Filed by MSCI Inc.
Pursuant to Rule 425 of the Securities
Act of 1933
and deemed filed pursuant to Rule
14a-12
of the Securities Exchange Act of
1934
Subject Company: RiskMetrics Group,
Inc.
(Commission File No.:
1-33928)
On March 1, 2010, MSCI Inc. held a
conference call of analysts and investors regarding its announcement that it had
entered into a definitive merger agreement to acquire RiskMetrics
Group, Inc. The following is the transcript of the
presentation. The electronic slides referred to in the following
transcript are also being filed on March 1, 2010 by MSCI Inc. pursuant to Rule 425 under the
Securities Act of 1933, and
the transcript should be read in conjunction with those
materials.
—
MANAGEMENT DISCUSSION SECTION
Operator: Good
day, everyone, and welcome to this MSCI Incorporated Conference
Call.
At
this time, I’d like to turn the call over to Mr. Edings Thibault, Head of
Investor Relations. Please go ahead, sir.
Edings
Thibault, Investor Relations
Thank you very
much, Operator. Good morning and thank you very much, for joining our call to
discuss the acquisition of RiskMetrics Group by MSCI Inc. We are joined on the
call by Mr. Henry Fernandez, the Chairman and Chief Executive Officer of MSCI;
by Mr. Ethan Berman, the Chief Executive Officer of RiskMetrics Group; Mr.
Michael Neborak, Chief Financial Officer of MSCI; Mr. David Obstler, Chief
Financial Officer of RiskMetrics.
Please note that
earlier this morning, we issued a press release announcing the deal and
describing the terms and conditions. A copy of that release, together with a
version of the presentation slides that will accompany this call can be viewed
on MSCI’s website at mscibarra.com under Investor Relations. An additional copy
of the press release can be found on the Investor Relations section of the
RiskMetrics website at www.riskmetrics.com.
This presentation
may contain forward-looking statements. You are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date in which
they are made, which reflects management’s current estimates, projections,
expectations or belief, and which are subject to risks and uncertainties that
may cause actual results to differ materially.
For a discussion of
additional risks and uncertainties that may affect the future results of the
Company, please see the description of risk factors and forward-looking
statements in our Form 10-K for our fiscal year ended November 30,
2009.
Today’s call may
also include discussion of certain non-GAAP financial measures. Please refer to
today’s earnings release for the required reconciliation of non-GAAP financial
measures, the most directly comparable GAAP financial measures, and other
related disclosures.
I
will now turn the call over to Mr. Henry Fernandez, Chairman and Chief Executive
Officer of MSCI. Henry?
Henry
A. Fernandez, Chairman, Chief Executive Officer and President
Thanks, Edings, and
good morning to everyone. I want to extend a particular welcome to Ethan and
David. Thank you for joining us this morning.
Today is a historic
day for MSCI. Our proposed acquisition of RiskMetrics greatly expands our
capabilities in the high growth, high margin business of multi-asset class risk
management analytics. We could not be more excited about what this combination
offers our clients, our shareholders and our employees. From a strategic
perspective, the fit between our two companies could not be more compelling.
Together, MSCI and RiskMetrics will be a leading provider of widely-recognized
tools for equity performance, for equity portfolio management, and risk
management of gross asset classes.
Today’s deal also
represents a step function change in the scale and the scope of our business.
Together, we have revenues of about $750 million and generate a combined EBITDA
of more than $315 million. Our combined company will have more than 2,000
employees around the world. Individually, each company has more than 3,000
clients in the Americas, in EMEA and in Asia.
The combination of
MSCI and RiskMetrics significantly accelerates our efforts to take advantage of
what we think will be an important theme for at least the next decade. That is
the critical need to understand, to measure, manage and report risk across an
entire portfolio. This is going to be a key growth area for our company for a
very long time to come.
The combination of
our deep understanding of the risk needs of asset owners and asset managers,
combined with RiskMetrics’ knowledge of hedge funds and banks, will result in a
more comprehensive product suite for all of our customers. In addition, the
combined revenues of the two companies should support more intensive research
and product development, leading to improved products for our clients and faster
growth for our shareholders.
Furthermore, our
core strategy in analytics has been to marry our equity and fixed income
portfolio management tools with a powerful risk management platform to create an
integrated understanding of risk across our clients’ investment processes. This
means the data and the valuation models used by portfolio managers in the front
office will be the same as those used by risk managers and CIOs and CROs,
creating a unified language of risk. We think that combination has been -- this
combination has the potential to add enormous value to our clients’ investment
processes and be long-term engines of growth across all of our analytics
businesses.
