financial condition or liquidity and it should not be considered as an alternative to profit or loss for the period determined in accordance with IFRS or operating cash flows determined in accordance with IFRS. Adjusted EBITDA is not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider this performance measure in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with IFRS.

 

 

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The following table reconciles our profit for the period from continuing operations to our Adjusted EBITDA for the periods presented:

 

		For the three months ended March 31
($ in millions)		2016		2015
Profit for the period		24.7		54.5
Income tax expense		10.5		20.8
Finance costs – net		8.6		4.1
Depreciation and amortisation – other		27.9		24.9
Amortisation – acquisition related		18.9		14.4
Acquisition related items		1.6		-
Exceptional items		9.5		1.4
Share based compensation and related items		24.1		9.9
Other (gains) / losses – net		(0.9)		(7.9)
Share of results from joint venture not attributable to Adjusted EBITDA		(0.6)		(0.7)
Adjusted EBITDA attributable to non-controlling interests		(0.6)		(0.7)
Adjusted EBITDA		123.7		120.7

Adjusted Earnings and related metrics

In considering the financial performance of the business, management and our chief operating decision maker analyse the performance measure of Adjusted Earnings. Adjusted Earnings is defined as profit for the period from continuing operations before amortisation of acquired intangibles, acquisition related items, exceptional items, share based compensation and related items, net other gains or losses and unwind of discount, less the tax effect of these adjustments and excluding Adjusted Earnings attributable to non-controlling interests. The most directly comparable IFRS measure to Adjusted Earnings is our profit for the period from continuing operations. Adjusted earnings per share, diluted is defined as Adjusted Earnings divided by the weighted average number of shares issued and outstanding, diluted.

We believe Adjusted Earnings is useful to investors and is used by our management for measuring profitability because it represents a group measure of performance which excludes the impact of certain non-cash charges and other charges not associated with the underlying operating performance of the business, while including the effect of items that we believe affect shareholder value and in-year return, such as income tax expense and net finance costs.

Management uses Adjusted Earnings to (i) provide senior management a monthly report of our operating results that is prepared on an adjusted earnings basis; (ii) prepare strategic plans and annual budgets on an adjusted earnings basis; and (iii) review senior management’s annual compensation, in part, using adjusted performance measures.

Adjusted Earnings is defined to exclude items which have less bearing on our core operating performance or are unusual in nature or infrequent in occurrence and therefore are inherently difficult to budget for or control. Adjusted Earnings measures are frequently used by securities analysts, investors and other interested parties in their evaluation of companies comparable to us, many of which present an Adjusted Earnings-related performance measure when reporting their results.

In addition we use Adjusted Earnings for the purposes of calculating diluted Adjusted earnings per share. Management uses diluted Adjusted earnings per share to assess total company performance on a consistent basis at a per share level.

We also use Adjusted Earnings for the purposes of calculating Adjusted Earnings effective tax rate. Adjusted Earnings effective tax rate is a rate calculated using income tax for the period adjusted for the tax effect of Adjusted earnings adjustments, divided by Adjusted earnings excluding tax and excluding earnings attributable to non-controlling interests. Management uses Adjusted Earnings effective tax rate to measure the average underlying tax rate.

 

 

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Adjusted Earnings has limitations as an analytical tool. Adjusted Earnings is not a presentation made in accordance with IFRS, nor is it a measure of financial condition or liquidity and it should not be considered as an alternative to profit or loss for the period determined in accordance with IFRS or operating cash flows determined in accordance with IFRS. Adjusted Earnings is not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider this performance measure in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with IFRS.

The following table reconciles our profit for the period from continuing operations to our Adjusted Earnings for the periods presented:

 

		For the three months ended March 31
($ in millions)		2016		2015
Profit for the period		24.7		54.5
Amortisation – acquisition related		18.9		14.4
Acquisition related items		1.6		-
Exceptional items		9.5		1.4
Share based compensation and related items		24.1		9.9
Other (gains) / losses – net		(0.9)		(7.9)
Unwind of discount (1)		1.9		2.5
Tax effect of above adjustments		(14.9)		(5.6)
Adjusted Earnings attributable to non-controlling interests		(0.6)		(0.7)
Adjusted Earnings		64.3		68.5
Weighted average number of shares issued and outstanding, diluted		186,125,224		191,653,520

(1)        Unwind of discount represents the non-cash unwinding of discount, recorded through finance costs – net in the income statement, primarily in relation to our share buyback liability.

 

 

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Contractual obligations and contingencies

 

 

Contractual obligations

There have been no material changes to our contractual obligations outside the ordinary course of our business from those reported in “Management’s discussion and analysis of financial condition and results of operations – Contractual obligations and contingencies – Contractual obligations” in our Annual Report on Form 20-F for the year ended December 31, 2015, except as follows:

As of March 31, 2016 other indebtedness reduced to $107.6 million from $128.6 million as a result of repayments.

As of March 31, 2016 bank borrowings reduced to $137.5 million from $197.4 million following repayments.

Off-balance sheet arrangements

We have no significant off-balance sheet arrangements.

Quantitative and qualitative disclosures about market risk

 

 

During the period ended March 31, 2016, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to “Item 11. Quantitative and qualitative disclosures about market risk” included in our Annual Report for a more complete discussion on the market risks we encounter.

Principal Accounting Policies, Critical Accounting Estimates and Key Judgments

 

 

There have been no material changes to the principal accounting policies, critical accounting estimates and key judgements described in our audited consolidated financial statements included in our Annual Report. Please refer to “Item 5. Operating and Financial Review and Prospects–A. Operating Results–Principal Accounting Policies, Critical Accounting Estimates and Key Judgments” included in our Annual Report for a more complete discussion.

Common shares outstanding as of March 31, 2016

 

 

As of March 31, 2016, 180,155,084 common shares were issued and outstanding, including 3,126,158 unvested restricted common shares issued and outstanding under our employee benefit plans but excluding 25,219,470 common shares held by the Markit Group Holdings Limited Employee Benefit Trust (the “EBT”).

The EBT is a discretionary trust established by a deed dated January 27, 2010 between Markit Group Holdings Limited and Elian Employee Benefit Trustee Limited, as trustee of the EBT, through which shares may be delivered to Markit’s existing and former employees in satisfaction of their rights under any share incentive arrangements established by Markit. The trustee is an independent provider of fiduciary services, based in Jersey, Channel Islands. The EBT will terminate on January 27, 2090, unless terminated earlier by the trustee.

No current or former employee has the right to receive any benefit from the EBT unless and until the trustee exercises its discretion to confer a benefit. Subject to the exercise of the trustee’s discretion, shares held by the EBT may be delivered to such employees in satisfaction of their rights under any share incentive arrangements established by Markit. Markit may make non-binding recommendations to the trustee regarding the EBT.

 

 

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Unless we direct otherwise, the trustee of the EBT may not vote any of the common shares held by the EBT and is also generally obliged to forgo dividends.

Markit has historically funded the EBT’s acquisition of common shares through interest-free loans that are repayable on demand, but without recourse to any assets other than those held by the trustee in its capacity as trustee of the EBT.

Cautionary statement regarding forward-looking statements

 

 

This management’s discussion and analysis contains statements that constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. Many of the forward-looking statements contained in this discussion and analysis can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate,” “will” and “potential,” among others, or the negative of these words.

