The Deal: MSCI Puts ISS on the Block

NEW YORK (The Deal) -- Proxy advisory firm Institutional Shareholders Services finds itself on the block, as index provider MSCI (MSCI) initiates a strategic review of the business it acquired only three years ago through its purchase of RiskMetrics Group.

MSCI said Wednesday, Oct. 30, that it is working with Morgan Stanley to look into options including a possible or spin-off of ISS. MSCI did not provide a specific time frame for the review, but said ISS' senior management was supportive of the decision.

"The decision to do it is not surprising," UBS analyst Alex Kramm said in a phone interview Thursday, as "MSCI is really hopping to bring greater shareholder returns through focusing on its core index business."

MSCI's index business accounted for 35% of its total revenues of $258.2 million for the third quarter of 2013, while the governance division contributed only about 11% of that number, according to company filings. ISS, which is located in Rockville, Md., guides shareholders voting on key corporate transactions, including board elections and activist investor scenarios. Other notable proxy advisory firms include Glass, Lewis & Co. and Egan-Jones Ratings Co. ISS, which forms a part of MSCI's governance division, is the only remaining business in the division. In May, MSCI sold its forensic account research business, CFRA, also a part of that division, to an unnamed buyer. Terms of the deal weren't disclosed. On that transaction, Chudd William at David Polk & Wardwell LLP served as legal counsel to MSCI. Now, MSCI CEO and president Henry Fernance said in the statement about ISS, "the time is right to explore our strategic alternatives." "Over the past three years, MSCI has worked hard to return that business to a growth track. We have launched new products, most notably executive compensation data and analytics and Quickscore, grown our salesforce, reached out to new clients and invested in the technology platform," Fernandez said showcasing ISS as an attractive asset, ripe for acquisition/ "We also strengthened the senior management team ... the Governance business reported organic revenue growth of 7% and Adjusted EBITDA growth of 12%," for the third quarter ended Sept. 30, he added.

In the same quarter, however, ISS showed a 1.4% drop in revenues to $29.6 million. On the other hand, MSCI reported a 14.6% increase in net income to $55.3 million as well as a 4.4% increase in Ebitda to $112.8 million.

MSCI bought RiskMetrics in 2010 in a cash-and-stock deal valuing the company at $21.75 per share or $1.55 billion. ISS, known as Institutional Shareholder Services, had been bought by RiskMetrics from Warburg Pincus and Hermes Investment Management in 2006 for $553 million.

After MSCI bought RiskMetrics it moved the governance business into its own division.

New York.-based MSCI trades on the New York Stock Exchange under the ticker symbol MSCI. Shares closed down 1.07% at $40.77 Thursday, giving the company a market capitalization of about $4.9 billion. MSCI spokesman Edings Thibault said the company wasn't commenting further. -- Written by Tatjana Kulkarni in New York