The acquisition of
RiskMetrics materially accelerates our own efforts to build that capability
organically in our own multi-asset class product line. It should also accelerate
the build-out of our fixed income portfolio management tools, which today is a
small part of our business but a key growth area.
To
sum up, the addition of risk metrics is an important step in the long-term
strategy of building a fast-growing, highly-profitable and industry-leading
mission-critical analytics product portfolio. The increased scale and the scope
of our business will enable us to leverage our existing cost space, resulting in
higher margins, which in turn will enable us to invest more in developing new
products and capabilities, which in turn should translate into higher retention
and accelerated revenue growth.
This is the virtual
circle that has created so much value for us in our equity-index business and we
intend to replicate it in our analytics business. We also think this transaction
will yield significant financial benefits to our shareholders.
First, this deal is
expected to immediately be accretive to our cash earnings. If this deal had been
completed at the beginning of 2009, and assuming no synergies, we would expect
accretion to cash earnings in the mid to high-single digit percentage range. By
the end of year three, assuming full effect for our synergies, the level of
accretion will be much higher.
The key driver of
this accretion will be our ability to drive substantial synergies by eliminating
overlapping costs and leveraging the significant investment both companies have
made in our own cost infrastructure. And I want to reiterate this point; the
multi-asset class risk management business is one we know well, so we are highly
confident in our ability to realize our $50 million of cost
synergies.
We
are also confident that there are multiple revenue synergies as well. Given the
broad base of clients and the enhanced product suite, we think there are ample
opportunities for cross-selling and up-selling existing products to our existing
combined client base. One clear example of that kind of revenue synergy comes in
the environmental social governance space that RiskMetrics has been expanding
on.
We
are excited about the potential to leverage the research, the analytics and the
data of RiskMetrics ESG business to create global indices that will enable us to
offer benchmark products for global, socially conscious investors. That’s just
one example of the synergies that we can generate with this
combination.
We
are taking on more debt as part of this deal. But it is important to note that
this debt is supported by a very strong combined free cash flow of both
companies. And we expect that this cash flow will enable us to delever rapidly
in a few years.
Finally, one of the
most attractive characteristics of our business model is the combination of a
fast-growing top line with the steady and predictable nature of our subscription
revenue model. The addition of RiskMetrics will only increase the relative
weighting of subscription revenues and the increased diversity of our revenue
stream to reduce the volatility of our revenues. So not only will this deal
accelerate our growth and improve our overall profitability, it should also
result in a larger and even more predictable top-line growth.
With that as an
introduction as to why we are so excited about today’s announcement, I would
like to invite Ethan Berman, RiskMetrics’ Chief Executive Officer and a good
friend, to share his thoughts with you. Ethan?
Ethan
Berman, Chief Executive Officer and Founder, RiskMetrics Group
Thank you, Henry.
As I know you know, I am absolutely thrilled to be here, and would like to take
a minute to talk about why we at RiskMetrics are so excited about these two
companies coming together. As Henry made reference, the need to understand risk
as part of the investment process is critical, and that need is only going to
increase over the next 10 years.
In
addition, we have seen that our clients are looking for providers to bring them
broader, more complete solutions. As such, we saw an attractive opportunity to
combine with MSCI, create a preeminent provider for tools for portfolio risk
management, with scale across all asset classes. This combination gives us the
size and scope to address the top to bottom risk management needs of a broad
range of customers, while enabling the combined company to increase our
investment in new product development, which is essential in our
industry.
The two companies
will together allow us to deliver a powerful set of products to our clients,
while at the same time creating shareholder value for investors and growth
opportunities for our employees. It is my view and one shared by the RiskMetrics
board that this truly is a powerful combination.
Henry
A. Fernandez, Chairman, Chief Executive Officer and President
Thanks, Ethan. I
could not agree with you any more. It is a powerful combination. We will be
marrying MSCI’s expertise in equity performance indices, equity portfolio risk,
and multi-asset class risk analytics with your very own core strength in
multi-asset class risk analytics and corporate governance.
We’re also bringing
together two broad complementary client bases. Each company has more than 3000
clients, but more importantly, it’s the product set and expertise we can now
bring to the full range of investment companies, from asset owners, to asset
managers, broker dealers, mutual funds, hedge funds, banks and insurance
companies. This broad client set enables us to leverage the expertise we have
each developed in delivering investment decision tools to each group in order to
create an even more comprehensive product suite and add more value to all. We
are also bringing together a powerful combination of brands, global brands,
MSCI, RiskMetrics, Barra, FEA, ISS.