Forward-looking statements appear in a number of places in this discussion and analysis and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified under the section entitled “Item 3. Key Information – D. Risk Factors” in our Annual Report. These risks and uncertainties include factors relating to:

 

—	the completion of the proposed merger with IHS on anticipated terms and timing;

 

—	the ability of IHS and Markit to integrate the business successfully and to achieve anticipated synergies, risks and costs;

 

—	potential litigation relating to the proposed transaction that could be instituted against IHS, Markit or their respective directors;

 

—	our operation in highly competitive markets;

 

—	our inability to develop successful new products and services;

 

—	any design defects, errors, failures or delays associated with our products or services;

 

—	declining activity levels in the securities or derivatives markets, weak or declining financial performance of financial market participants or the failure of market participants;

 

—	our generation of a significant percentage of our total revenue from financial institutions that are also our shareholders;

 

—	our dependence on third parties for data and information services;

 

—	consolidation in our end customer market;

 

—	the impact of cost-cutting pressures across the financial services industry;

 

—	our customers becoming more self-sufficient in terms of their needs for our products and services;

 

 

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—	ongoing antitrust investigations and litigation arising from our activities relating to credit default swaps;

 

—	long selling cycles to secure new contracts that require us to commit significant resources before we receive revenue;

 

—	our reliance on network systems and the Internet; and

 

—	other risk factors discussed under “Item 3. Key Information – D. Risk Factors” included in our Annual Report.

Moreover, new risks emerge from time to time as we operate in a very competitive and rapidly changing environment. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

You should read this discussion and analysis completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

 

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Exhibit 99.3

 

For Immediate Release

May 10^th 2016

Markit reports first quarter 2016 financial results

London and New York – Markit Ltd. (Nasdaq: MRKT), a leading global provider of financial information services, today announced financial results under International Financial Reporting Standards (IFRS) for the first quarter ended March 31^st 2016.

Financial highlights for first quarter 2016

 

—	Revenue increased by 6.0% to $287.8 million from first quarter 2015, or 7.8% on a constant currency basis

 

—	Organic revenue growth was 1.0% from first quarter 2015, driven by Information (+4.9%) and Solutions (+4.0%), partially offset by a 9.6% decrease in Processing

 

—	Acquired revenue growth was 6.8% from first quarter 2015, driven by Information (+4.1%), Processing (+4.6%) and Solutions (+12.5%)

 

—	Adjusted EBITDA margin was 43.3% while Adjusted diluted earnings per share was $0.35

“In the first quarter, Information produced solid operating results and we saw steady performance in Processing. Despite expected slower growth in Solutions this quarter, and challenging market conditions, our long term financial objectives for Markit’s businesses have not changed. We remain focused on helping our customers manage regulatory change and reduce costs while delivering strong results for our shareholders,” said Lance Uggla, chairman and chief executive officer of Markit.

“I am excited about our transformational merger with IHS, which will create a global information powerhouse with leading positions in energy, financial services and transportation, and will leverage leading edge technology to help our broad combined customer base improve decision making. I am confident that the enhanced growth potential of the combined company will lead to significant long term value creation. I want to thank all Markit and IHS employees for their dedication and commitment as we work toward closing, which is on track for the second half of 2016.”

 

Table 1: Selected Financial Information		For the three months ended March 31
($ millions except percentages and per share amounts)		2016		2015		YoY
Revenue		287.8		271.5		6.0%
Operating expenses		(160.5)		(146.8)		9.3%
Adjusted EBITDA (1)		123.7		120.7		2.5%
Adjusted EBITDA margin (2)		43.3%		44.8%		(1.5)%
Adjusted Earnings (1)		64.3		68.5		(6.1)%
Adjusted earnings per share, diluted (3)		0.35		0.36		(2.8)%
Weighted average number of shares used to compute earnings per share, diluted		186.1		191.7		(2.9)%

(1)	See “Reconciliation to Non-IFRS financial measures” for definitions of Adjusted EBITDA and Adjusted Earnings, which are Non-IFRS financial measures, and for reconciliations to their most directly comparable IFRS financial measures.

(2)	Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenue, excluding revenue attributable to non-controlling interests.

(3)

Adjusted earnings per share, diluted is defined as Adjusted Earnings divided by the weighted average number of shares used to compute earnings per share, diluted. See the Consolidated Income Statement (unaudited) for the weighted average number of shares used to compute earnings per share, diluted for each period.

 

 

Markit Ltd.

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Press release

 

 

First quarter 2016 results

Revenue

Revenue increased by $16.3 million, or 6.0%, to $287.8 million for the three months ended March 31, 2016, from $271.5 million for the three months ended March 31, 2015. On a constant currency basis, our revenue growth was 7.8%.

Organic revenue growth was $2.7 million, or 1.0%. This was driven by new business wins across our Solutions and Information segments, and increased customer assets under management in products benchmarked to our indices. This was offset by a decrease in our Processing segment mainly as a result of previously announced price reductions in our derivatives processing product and lower primary loan issuance volumes in our loans processing product.

Acquisitions contributed $18.4 million, or 6.8%, to revenue growth. In our Solutions segment, Information Mosaic was acquired in July 2015. In our Processing segment, DealHub was acquired in September 2015, and in our Information and Solutions segments, CoreOne was acquired in October 2015.

We experienced an adverse movement in exchange rates period-over-period, which decreased our revenue growth by $4.8 million, or 1.8%. Our revenue currency exposure for the three months ended March 31, 2016 was 73.2% in US dollars, 21.6% in British pounds and 5.2% in other currencies.

Operating expenses

Operating expenses increased by $13.7 million, or 9.3%, to $160.5 million for the three months ended March 31, 2016, from $146.8 million for the three months ended March 31, 2015. This increase was due to increases in personnel costs and acquisitions.

Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA of $123.7 million for the three months ended March 31, 2016 increased by $3.0 million, or 2.5%, from $120.7 million for the three months ended March 31, 2015. This increase was driven by the Information and Solutions segments, partially offset by a decrease in the Processing segment and reflects the operating performance as described above. Adjusted EBITDA includes a $3.0 million loss in the three months ended March 31, 2016 associated with our share of the KYC joint venture, which is included in our Solutions segment. The loss associated with our share of the KYC joint venture in the three months ended March 31, 2015 was $3.3 million.

Adjusted EBITDA margin decreased to 43.3% for the three months ended March 31, 2016, compared to 44.8% for the three months ended March 31, 2015, largely as a result of reduced revenue in the Processing segment, and the dilutive impact of acquisitions completed in 2015.

Adjusted earnings and Adjusted earnings per share, diluted

Adjusted earnings for the three months ended March 31, 2016, decreased $4.2 million, or 6.1%, to $64.3 million from $68.5 million for the three months ended March 31, 2015. This reflects an increase in the depreciation and amortisation charge and interest expense for the period. Net finance costs increased by $4.5 million compared to the prior year, primarily due to the November 2015 issuance of $500.0 million in senior unsecured notes.

Adjusted earnings per share, diluted for the three months ended March 31, 2016 was $0.35 compared to $0.36 for the three months ended March 31, 2015.

