MSCI buys RiskMetrics for $1.55B

MSCI Inc. agreed to acquire RiskMetrics Group Inc. in a cash-and-stock transaction valued at $1.55 billion, according to a joint statement by the companies issued March 1.

The deal should net index provider MSCI $50 million in cost savings by next year, including $30 million in overlapping positions across a range of functions from RiskMetrics, a leading provider of corporate governance and risk management advisory services, Henry A. Fernandez, MSCI chairman, CEO and president, said in an interview. The other $20 million in savings is expected from overlapping market data, office location and administrative expenses.

M. Ethan Berman, RiskMetrics chairman and CEO, will become an advisory director of the combined company, a non-management role, Mr. Fernandez said. Mr. Berman will advise on the integration of the two companies and is expected to leave when that work is completed.

Mr. Fernandez will remain as MSCI chairman, CEO and president.

Decisions on inviting other RiskMetrics senior management to stay haven't been made, Mr. Fernandez said. Professional staff reduction from the consolidation is expected to be small; the larger part of the reduction is expected to come from administrative support staff.

“We have quantified (the reduction) precisely,” Mr. Fernandez said. “We are confident we can create synergies across the two (companies).”

The companies will be consolidated under the MSCI corporate name, Mr. Fernandez said. But MSCI will adopt some of RiskMetrics' well-known brands, joining those of MSCI in indexing and Barra, which is MSCI's portfolio risk analytics division, he added.

The combination of the companies in part builds on MSCI's effort to take advantage of what is becoming increasing critical — the need to understand, measure and manage portfolio risk, Mr. Fernandez said.

MSCI will consolidate RiskMetrics' businesses in four key areas, he said.

MSCI plans to combine its Barra portfolio risk management analytics and RiskMetrics' risk management analysis services under the RiskMetrics brand name, Mr. Fernandez said.

In addition, MSCI plans to operate RiskMetrics' corporate governance research and proxy-voting advisory services under the ISS, or Institutional Shareholders Services, brand name that RiskMetrics used for such business operations.

MSCI plans to combine RiskMetrics' environmental, social and governance data and analytics with MSCI's equity research business.

Also, MSCI plans to use the acquisition to expand its equity index business, creating global indexes and other products in the sustainability area tied to RiskMetrics corporate governance and ESG research, Mr. Fernandez said.

MSCI has no indexes on corporate governance or ESG factors now “because we want to have total control on the screens” used to determine the component companies, Mr. Fernandez said.

MSCI will now have that screening capability with the acquisition, Mr. Fernandez said. He specifically cited RiskMetrics' corporate governance research and ESG research from RiskMetrics' acquisitions of KLD Research & Analytics Inc. last November and Innovest Strategic Value Advisors Inc. in February 2009.

RiskMetrics shareholders will have to vote to approve the acquisition but voting will be a formality. RiskMetrics and MSCI share some major shareholders.

Mr. Berman, who owned 11.92% of RiskMetrics stock according to RiskMetrics' latest proxy statement, filed April 29, and other RiskMetrics shareholders have agreed to vote their total 54% of the RiskMetrics shares in favor of the acquisition, according to the joint statement.

Stephanie Hanbury-Brown, who owned 21.7% of RiskMetrics shares, is the company's largest shareholder, according to the RiskMetrics' proxy statement. Ms. Brown, a RiskMetrics director, is managing director of Golden Seeds LLC, a private equity firm she founded in 2004 to provide investment capital to early-stage, high-growth companies.

Entities of General Atlantic LLC, a private and public equity investment partnership and RiskMetrics' next largest shareholder, owned 21.67% of the stock. Spectrum Equity Investors IV entities and Christopher Mitchell each owned 17.61% of the stock. Mr. Mitchell, a RiskMetrics director, is a managing director of Spectrum Equity Investors, a private equity investor in growth companies.

Technology Crossover Ventures' TCV V entities owned 10.44% of the stock; Baron Capital Group entities, 6.51%; and Morgan Stanley and Morgan Stanley Investment Management entities owned a combined 6.35%.

The Morgan Stanley group is MSCI's biggest shareholder with 10.08% of the stock, as of Jan. 29, according to the MSCI's proxy statement, issued Feb. 23.

Baron Capital Group owned 9.23% of MSCI. Other major MSCI owners are T. Rowe Price Associates Inc. with 8.34% and BlackRock Inc. with 5.9%

Morgan Stanley also served as MSCI's financial adviser for the acquisition and is providing some financing for the transaction. RiskMetrics used Evercore Group LLC as financial adviser.

MSCI shareholders do not vote on the deal.

The companies expect the deal to close in the third quarter pending shareholder and regulatory approval, the statement said.

None of RiskMetrics directors will be joining the MSCI board, Mr. Fernandez said.

MSCI is offering RiskMetrics shareholders $21.75 a share, comprising $16.35 of cash and 0.1802 shares of MSCI stock per RiskMetrics share. The deal amounts to 75% cash and 25% stock for RiskMetrics shareholders.

MSCI had $443 million in revenue and $82 million in net income for the 12 months ended Nov. 30; RiskMetrics had $303 million in revenue and $31 million in net income for the 12 months ended Dec. 31.