MARCH 2, 2010
MSCI Seizes RiskMetrics
in Union of Niche Firms
Financial-index and investment-services firm
MSCI Inc. took a big plunge into the growing business of risk
management, saying it would buy analytics and corporate-governance adviser
RiskMetrics Group Inc. for $1.55 billion.
The deal represents the first major move for
MSCI Chief Executive Henry Fernandez since the firm fully separated from
Morgan Stanley in 2009. It also brings together two firms whose
specialties are in lucrative niche areas of finance that haven't been
directly hammered by credit losses of the last three years.
MSCI's main business is creating indexes that
serve as market benchmarks for institutional investors and the building
blocks for fast-growing investment products such as exchange traded funds.
RiskMetrics is perhaps best known for its
ownership of Institutional Shareholder Services, a powerful proxy research
firm that advises large shareholders how to vote on various corporate moves.
But the bulk of its profits come from
advising trading desks and institutions on the risks in their market
portfolios. The risk consulting business has absorbed criticism following
the credit bubble, and ensuing market panic, in 2008.
Mr. Fernandez, however, is betting that
regulators' increased monitoring of risk will help RiskMetrics, which was
spun out of J.P. Morgan as a tiny startup in the 1990s.
"Another layer of demand is going to come
from potential regulations," said Mr. Fernandez. "Regulations on risk are
not going down."
MSCI, which also has a money-losing risk
management operation, hopes to save $50 million per year from slashing
duplication in the combined company.
MSCI is hoping that it can build revenues
from big banks and institutional investors that currently use services from
both companies. It also hopes a combined research staff with RiskMetics
willl create new financial products and risk-management strategies to
compete with other large financial information players. "You need to have
scale in order to invest and break new ground," says Mr. Fernandez, whose
company had $443 million in revenue for the fiscal year ended Nov. 30,
compared with $303 million at RiskMetrics for the year ended Dec. 31.
The deal was the largest for MSCI in its
41-year history, eclipsing its $800 million purchase of financial risk firm
Barra Inc. in 2004. In 1969, the company, then part of mutual-fund company
Capital Group, launched its first index. In 1986, Morgan Stanley bought
exclusive rights to the indexes in a joint venture with Capital called
Morgan Stanley Capital International.
Capital Group, which manages the American
Funds, sold its minority stake in 2008, and Morgan Stanley wound its stake
down in 2007 and 2008.
Separating from Morgan Stanley helped MSCI
with the RiskMetrics deal, which had been discussed for years between Mr.
Fernandez and RiskMetrics Chief Executive Ethan Berman. In 2007, RiskMetrics
bought ISS in a deal designed to broaden its product mix beyond quantiative,
Mr. Fernandez Monday called the ISS portion
of RiskMetrics business "non core" but said he planned to retain it because
of its cash generation.
RiskMetrics' Mr. Berman is expected to stay
on at the combined company as an adviser after the deal closes, but not much
past 2010. Mr. Berman says he's committed to working on the integration of
the two firms.
In trading Monday, MSCI shares slipped 4.6%
and RiskMetrics shares rose 13%. Morgan Stanley advised its old unit on the
deal and agreed to provide $1.375 billion in financing for the cash part of
óJoann S. Lublin
contributed to this article
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