Table 2: Revenue growth composition by segment

 

For the three months ended March 31, 2016
(in percentages)		Organic		Acquisition related		Foreign currency		Total revenue growth
Information		4.9%		4.1%		(1.6)%		7.4%
Processing		(9.6)%		4.6%		(2.6)%		(7.6)%
Solutions		4.0%		12.5%		(1.5)%		15.0%
Total		1.0%		6.8%		(1.8)%		6.0%

 

 

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Table 3: Segmental analysis

 

		For the three months ended March 31,
($ in millions, except percent)				2016		2015
Information				129.5		120.6
Processing				62.3		67.4
Solutions				96.0		83.5
Total revenue				287.8		271.5
Information				63.2		58.2
Processing				31.7		35.4
Solutions				29.4		27.8
Non-controlling interest				(0.6)		(0.7)
Total Adjusted EBITDA				123.7		120.7
Information				48.8%		48.3%
Processing				50.9%		52.5%
Solutions				30.6%		33.3%
Total Adjusted EBITDA margin(2)				43.3%		44.8%

 

(1)

Adjusted EBITDA margin is total Adjusted EBITDA divided by total revenue, excluding revenue attributable to non-controlling interests.

First quarter 2016 segment results

Information

Revenue in our Information segment increased by $8.9 million, or 7.4%, to $129.5 million for the three months ended March 31, 2016, compared to $120.6 million for the three months ended March 31, 2015. Organic revenue growth was 4.9%. Acquired revenue growth was 4.1%, driven by the acquisition of CoreOne in October 2015, which is reported across the Information and Solutions segments. Adverse movements in exchange rates period-over-period offset this growth, reducing Information revenue growth by 1.6%.

Organic revenue growth was largely driven by new business wins within the Pricing and Reference Data and Indices sub-divisions, as well as increased customer assets under management in products benchmarked to our indices.

Processing

Revenue in our Processing segment decreased by $5.1 million, or 7.6%, to $62.3 million for the three months ended March 31, 2016, from $67.4 million for the three months ended March 31, 2015. Organic revenues decreased 9.6%. Adverse movements in exchange rates period-over-period contributed 2.6% of the decrease in revenue. Partially offsetting this was the acquisition of DealHub in September 2015, which contributed an increase of 4.6% to Processing revenue.

The decrease in organic revenue reflects reduced revenue in our derivatives processing product due to price reductions introduced on April 1, 2015 and slightly lower volumes in the credit and rates asset classes. In addition, we saw lower revenues in our loans processing product associated with reduced primary loan issuance volumes period over period.

 

 

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Solutions

Revenue in our Solutions segment increased by $12.5 million, or 15.0%, to $96.0 million for the three months ended March 31, 2016, from $83.5 million for the three months ended March 31, 2015. Organic revenue growth was 4.0%. Acquired revenue growth was 12.5%, driven by the acquisitions of Information Mosaic and CoreOne in July 2015 and October 2015, respectively. Adverse movements in exchange rates period-over-period reduced Solutions revenue by 1.5%.

Organic revenue growth was driven by new business wins particularly in our Managed Services sub-division, partially offset by the timing of some large one-off software licence revenues recognised in Enterprise Software in the prior year. Additionally, lower relative growth rates in loan assets under management impacted revenue growth in Managed Services.

Webcast and conference call information

Markit’s management will host a conference call at 8.30am EST today to review and discuss the company’s results. The live audio webcast, press release and accompanying financial information can be accessed on Markit’s investor relations website: http://www.markit.com/Company/Investors-Events-And-Presentations or by dialling +1 888 771 4371 (US toll free) or +1 847 585 4405 (outside US). The conference ID for the call is 42272557. A replay of the webcast will be available through the above link following the conference call.

Note on IFRS reporting standards

We prepare and report our consolidated financial statements and financial information in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”). We have made rounding adjustments to some of the figures included in this press release. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them.

Use of non-IFRS financial measures

Non-IFRS results are presented only as a supplement to our financial statements based on IFRS. Non-IFRS financial information is provided to enhance understanding of our financial performance, but none of these non-IFRS financial measures are recognised terms under IFRS and non-IFRS measures should not be considered in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with IFRS. Definitions and reconciliations of non-IFRS measures to the most directly comparable IFRS measures are provided within the schedules attached to this release.

We use non-IFRS measures in our operational and financial decision making, as we believe that it is useful to exclude certain items in order to focus on what we regard to be a more reliable indicator of the underlying operating performance of the business. As a result, internal management reports feature non-IFRS measures which are also used to prepare strategic plans and annual budgets and review management compensation. We also believe that investors may find non-IFRS financial measures useful for the same reasons, although investors are cautioned that non-IFRS financial measures are not a substitute for IFRS disclosures.

Non-IFRS measures are frequently used by securities analysts, investors and other interested parties in their evaluation of companies comparable to us, many of which present non-IFRS measures when reporting their results. Non-IFRS measures have limitations as an analytical tool. They are not presentations made in accordance with IFRS, are not measures of financial condition or liquidity and should not be considered as an alternative to profit or loss for the period determined in accordance with IFRS or operating cash flows determined in accordance with IFRS. Non-IFRS measures are not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider such performance measures in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with IFRS.

 

 

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Forward-looking statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that Markit expects, believes or anticipates will or may occur in the future are forward-looking statements. Markit’s estimates and forward-looking statements are mainly based on its current expectations and estimates of future events and trends, which affect or may affect its businesses and operations. Although Markit believes that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to Markit. When used in this press release, the words “anticipate,” “believe,” “could,” “intend,” “expect,” “estimate,” “should,” “plan,” “will” or other similar words are intended to identify forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of Markit, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Further information on such assumptions, risks and uncertainties is available in Markit’s filings with the US Securities and Exchange Commission, including its annual report on Form 20-F. Markit undertakes no obligation and does not intend to update or correct these forward-looking statements to reflect events or circumstances occurring after the date of this press release, except as required by applicable law. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. All forward-looking statements are qualified in their entirety by this cautionary statement.

 

 

Media enquiries, please contact:   Ed Canaday Telephone: +1 646 679 3031 Email: [email protected]		Investor enquiries, please contact:   Matthew Kolby Telephone: +1 646 679 3140 Email: [email protected]   James Arestia Telephone: +1 646 679 3230 Email: [email protected]

 

Notes to Editors

 

 

About Markit

Markit is a leading global provider of financial information services. We provide products that enhance transparency, reduce risk and improve operational efficiency. Our customers include banks, hedge funds, asset managers, central banks, regulators, auditors, fund administrators and insurance companies. Founded in 2003, we employ over 4,200 people in 13 countries. Markit shares are listed on Nasdaq under the symbol MRKT. For more information, please see www.markit.com.

 

 

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Markit Ltd.

Consolidated income statement (unaudited)

 

 

 

		Three   months     ended       March 31,   2016   $’m				Three   months   ended       March 31,   2015   $’m
Revenue			287.8				271.5
Operating expenses			(160.5)				(146.8)
Exceptional items			(9.5)				(1.4)
Acquisition related items			(1.6)				-
Amortisation - acquisition related			(18.9)				(14.4)
Depreciation and amortisation - other			(27.9)				(24.9)
Share based compensation and related items			(24.1)				(9.9)
Other gains/(losses) - net			0.9				7.9
Operating profit			46.2				82.0
Finance costs - net			(8.6)				(4.1)
Share of results from joint venture			(2.4)				(2.6)
Profit before income tax			35.2				75.3
Income tax expense			(10.5)				(20.8)
Profit for the period			24.7				54.5
Profit attributable to:
Owners of the parent			24.9				54.8
Non-controlling interests			(0.2)				(0.3)
			24.7				54.5
			$				$
Earnings per share, basic			0.14				0.30
Earnings per share, diluted			0.13				0.29

There were no discontinued operations for either period presented.

