In January 2008 RiskMetrics (Nasdaq:RISK) went public, selling 14 million shares at $17.50. The IPO valued the entire business at $1.05 billion. Just over two years later, index creator MSCI (Nasdaq:MXB) is buying the risk analytics company for $16.35 a share in cash plus 0.1802 MSCI shares, which values the deal at $1.55 billion, a 48% increase in just 24 months. Winners and losers, there are few. Read on and I'll sort out the details.
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MSCI and RiskMetrics put out an 18-page document to help explain the key points of the deal. According to the two companies, professional investors of all stripes will benefit from the complimentary products and services it will be able to provide clients. With annual revenues of $746 million and adjusted EBITDA of $314 million, it will have the scale to compete profitably anywhere in the world. It is expected to be immediately accretive with annual cost savings of $50 million a year by 2012. If you include these savings, its compound annual growth rate for adjusted EBITDA would have been 27.2% in the last three years. It's no wonder McGraw-Hill (NYSE:MHP) and Thomson Reuters (NYSE:TRI) were also interested in RiskMetrics.
CEO Moving On
Don't feel sorry for outgoing RiskMetrics CEO Ethan Berman. He stands to receive as much as $162 million for his shares. He'll stay on until the integration of the two companies is complete. As for Spectrum Equity Investors, General Atlantic Partners and Technology Crossover Ventures, the private equity consortium that contributed $122 million to RiskMetrics recapitalization in 2004, they stand to do even better. Right out of the gate, Spectrum Equity Investors sold $40.9 million in RiskMetric stock in the IPO for which they paid $9.4 million. That's a 335% profit. As a group, it stands to receive as much as $658 million for its 50% stake. Add it all up and the three lead investors made approximately $577 million over five-and-a-half years from its original investment, an annualized rate of return of 37%. We know that the S&P 500 didn't do that.
Ambulance Chasers Appear
Like everything in America, when you're not happy with an outcome in life, you hire a lawyer. Why should this be any different? I've counted no less than six law firms making headlines for commencing investigations into the acquisition. The lawyers contend RiskMetric's board of directors breached its fiduciary duty by not seeking out better offers. Does this imply the deal is a bad one? Not on your life. RiskMetric's 2007 revenues were $240 million. Given the $1.05 billion IPO valuation mentioned earlier, its shares sold for 4.4 time's sales. Its 2009 revenues were $303 million. That's 5.1 times sales based on the $1.55 billion deal value. I can't imagine either McGraw Hill or Thomson Reuters paying more just because they can. Looking at it another way, if you value the offer from MSCI at $21.75 a share and you bought IPO shares in 2008 for $17.50, your return is 24.3%. In the same two-year period, the S&P 500 lost 17.5%. I'm not a lawyer but this appears to be nothing but pure greed by a small group of disgruntled investors. Take the offer and move on. You're not going to find a better deal.
It appears to me that the big losers in this deal are retail investors, but not for the reason you think. I see no problem with the offer by MSCI. Instead, I wonder if average investors are ever going to get an opportunity to make the kind of returns RiskMetric's three lead investors did. The wealthy who provided the equity for those funds will always have access to above-average returns while the rest of us get to invest in mediocre propositions like Fortress Investment Group (NYSE:FIG) and American Capital Strategies (Nasdaq:ACAS). If lawyers want to investigate something, they might start with the SEC-accredited investor rules, which clearly favor the wealthy. But that's a subject for another day. (Weighted average cost of capital is hard to calculate as it is affected by potential and ongoing lawsuits. To learn more about the calculation, see Investors Need A Good WACC.)
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