BANGALORE MSCI Inc MXB.N will buy RiskMetrics Group Inc RISK.N in a cash-and-stock deal valued at about $1.55 billion, ending two months of speculation over the risk advisory firm's future, and creating a giant advisory business.
However, MSCI shares were trading about 7 percent down before the bell Monday, indicating some investor trepidation about the deal terms.
The deal will mark the entry of MSCI, an investment analysis and market index company, into proxy advisory, which has become ever more sought after, following the global financial meltdown.
RiskMetrics, which was spun off from JPMorgan Chase (JPM.N) in 1998, is the market leader in risk management systems and supplies data, analytics, risk reporting, and other information services.
"The combined scale, complementary product capabilities and clients and extensive geographic footprint of MSCI and RiskMetrics will drive significant cost-saving synergies and revenue opportunities, MSCI Chief Executive Henry Fernandez said in a statement.
The new company would have about $750 million in revenue and estimates $50 million in cost synergies from duplicate areas such as platforms, services and offices.
Media reports in January said that RiskMetrics had put itself up for sale, with MSCI, Bloomberg, McGraw-Hill Cos Inc MHP.N and Thomson Reuters Corp (TRI.TO) (TRI.N) named as interested parties.
Demand for risk management products has risen since the start of the credit crisis as financial firms look to mitigate the risk arising on their investment portfolios and balance sheets.
However, as firms cut back on costs and look to consolidate, expenses for risk products have taken a hit.
MSCI, formerly known as Morgan Stanley Capital International, manages more than 120,000 equity, fixed income and hedge fund indices that form the basis for investment funds and derivatives.
It also sells Barra risk management tools for portfolio managers.
The company was one of the leading bidders for Dow Jones' namesake indexes business, but eventually lost out to derivatives exchange operator CME Group Inc (CME.O), who bought the former News Corp (NWSA.O) business in a debt-funded joint venture last month.
Morgan Stanley (MS.N) divested the last of its stake in MSCI in 2009, through an offering of 27.7 million shares of MSCI class A shares. Morgan Stanley started spinning off the business in 2007.
MSCI, known for its MSCI international stock indexes, said its offer for RiskMetrics consisted of $16.35 in cash and 0.1802 MSCI share for each RiskMetrics share.
The offer represents a 17 percent premium to RiskMetrics' Friday closing of $18.63.
RiskMetrics CEO Ethan Berman and certain other RiskMetrics shareholders have entered into a voting agreement with MSCI and agreed to vote about 54 percent of the outstanding RiskMetrics shares supporting the deal, the companies said.
The transaction is expected to close in MSCI's third fiscal quarter of 2010, and would be financed by existing cash and proceeds of debt financing, MSCI said.
New York-based MSCI said it received a commitment letter from Morgan Stanley Senior Funding Inc, for senior secured credit facilities amounting to up to $1.38 billion to fund the cash consideration in the acquisition.
Morgan Stanley advised MSCI in the deal, while Evercore Group LLC advised RiskMetrics.
MSCI shares were trading at $28.00 before the bell, after closing at $29.98, Friday on the New York Stock Exchange.
(Reporting by Brenton Cordeiro and Anurag Kotoky in Bangalore; Editing by Jarshad Kakkrakandy, Anthony Kurian)