BANGALORE (Reuters) - Investment analysis firm MSCI Inc MXB.N plans to buy RiskMetrics Group Inc RISK.N for $1.55 billion in cash and stock to add to its financial risk management business and widen its geographical reach.
The deal, announced on Monday, will combine RiskMetrics’ risk advisory content with MSCI’s Barra business, which provides risk management and portfolio analysis tools to fund managers for managing equity, fixed income and multi-asset class portfolios.
MSCI’s offer values RiskMetrics at $21.75 per share, a premium of 17 percent over the company’s Friday close. It also values the stock 40 percent above its trading levels in January, prior to the news that the firm was putting itself up for sale.
MSCI shares fell as much as 7 percent to $27.97, indicating some investor trepidation about the deal terms, but recovered some of their losses to trade down about 4 percent at $28.73.
The stock was already trading at about 35 times forward earnings, compared with broader diversified investment services’ multiple of 19.
“We believe the deal makes strategic sense, combining the multi-asset class RiskMetrics business with the Barra business of MXB that is the dominant provider in equity portfolios,” Robert W Baird analyst Daniel Leben said.
MSCI approached RiskMetrics with an acquisition offer about three months ago that spurred RiskMetrics to hire a financial adviser and run a formal sale process, sources familiar with the matter have told Reuters.
“The addition of RiskMetrics will only increase the relative weighting of subscription revenue, and the increased diversity of our revenue stream should reduce the volatility,” MSCI’s Chief Executive Henry Fernandez said on a conference call with analysts.
The deal would immediately add to MSCI’s cash earnings per share, the CEO added.
MSCI also said that it would continue to be on the lookout for any further deals, should the opportunity arise. 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.
“There should be absolutely no doubt in anybody’s mind that the acquisition of RiskMetrics can put any damp on our desire to continue to expand on the equity index business,” Fernandez said on the call.
RiskMetrics was spun off from JPMorgan Chase (JPM.N) in 1998. Three private equity firms — General Atlantic, Spectrum Equity Investors and Technology Crossover Ventures — invested $122 million into the company in 2004.
In 2007, RiskMetrics entered the proxy advisory services business with its purchase of Institutional Shareholder Services (ISS), the top provider of corporate governance and proxy voting services to investors.
“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,” Fernandez said in a statement.
The new company will have about $750 million in revenue and estimates $50 million in cost synergies from duplicate areas such as platforms, services and offices.
Since RiskMetrics ran an auction to sell itself, competing bids are unlikely, analysts said. Analysts also do not expect any regulatory hurdle.
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.
Morgan Stanley (MS.N), which began spinning off the business in 2007, divested the last of its stake in MSCI in 2009.
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.
RiskMetrics CEO Ethan Berman and certain other 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 will be financed with existing cash and proceeds from 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 component of the deal.
Morgan Stanley advised MSCI in the deal, while Evercore Group LLC advised RiskMetrics.
Additional reporting by Anupreeta Das in New York; Editing by Jarshad Kakkrakandy, Anthony Kurian and Anil D'Silva