 

 

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Consolidated Balance Sheet (Unaudited)

 

 

 

		March 31,   2016   $’m				December   31, 2015   $’m
Assets
Non-current assets
Property, plant and equipment			46.4				49.6
Intangible assets			3,066.5				3,076.8
Deferred income tax assets			2.8				2.3
Derivative financial instruments			0.3				0.5
Investment in joint venture			10.1				12.5
Available-for-sale financial assets			2.8				1.1
Total non-current assets			3,128.9				3,142.8
Current assets
Trade and other receivables			275.7				272.5
Derivative financial instruments			6.9				3.9
Current income tax receivables			0.7				3.1
Cash and cash equivalents			89.7				146.0
Total current assets			373.0				425.5
Total assets			3,501.9				3,568.3
Equity
Capital and reserves
Common shares			1.8				1.7
Share premium			212.6				177.2
Other reserves			(178.3)				(170.0)
Retained earnings			2,128.6				2,067.4
Equity attributable to owners of the parent			2,164.7				2,076.3
Non-controlling interests			36.0				36.2
Total equity			2,200.7				2,112.5
Liabilities
Non-current liabilities
Borrowings			656.6				737.6
Trade and other payables			163.1				157.2
Derivative financial instruments			0.4				0.1
Deferred income tax liabilities			8.0				22.9
Total non-current liabilities			828.1				917.8
Current liabilities
Borrowings			86.4				86.4
Trade and other payables			158.1				213.4
Deferred income			223.8				226.7
Current income tax liabilities			3.4				9.9
Derivative financial instruments			1.4				1.6
Total current liabilities			473.1				538.0
Total liabilities			1,301.2				1,455.8
Total equity and liabilities			3,501.9				3,568.3

 

 

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Consolidated Statement Of Cash Flows (Unaudited)

 

 

 

		Three   months   ended       March 31,   2016   $’m				Three   months   ended   March 31,   2015   $’m
Profit before income tax			35.2				75.3
Adjustment for:
Amortisation - acquisition related			18.9				14.4
Depreciation and amortisation - other			27.9				24.9
Fair value gains on derivative financial instruments			(0.7)				(0.1)
Fair value loss on contingent consideration			0.1				-
Share based compensation			13.2				9.1
Finance costs – net			8.6				4.1
Share of results from joint venture			2.4				2.6
Foreign exchange losses/(gains) and other non-cash charges/(income) in operating activities			0.9				(0.9)
Changes in working capital:
(Increase) /decrease in trade and other receivables			(5.0)				2.5
Decrease in trade and other payables			(39.6)				(56.3)
Cash generated from operations			61.9				75.6
Cash flows from operating activities
Cash generated from operations			61.9				75.6
Interest paid			(1.7)				(1.6)
Income tax paid			(5.8)				(13.1)
Net cash generated from operating activities			54.4				60.9
Cash flows from investing activities
Acquisition of businesses, net of cash acquired			(22.2)				-
Purchases of property, plant and equipment			(2.8)				(5.8)
Purchases of intangible assets			(37.4)				(34.1)
Investment in joint venture			-				(7.6)
Investment in available-for-sale financial assets			(1.7)				-
Net cash used in investing activities			(64.1)				(47.5)
Cash flows from financing activities
Proceeds from issuance of common shares			35.8				79.9
Payments for shares bought back			(22.2)				(22.0)
Repayments of borrowings			(60.1)				(103.0)
Net cash generated used in financing activities			(46.5)				(45.1)
Net decrease in cash and cash equivalents			(56.2)				(31.7)
Cash and cash equivalents at beginning of period			146.0				117.7
Net decrease in cash and cash equivalents			(56.2)				(31.7)
Exchange losses on cash and cash equivalents			(0.1)				(1.6)
Cash and cash equivalents at end of period			89.7				84.4

 

 

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Reconciliation to Non-IFRS Financial Measures

 

 

Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA is defined as profit for the period from continuing operations before income taxes, net finance costs, depreciation and amortisation on fixed assets and intangible assets (including acquisition related intangible assets), acquisition related items, exceptional items, share based compensation and related items, net other gains or losses, including Adjusted EBITDA attributable to joint ventures and excluding Adjusted EBITDA attributable to non-controlling interests.

Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenue, excluding revenue attributable to non-controlling interests.

The following table reconciles our profit for the period from continuing operations to our Adjusted EBITDA for the periods presented:

 

		For the three months ended March 31
($ in millions)				2016		2015
Profit for the period				24.7		54.5
Income tax expense				10.5		20.8
Finance costs – net				8.6		4.1
Depreciation and amortisation – other				27.9		24.9
Amortisation – acquisition related				18.9		14.4
Acquisition related items				1.6		-
Exceptional items				9.5		1.4
Share based compensation and related items				24.1		9.9
Other (gains) / losses – net				(0.9)		(7.9)
Share of results from joint venture not attributable to Adjusted EBITDA				(0.6)		(0.7)
Adjusted EBITDA attributable to non-controlling interests				(0.6)		(0.7)
Adjusted EBITDA				123.7		120.7

 

 

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Reconciliation to Non-IFRS Financial Measures

 

 

Adjusted Earnings and adjusted earnings per share, diluted:

Adjusted Earnings is defined as profit for the period from continuing operations before amortisation of acquired intangibles, acquisition related items, exceptional items, share based compensation and related items, net other gains or losses and unwind of discount, less the tax effect of these adjustments and excluding Adjusted Earnings attributable to non-controlling interests.

In addition we use Adjusted Earnings for the purposes of calculating diluted Adjusted Earnings per share.

The following table reconciles our profit for the period from continuing operations to our Adjusted Earnings for the periods presented:

 

		For the three months ended March 31
($ in millions)		2016		2015
Profit for the period		24.7		54.5
Amortisation – acquisition related		18.9		14.4
Acquisition related items		1.6		-
Exceptional items		9.5		1.4
Share based compensation and related items		24.1		9.9
Other (gains) / losses – net		(0.9)		(7.9)
Unwind of discount (1)		1.9		2.5
Tax effect of above adjustments		(14.9)		(5.6)
Adjusted Earnings attributable to non-controlling interests		(0.6)		(0.7)
Adjusted Earnings		64.3		68.5

 

(1)	Unwind of discount represents the non-cash unwinding of discount, recorded through finance costs – net in the income statement, primarily in relation to our share buyback liability.

 

 

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Exhibit 99.4

On March 20, 2016, Markit entered into a definitive agreement with IHS Inc. under which the companies will combine in an all-share merger of equals (the “merger”). The following risk factors relate to the proposed merger and supplement, and should be read in connection with, the risk factors included in our Annual Report on Form 20-F for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 11, 2016.

