MARCH 2, 2010

MSCI Seizes RiskMetrics in Union of Niche Firms

By AARON LUCCHETTI

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 former parent 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, financial measurements.

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 the deal.

—Joann S. Lublin contributed to this article