Updates with analyst reaction in paragraph 5, competition paragraph 7, Microsoft deal paragraph 10, investor comment in 12, CEO pay and strategy paragraph 13

By Charlie Conchie

LONDON, Feb 11 (Reuters) - Activist investor Elliott Management has built a stake in the London Stock Exchange Group LSEG.L and is engaging with the financial data and analytics group to improve its performance, a person familiar with the matter told Reuters on Wednesday.

Shares in LSEG were up 2.7% at 1000 GMT, having fallen by more than 35% in the past 12 months, including a selloff last week that wiped nearly $1 trillion off the value of global software stocks.

Elliott's exact shareholding was unclear. The fund has been in talks with LSEG to help drive an improvement in its performance, encourage a fresh share buyback and close margin gaps with rivals, the source said, confirming details first reported by the Financial Times. The FT reported that Elliott does not want LSEG to consider a full sale or spin-off of its stock exchange business.

Elliott and LSEG declined to comment when contacted by Reuters, which provides news for LSEG's news and data terminal Workspace.

The market will be watching closely for Elliott to spell out exactly how it plans to refocus LSEG and make money along the way, said Dan Coatsworth, head of markets at AJ Bell in a note.

DATA RACE

LSEG has rebalanced its earnings towards data and analytics in recent years and away from fees earned through trading on its stock exchange. The company's 2019 acquisition of Refinitiv brought major financial data and analytics under LSEG's umbrella.

In 2024, LSEG’s capital markets division, which houses the stock exchange, accounted for 21% of the group’s revenues, while its biggest unit, data and analytics contributed nearly 50%.

It is now battling concerns that rising competition and artificial intelligence will squeeze its income, a worry also plaguing the broader software and services sector.

The company is also having to contend with a diminished flow of initial public offerings as volatility and fund outflows have hindered new listings, as well as competition from other venues like Amsterdam and the U.S.

LSEG has been working at pace to embrace AI and distribute its licensed data more widely through platforms, including OpenAI's ChatGPT and Anthropic's Claude, as financial services firms race to adopt generative AI tools that can quickly analyse vast amounts of market information.

It has also been rolling out products in collaboration with Microsoft after the U.S. firm bought a 4% stake worth $2 billion in 2022 as part of a 10-year partnership to make its data and analytics available through Microsoft products including Azure, AI and Teams.
"Within the Diversified financial sector, the impact of AI concerns has been felt hardest to date by the Exchange sub-sector as the scope and scale of data and analytics review have come into focus," Barclays analysts said in a note, adding that the de-rating, in particular for LSEG, was overdone.

Some shareholders, however, welcomed the move by Elliott.

'When you've got your core business under attack from AI, you need to really focus strategy and I don't think that has been the case in the past few years,” said Stephen Yiu, chief investment officer of Blue Whale growth fund, an LSEG shareholder.

Last year LSEG said it would sell 20% of its post-trade services business and surprised investors with a 1 billion pound ($1.37 billion) buyback as it also suggested a deeper push into private markets data. In 2024 shareholders voted to nearly double CEO David Schwimmer's pay up to 13 million pounds as some UK fund managers backed calls to increase flexibility on paying top talent to stem a brain-drain.

PREVIOUS CAMPAIGNS

The call for change at LSEG by Elliott follows a failed attempt in 2017 by activist investor TCI to oust the data group's chairman. TCI cut its stake about a year later.

Elliott is one of the world's busiest activist investors, and with assets under management of about $80 billion, it has built a reputation as a relentless activist.

Its other campaign targets include oil major BP BP.L, Lululemon Athletica LULU.O and PepsiCo PEP.O, where it reached a settlement in December that will include cost cuts and other changes. It is also an investor in Anglo American AAL.L.

Since Elliott started building a stake in BP, the company has shifted spending from low-carbon projects to oil and gas while its chair and CEO, closely associated with previous chief Bernard Looney, have both been replaced.

($1 = 0.7305 pounds)