RISK FACTORS

Risks Related to the Merger

The Market Price for the Combined Company Common Shares May Be Affected by Factors Different from Those that Historically Have Affected IHS Common Stock and Markit Common Shares.

Upon completion of the merger, holders of shares of IHS common stock (other than any shares held in treasury) will become holders of Markit common shares. IHS and Markit each have businesses that differ from each other. Accordingly, the results of operations of the combined company will be affected by some factors that are different from those currently affecting the results of operations of each of Markit and IHS.

The Merger Agreement May Be Terminated in Accordance with Its Terms and the Merger May Not Be Completed.

The completion of the merger is subject to the satisfaction or waiver of a number of conditions. Those conditions include: (i) the approval of the IHS merger proposal by the IHS stockholders and the approval of the Markit share issuance proposal, the Markit amended bye-laws proposal and the Markit name change proposal by the Markit shareholders; (ii) the receipt of certain domestic and foreign regulatory approvals under competition laws, including the termination or expiration of the waiting period under the HSR Act; (iii) the absence of certain governmental restraints or prohibitions preventing completion of the merger or imposing a regulatory material adverse effect; (iv) the effectiveness of the registration statement of which this joint proxy statement/prospectus forms a part and the absence of any stop order or proceedings by the SEC; (v) the approval of the Markit common shares to be issued to IHS stockholders for listing on the NYSE or NASDAQ; (vi) the truth and correctness of the representations and warranties made by both parties (generally subject to certain “materiality” and “material adverse effect” qualifiers); and (vii) the performance by IHS and Markit of their respective obligations under the merger agreement in all material respects.

These conditions to the closing may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the merger is not completed by November 30, 2016 (subject to extension to February 28, 2017, by either party if certain antitrust-related conditions to the closing have not been satisfied), either IHS or Markit may choose not to proceed with the merger, and the parties can mutually decide to terminate the merger agreement at any time prior to the consummation of the merger, before or after the required IHS and Markit shareholder approvals. In addition, IHS or Markit may elect to terminate the merger agreement in certain other circumstances. If the merger agreement is terminated, Markit may incur substantial fees in connection with termination of the merger agreement and will not recognize the anticipated benefits of the merger.

Termination of the Merger Agreement Could Negatively Impact Markit.

If the merger agreement is terminated in accordance with its terms and the merger is not consummated, the ongoing business of Markit may be adversely affected by a variety of factors. Markit’s business may be adversely impacted by the failure to pursue other beneficial opportunities during the pendency of the merger, by the failure to obtain the anticipated benefits of completing the merger, by payment of certain costs relating to the merger, and by the focus of their respective managements on the merger for an extended period of time rather than on management opportunities or other issues. The market price of Markit common shares might decline as a result of any such failures to the extent that the current market prices reflect a market assumption that the merger will be completed.

In addition, if the merger agreement is terminated under certain circumstances, Markit may be required to pay IHS a termination fee of $195,000,000 in cash or to pay IHS’s expenses in the amount of $30,000,000 in cash, depending on the circumstances surrounding the termination (and in each case subject to any adjustments that may be required in respect of VAT). Markit may also be negatively impacted if the merger agreement is terminated and their respective boards seek but are unable to find another business combination or strategic transaction offering equivalent or more attractive benefits than the benefits expected to be provided in the merger, or if the respective companies become subject to litigation related to entering into or failing to consummate the merger, including direct actions by Markit shareholders against the directors and/or officers of Markit for breaches of fiduciary duty and derivative actions brought by Markit shareholders in the name of the company.

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IHS and Markit Will Be Subject to Business Uncertainties While the Merger is Pending.

Uncertainty about the completion or effect of the merger may affect the relationship between Markit and IHS and their respective suppliers, customers, distributors, licensors and licensees and may have an adverse effect on IHS and/or Markit, and consequently on the combined company. These uncertainties may cause suppliers, customers, distributors, licensors and others that deal with the parties to seek to change existing business relationships with them and to delay or defer decisions concerning Markit or IHS. Changes to existing business relationships, including termination or modification, could negatively affect each of IHS’s and Markit’s revenues, earnings and cash flow, as well as the market price of its common stock.

In addition, each of IHS and Markit is dependent on the experience and industry knowledge of their respective officers, key management personnel and other key employees to operate their businesses and execute their respective business plans. The combined company’s success after the merger will depend in part upon the ability of IHS and Markit to retain key management personnel and other key employees and to attract new management personnel and other key employees. Current and prospective employees of IHS and Markit may experience uncertainty about their roles within the combined company following the merger, which may have an adverse effect on the ability of each of IHS and Markit to attract or retain key management personnel and other key employees. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the businesses, the combined company’s business following the consummation of the merger could be negatively impacted. Accordingly, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees of IHS and Markit to the same extent that IHS and Markit have previously been able to attract or retain their employees. Adverse effects arising from the pendency of the merger could be exacerbated by any delays in consummation of the merger or termination of the merger agreement.

IHS and Markit Will Be Subject to Certain Contractual Restrictions While the Merger is Pending.

The merger agreement restricts each of IHS and Markit from making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and expenditures, repurchasing or issuing securities outside of existing equity award programs (and, in the case of Markit, outside of Markit’s existing accelerated share repurchase program), and taking other specified actions until the earlier of the completion of the merger or the termination of the merger agreement without the consent of the other party. These restrictions may prevent IHS and/or Markit from pursuing attractive business opportunities that may arise prior to the completion of the merger and could have the effect of delaying or preventing other strategic transactions. Adverse effects arising from the pendency of the merger could be exacerbated by any delays in consummation of the merger or the termination of the merger agreement.

Third Parties May Terminate or Alter Existing Contracts or Relationships with IHS or Markit.

Each of IHS and Markit has contracts with customers, suppliers, vendors, distributors, landlords, licensors, joint venture partners, and other business partners which may require IHS or Markit, as applicable, to obtain consent from these other parties in connection with the merger. If these consents cannot be obtained, the counterparties to these contracts and other third parties with which IHS and/or Markit currently have relationships may have the ability to terminate, reduce the scope of or otherwise materially adversely alter their relationships with either or both parties in anticipation of the merger, or with the combined company following the merger. The pursuit of such rights may result in IHS, Markit or the combined company suffering a loss of potential future revenue or incurring liabilities in connection with a breach of such agreements and losing rights that are material to its business. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the merger. The adverse effect of such disruptions could also be exacerbated by a delay in the completion of the merger or the termination of the merger agreement.

Markit Will Incur Significant Transaction Costs in Connection with the Merger.

Markit has incurred and expects to incur a number of non-recurring costs associated with the merger. These costs and expenses include financial advisory, legal, accounting, consulting and other advisory fees and expenses, reorganization and restructuring costs, severance/employee benefit-related expenses, public company filing fees and other regulatory expenses, printing expenses and other related charges. Some of these costs are payable by Markit regardless of whether the merger is completed.

 

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Markit Directors and Executive Officers May Have Interests in the Merger Different from the Interests of Markit Shareholders Generally.

Certain of the directors and executive officers of Markit negotiated the terms of the merger agreement, the Markit board recommended that Markit shareholders vote in favor of the Markit share issuance proposal, the Markit amended bye-laws proposal, the Markit name change proposal and the Markit adjournment proposal. These directors and executive officers may have interests in the merger, which are different from, or in addition to, or in conflict with, those of Markit shareholders, generally. These interests include the continued employment of certain executive officers of Markit by the combined company, the continued service of certain independent directors and executive directors of Markit as directors of the combined company upon completion of the merger, which will be renamed IHS Markit Ltd. (“IHS Markit”), the treatment in (or in connection with) the merger of equity awards as well as certain change-in-control severance payments and benefits, transition or retention awards, or other rights held by Markit directors and executive officers, as applicable, and the indemnification of former Markit directors and officers by the combined company.

Markit shareholders should be aware of these interests when they consider recommendations of the Markit board that they vote in favor of the Markit share issuance proposal, the Markit amended bye-laws proposal, the Markit name change and the Markit adjournment proposal. The Markit board was aware of these interests when it determined that the merger agreement and the transactions contemplated thereby were advisable and fair to and in the best interests of the Markit shareholders and recommended that the Markit shareholders approve the Markit share issuance, the Markit amended bye-laws and the Markit name change.

Existing Markit Shareholders Will Have a Reduced Ownership and Voting Interest in, and Will Exercise Less Influence Over Management of, the Combined Company After the Merger Than They Did With Respect to Markit Prior to the Merger.

Markit shareholders currently have the right to vote in the election of the the Markit board and on other matters affecting the company. As a result of the Markit share issuance, upon the completion of the merger, each Markit shareholder will have a percentage ownership of, and voting interest in, the combined company that is smaller than such shareholder’s percentage ownership of, and voting interest in Markit immediately prior to the merger. Immediately following the completion of the merger, the former Markit shareholders, as a group, will own approximately 43% of the combined company. In addition, former directors of Markit will constitute five of the eleven members of the IHS Markit board. Accordingly, Markit shareholders will have less influence on the management and policies of the combined company than they now have on the management and policies of Markit.

Markit Common Shares to Be Received by IHS Stockholders in the Merger Will Have Rights Different from the Shares of IHS Common Stock.

Upon completion of the merger, IHS stockholders will no longer be stockholders of IHS, but will instead be shareholders of Markit. The rights of former IHS stockholders who become Markit shareholders will be governed by the Markit amended bye-laws, which will be adopted, as of the effective time. The rights associated with Markit common shares are different from the rights associated with shares of IHS common stock.

The Merger Agreement Contains Provisions that May Discourage Other Companies from Trying to Enter into a Strategic Transaction with Markit for Greater Consideration.

The merger agreement contains provisions that may discourage a third party from submitting a business combination proposal to Markit both during the pendency of the proposed combination transaction as well as afterward, should the merger not be consummated, that might result in greater value to Markit shareholders than the merger. These merger agreement provisions include a general prohibition on each company from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition or combination proposal or offers for competing transactions, subject to limited exceptions. Further, if the Markit board (i) withdraws, qualifies or modifies, or proposes publicly to withdraw, qualify or modify, or fails to make, in each case in any manner adverse to the other party, its approval or recommendation of the Markit required shareholder approvals or (ii) approves or recommends, or proposes publicly to approve or recommend, any alternative transaction, Markit will still be required to submit the merger, to a vote of its stockholders or shareholders, as applicable, at the respective special meetings unless the merger agreement is earlier terminated in accordance with its terms.

In addition, Markit may be required to pay to IHS a termination fee in cash equal to $195,000,000 in certain circumstances involving acquisition proposals for competing transactions.

If the merger agreement is terminated and Markit determines to seek another strategic transaction, Markit may not be able to negotiate a transaction on terms comparable to, or better than, the terms of this transaction.

 

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The Market Price of the Combined Company’s Common Shares May Be Volatile, and Holders of the Combined Company’s Common Shares Could Lose a Significant Portion of Their Investment Due to Drops in the Market Price of the Combined Company’s Common Shares Following Completion of the Merger.

The market price of the combined company’s common shares may be volatile, and following completion of the merger, shareholders may not be able to resell their IHS Markit common shares at or above the price at which they acquired the common shares pursuant to the merger agreement or otherwise due to fluctuations in its market price, including changes in price caused by factors unrelated to the combined company’s operating performance or prospects.

Specific factors that may have a significant effect on the market price for the combined company’s common shares include, among others, the following:

 

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changes in stock market analyst recommendations or earnings estimates regarding the combined company’s common shares, other companies comparable to it or companies in the industries they serve;

 

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actual or anticipated fluctuations in the combined company’s operating results of future prospects;

 

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reaction to public announcements by the combined company;

 

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strategic actions taken by the combined company or its competitors;

 

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failure of the combined company to achieve the perceived benefits of the transactions, including financial results and anticipated synergies, as rapidly as or to the extent anticipated by financial or industry analysts;

 

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adverse conditions in the financial market or general U.S. or international economic conditions, including those results from war, incidents of terrorism and responses to such events; and

 

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sales of common shares by the combined company, members of its management team or significant shareholders.

Markit Shareholders Will Not Be Entitled to Appraisal Rights in the Merger.

Under the Companies Act 1981, as amended, of Bermuda, in the event of an amalgamation or merger of a Bermuda company with another company or corporation, a shareholder of the Bermuda company who did not vote in favor of the amalgamation or merger and who is not satisfied that fair value has been offered for such shareholder’s shares may, within one month of notice of the shareholders meeting, apply to the Supreme Court of Bermuda to appraise the fair value of those shares.

Because Markit is not a direct party to the merger and Markit shareholders will continue to own their Markit common shares, Markit shareholders will not be entitled to appraisal rights in connection with the merger.

Risks Related to the Business of the Combined Company Upon Completion of the Merger

The Combined Company May Fail to Realize the Anticipated Benefits of the Merger.

The success of the merger will depend on, among other things, the combined company’s ability to combine the IHS and Markit businesses in a manner that realizes anticipated synergies and exceeds the projected stand-alone cost savings and revenue growth trends identified by each company. On a combined basis, IHS Markit expects to benefit from significant cost synergies at both the business and corporate levels that will exceed the cost reductions achievable by Markit and IHS through their stand-alone cost reduction programs. Such cost synergies are expected to be driven by integrating corporate functions, reducing technology spending by optimizing IT infrastructure, using centers of excellence in cost-competitive locations and optimizing real estate and other costs.

However, the combined company must successfully combine the businesses of IHS and Markit in a manner that permits these cost savings and synergies to be realized. In addition, the combined company must achieve the anticipated savings and synergies in a timely manner and without adversely affecting current revenues and investments in future growth. If the combined company is not able to successfully achieve these objectives, or the cost to achieve these synergies is greater than expected, then in either case the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.

 

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A variety of factors may adversely affect the combined company’s ability to realize the currently expected operating synergies, savings and other benefits of the merger, including the failure to successfully optimize the combined company’s facilities footprint, the inability to leverage existing customer relationships, the failure to identify and eliminate duplicative programs, and the failure to otherwise integrate Markit’s and IHS’s respective businesses, including their technology platforms.

Combining the Businesses of IHS and Markit May Be More Difficult, Costly or Time-Consuming than Expected, Which May Adversely Affect the Combined Company’s Results and Negatively Affect the Value of IHS Markit Common Shares Following the Merger.

IHS and Markit have entered into the merger agreement because each believes that the merger will be beneficial to its respective company and stockholders or shareholders, as applicable, and that combining the businesses of IHS and Markit will produce benefits and cost savings. However, IHS and Markit have historically operated as independent companies and will continue to do so until the completion of the merger. Following the completion of the merger, the combined company’s management will need to integrate IHS’s and Markit’s respective business. The combination of two independent businesses is a complex, costly and time consuming process and the management of the combined company may face significant challenges in implementing such integration, many of which may be beyond the control of management, including, without limitation:

 

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latent impacts resulting from the diversion of Markit’s and IHS’s respective management teams attention from ongoing business concerns as a result of the devotion of management’s attention to the merger and performance shortfalls at one or both of the companies;

 

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difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;

 

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the possibility of faulty assumptions underlying expectations regarding the integration process;

 

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unanticipated issues in integrating information technology, communications programs, financial procedures and operations, and other systems, procedures and policies;

 

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difficulties in managing a larger combined company, addressing differences in business culture and retaining key personnel;

 

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unanticipated changes in applicable laws and regulations;

 

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managing tax costs or inefficiencies associated with integrating the operations of the combined company;

 

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coordinating geographically separate organizations; and

 

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unforeseen expenses or delays associated with the merger.

Some of these factors will be outside of the control of Markit and IHS and any one of them could result in increased costs and diversion of management’s time and energy, as well as decreases in the amount of expected revenue which could materially impact our business, financial conditions and results of operations. The integration process and other disruptions resulting from the merger may also adversely affect the combined company’s relationships with employees, suppliers, customers, distributors, licensors and others with whom IHS and Markit have business or other dealings, and difficulties in integrating the businesses or regulatory functions of IHS and Markit could harm the reputation of the combined company.

If the combined company is not able to successfully combine the businesses of IHS and Markit in an efficient, cost-effective and timely manner, the anticipated benefits and cost savings of the merger may not be realized fully, or at all, or may take longer to realize than expected, and the value of IHS Markit common shares, the revenues, levels of expenses and results of operations may be affected adversely. If the combined company is not able to adequately address integration challenges, the combined company may be unable to successfully integrate IHS’s and Markit’s operations or realize the anticipated benefits of the transactions contemplated by the merger agreement.

 

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IHS Markit has Incurred and Expects to Incur Additional Significant Costs in Connection with the Integration of the Combined Company.

There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger. While both IHS and Markit have assumed that a certain level of expenses would be incurred in connection with the merger and the other transactions contemplated by the merger agreement, there are many factors beyond their control that could affect the total amount of, or the timing of, anticipated expenses with respect to the integration and implementation of the combined businesses.

There may also be additional unanticipated significant costs in connection with the merger that the combined company may not recoup. These costs and expenses could reduce the benefits and additional income IHS Markit expects to achieve from the merger. Although IHS Markit expects that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.

Inability to Access the Debt Capital Markets Could Impair the Combined Company’s Liquidity, Business or Financial Condition.

Each of IHS and Markit has relied and continues to rely on access to the debt capital markets to finance their day-to-day and long-term operations. An inability to raise money in the long-term or short-term debt markets could have a substantial negative effect on the liquidity of the combined company. The combined company’s access to the debt markets in amounts adequate to finance its activities could be impaired as a result of potential factors, including factors that are not specific to the combined company, such as a severe disruption of the financial markets and interest rate fluctuations.

The costs and availability of financing from the debt capital markets will be dependent on the short-term and long-term credit ratings of the combined company. The level and quality of the combined company’s earnings, operations, business and management, among other things, will impact the determination of the combined company’s credit ratings. A decrease in the ratings assigned to the combined company by the ratings agencies may negatively impact the combined company’s access to the debt capital markets and increase the combined company’s cost of borrowing. There can be no assurance that the combined company will maintain the current creditworthiness or prospective credit ratings of Markit or IHS, and any actual or anticipated changes or downgrades in such credit ratings may have a negative impact on the liquidity, capital position or access to capital markets of the combined company.

The U.S. Internal Revenue Service (the “IRS”) may not agree with the conclusion that IHS Markit is to be treated as a foreign corporation for U.S. federal income tax purposes following the merger.

Although Markit is incorporated in Bermuda and is and has been treated as (and IHS Markit after the merger is expected to be treated as) tax resident in the United Kingdom, the IRS may assert that IHS Markit should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to Section 7874 of the Code (referred to as “Section 7874”). Under current U.S. federal income tax law, a corporation generally will be considered to be resident for U.S. federal income tax purposes in its place of organization or incorporation. Accordingly, under the generally applicable U.S. federal income tax rules, IHS Markit would generally be classified as a non-U.S. corporation (and, therefore, not a U.S. tax resident). Section 7874 and the Treasury regulations promulgated thereunder, however, contain specific rules that may cause a non-U.S. corporation to be treated as a U.S. corporation for U.S. federal income tax purposes under certain circumstances.

Section 7874 provides that if, following an acquisition of a U.S. corporation by a non-U.S. corporation, at least 80% of the acquiring non-U.S. corporation’s stock (by vote or value) is considered to be held by former shareholders of the U.S. corporation by reason of holding stock of such U.S. corporation (such percentage referred to as the “ownership percentage” and such test referred to as the “ownership test”) and the “expanded affiliated group” which includes the acquiring non-U.S. corporation does not have substantial business activities in the country in which the acquiring non-U.S. corporation is created or organized, then the non-U.S. corporation would be treated as a U.S. corporation for U.S. federal income tax purposes even though it is a corporation created and organized outside the United States.

 

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Section 7874 is not expected to apply to the merger because the former IHS stockholders are expected to hold, for purposes of the relevant Section 7874 rules, less than 60% of the IHS Markit common shares (by vote and value) after the merger by reason of holding IHS common stock. However, whether the ownership test has been satisfied is determined only after the closing of the merger, by which time there could be adverse changes to the relevant facts and circumstances, such as the number of equity-based awards of IHS or Markit that are granted, vested or are exercised before the closing of the merger and the number of Markit common shares delivered under Markit’s accelerated share repurchase programs. In addition, for purposes of determining the ownership percentage of the former IHS stockholders, the former IHS stockholders will be deemed to own an amount of IHS Markit common shares in respect of certain prior distributions (including stock repurchases) by IHS prior to the closing of the merger. A number of these factors are correlated with the share prices of IHS and Markit, and a substantial decline in Markit’s share price could result in former IHS stockholders being treated as holding 60% or more of IHS Markit common shares after the merger for purposes of the ownership test. Further, a subsequent change in law might cause IHS stockholders to be treated as owning 80% or more of the IHS Markit common shares after the merger for U.S. federal income tax purposes, including with retroactive effect to the date of the merger. In such event, IHS Markit could be treated as a U.S. corporation for U.S. federal income tax purposes, and IHS Markit could be liable for substantial additional U.S. federal income tax on its operations and income following the closing of the merger. Additionally, if IHS Markit were treated as a U.S. corporation for U.S. federal income tax purposes, non-U.S. IHS Markit shareholders would be subject to U.S. withholding tax on the gross amount of any dividends paid by IHS Markit to such shareholders. There can be no assurance that the IRS will agree with the position that IHS Markit is to be treated as a non-U.S. corporation.

The IRS may not agree with the conclusion that IHS Markit is not subject to certain adverse consequences for U.S. federal income tax purposes following the merger.

As described above, based on the rules for determining share ownership under Section 7874 and certain factual assumptions, after the merger, former IHS stockholders are expected to hold, for purposes of the relevant Section 7874 rules, less than 60% of the IHS Markit common shares (by vote and value) after the merger by reason of holding IHS common stock. However, if IHS stockholders were treated as owning 60% or more (but less than 80%) of the IHS Markit common shares after the merger for U.S. federal income tax purposes, IHS could be prohibited from using its foreign tax credits or other attributes to offset the income or gain recognized by reason of the transfer of property to a foreign related person or any income received or accrued by reason of a license of any property by IHS to a foreign related person. In addition, on April 4, 2016, the U.S. Treasury and the IRS released temporary regulations that, in such case, may limit the combined company’s ability to integrate certain of its non-U.S. operations or access cash earned by IHS’s non-U.S. subsidiaries, in each case without incurring substantial U.S. tax liabilities. Moreover, in such case, Section 4985 of the Code and rules related thereto would impose an excise tax on the value of certain IHS stock compensation held directly or indirectly by certain “disqualified individuals” (including officers and directors of IHS) at a rate equal to 15%.

As previously discussed, based on the rules for determining share ownership under Section 7874 and the Treasury regulations promulgated thereunder, and certain factual assumptions, the ownership percentage is expected to be less than 60%. However, as described above, there is limited guidance regarding the application of Section 7874, and there can be no assurance that the IRS will agree with the position that the former IHS stockholders will be treated as holding less than 60% of the IHS Markit common shares (by vote and value) after the merger by reason of holding IHS common stock for purposes of the ownership test.

Proposed Regulations under Section 385 of the Code may limit IHS Markit’s ability to use intercompany debt.

On April 4, 2016, the U.S. Treasury and the IRS released proposed Treasury regulations under Section 385 of the Code. In general, the proposed Treasury regulations would (i) require intercompany debt to be accompanied by extensive contemporaneous documentation in order to be treated as debt for U.S. federal income tax purposes; (ii) treat intercompany debt as equity for U.S. federal income tax purposes in certain circumstances; and (iii) authorize the IRS to treat intercompany debt as in part debt and in part equity for U.S. federal income tax purposes in certain circumstances. The scope and interpretation of the proposed Treasury regulations are subject to significant uncertainty. However, if finalized in their current form, that the proposed Treasury regulations may limit the ability of IHS Markit to utilize intercompany debt and may increase cash taxes for IHS Markit.

Changes to the U.S. Model Income Tax Treaty could adversely affect IHS Markit.

On February 17, 2016, the U.S. Treasury released a newly revised U.S. model income tax convention (the “model”), which is the baseline text used by the U.S. Treasury to negotiate tax treaties. The new model treaty provisions were preceded by draft versions released by the U.S. Treasury on May 20, 2015 (the “May 2015 draft”) for public comment. The revisions made to the model address certain aspects of the model by modifying existing provisions and introducing entirely new provisions. Specifically, the new provisions target (i) permanent establishments subject to little or no foreign tax, (ii) special tax regimes, (iii) expatriated entities subject to Section 7874, (iv) the anti-treaty shopping measures of the limitation on benefits article and (v) subsequent changes in treaty partners’ tax laws.

 

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With respect to new model provisions pertaining to expatriated entities, because it is expected that the merger will not result in the creation of an expatriated entity as defined in Section 7874, payments of interest, dividends, royalties and certain other items of income by or to IHS and/or its U.S. affiliates after the merger to or from non-U.S. persons would not be expected to become subject to full withholding tax, even if applicable treaties were subsequently amended to adopt the new model provisions. In response to comments the U.S. Treasury received regarding the May 2015 draft, the new model treaty provisions pertaining to expatriated entities states that the definition of “expatriated entity” has the meaning ascribed to such term under Section 7874 (a)(2)(A) as of the date the relevant bilateral treaty is signed. However, as discussed above, the rules under Section 7874 are relatively new, complex and are the subject of current and future legislative and regulatory changes. Accordingly, there can be no assurance that the IRS will agree with the position that the merger does not result in the creation of an expatriated entity (within the meaning of Section 7874) under the law as in effect at the time the applicable treaty were amended or that such a challenge would not be sustained by a court, or that such position would not be affected by future or regulatory action which may apply retroactively to the merger.

Future changes to U.S., U.K. and foreign tax laws could adversely affect the combined company.

As discussed above, under current law, IHS Markit is expected to be treated as a non-U.S. corporation for U.S. federal income tax purposes. However, changes to Section 7874, or the Treasury regulations promulgated thereunder, could affect the combined company’s status as a non-U.S. corporation for U.S. federal income tax purposes. Any such changes could have prospective or retroactive application, and may apply even if enacted or asserted after the merger is consummated. If the combined company were to be treated as a U.S. corporation for U.S. federal income tax purposes, it could be subject to substantially greater U.S. tax liability than currently contemplated as a non-U.S. corporation.

Recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, including in such a way as would cause IHS Markit to be treated as a U.S. corporation if the management and control of the combined company and its affiliates were determined to be located primarily in the United States, or would reduce the ownership percentage at or above which the combined company would be treated as a U.S. corporation. Thus, the rules under Section 7874 and other relevant provisions could change on a prospective or retroactive basis in a manner that could adversely affect IHS Markit after the merger.

In addition, the U.S. Congress, the Organisation for Economic Co-operation and Development and other government agencies in jurisdictions where IHS and Markit and their respective affiliates do business have had an extended focus on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The Organisation for Economic Co-operation and Development addressed fifteen specific actions as part of a comprehensive plan to create an agreed set of international rules for fighting base erosion and profit shifting that was presented in a report to the G20 finance ministers in October 2015. The G20 finance ministers subsequently endorsed the comprehensive plan. As a result, the tax laws in the United States, the United Kingdom, and other countries in which IHS and Markit and their respective affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect IHS Markit after the merger.

If Markit is, or IHS Markit were to become, a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes, U.S. investors in IHS Markit common shares would be subject to certain adverse U.S. federal income tax consequences.

In general, a non-U.S. corporation will be a PFIC for any taxable year if (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. Markit believes that it was not a PFIC for its 2015 taxable year, and IHS and Markit do not expect IHS Markit to be a PFIC for its 2016 taxable year or in the foreseeable future. However, there can be no assurance that IHS Markit will not be considered a PFIC for any taxable year. If IHS Markit were a PFIC for any taxable year during which a U.S. investor held IHS Markit common shares, such investor would be subject to certain adverse U.S. federal income tax consequences, such as ineligibility for any preferred tax rates on capital gains or on actual or deemed dividends, an additional interest charge on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws and regulations. If IHS Markit were characterized as a PFIC, a U.S. investor may be able to make a “mark-to-market” election with respect to its IHS Markit common shares that would alleviate some of the adverse consequences of PFIC status. Although U.S. tax rules also permit a U.S. investor to make a “qualified electing fund” election with respect to the shares of a foreign corporation that is a PFIC if the foreign corporation provides certain information to its investors, it is not expected that IHS Markit will provide the information that would be necessary for a U.S. investor to make a valid “qualified electing fund” election with respect to IHS Markit common shares.

 

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