Finally, we are
bringing together two global companies. Both businesses are global today, but
the combination will increase the size of our footprint in the major developed
markets and enable MSCI’s sales force to bring RiskMetrics’ solutions to Asia.
The real power of this combination is in the comprehensive product suite. As of
today, between MSCI and RiskMetrics, we offer a full array of products covering
multiple asset classes, and which run top to bottom of our clients’ investment
processes. This is a big diverse array of businesses today that offer attractive
growth prospects on any number of fronts.
But where the power
comes to bear the most is when we can begin to put those pieces together. Our
goal is to seamlessly connect the front office portfolio management function
with those of the middle office risk management function. That has the potential
to create an integrated and seamless view of risk that will provide the
functionality and insight to help individual portfolio managers better
understand their own trade-off between risk and return, and to help risk
managers and CROs understand the same trade-off across multiple portfolios and
multiple asset classes. That will translate into significant growth
opportunities for us, significant value to our clients.
That is our vision
and it represents the full potential of our suite of investment decision tools.
We are not there yet, but with RiskMetrics, we are a lot closer today than we
were last week. The other power in our combination is the ability to leverage a
core infrastructure platform to support multiple product
applications.
At
the end of the day, we are a company that takes in widely available market data,
cleans it, shapes it, combines it with models and software to create tools that
help our clients address specific needs. The key attribute that makes our
business model so attractive is that much of that infrastructure can be
leveraged across a variety of products. The same equity market data that we use
for our equity indices can be used in our equity portfolio analytics tools and
in our multi-asset class analytic tools. The same fixed-income data that shapes
our multi-asset class risk management tools can be used to drive fixed-income
portfolio analytics.
The key to making
this business model work is scale. Scale enables us to spread across multiple
product lines the high and relatively fixed costs of this platform of data,
models, analytics and software. The addition of RiskMetrics brings significant
scale to our business model, and we can then put on top of that – that we can
then put on top of that our data processing models and technology.
The ability to
leverage that fixed infrastructure is a key reason we think we can generate $50
million of cost synergies from our acquisition of RiskMetrics. This is a
business we know very well, and we are confident that we can deliver on our
synergy strategy. In addition to the ability to cut out the duplicative data
processing costs, we are also confident that we will be able to move quickly to
eliminate overlapping positions across a broad range of functions.
We
also anticipate being able to take advantage of the emerging market centers that
MSCI has built in Budapest, Mumbai, Monterrey, Mexico and in Shanghai; to
relocate or add positions in those places to continue the growth and
profitability of our business. We see additional savings coming from the
elimination of occupancy costs, public company expenses, and other G&A
functions. Not included in this $50 million synergy number, of course, are the
potential revenue synergies that I already described.
Now I would like to
ask our Chief Financial Officer, Michael Neborak, to walk us through the
financial profile of the combined company and review with you they key terms of
this deal. Mike?
Michael
K. Neborak, Chief Financial Officer
Thank you, Henry.
I’m going to talk first about the financial profile and then talk about some
transaction terms, and then talk a little bit about the combined pro forma
company. So first, the financial profile based on full year 2009 figures, the
transaction increases the size of MSCI’s revenue base from approximately $440
million to $750 million, and our adjusted EBITDA from $215 million to $314
million, and that’s before synergies. We achieved the enhanced scale while
maintaining MSCI’s strong historical revenues and EBITDA growth.
Another transaction
benefit comes from increased revenue diversification by adding substantially to
the multi-asset class analytics product category, which increases from 8% of our
revenue base today to 26% of pro forma combined revenues. Importantly, equity
indices continue to be our largest product category, representing 35% of pro
forma revenues.
In
addition, recurring revenue from subscription business increases from 84% to
87%, and market-based recurring revenue declines from 16% to 10%. The key
transaction terms can be thought of as follows. Based on MSCI’s closing stock
price on Friday, February 26, the purchase price is $21.75 per share. That price
is comprised of the cash component of $16.35 per share, representing
approximately $1.2 billion or 75% of full consideration, plus a stock component
of $5.40 per share in MSCI common stock based on a fixed exchange ratio of
0.1802 MSCI common shares for each RiskMetrics fully diluted common
share.
That exchange ratio
will cause MSCI to issue approximately 14 to 16 million new fully diluted common
share equivalents, representing 11 to 13% of MSCI’s pro forma fully diluted
common shares outstanding. The exact number of MSCI’s fully diluted share
equivalent issued will depend on how many RiskMetrics’ stock options are
exercised into RiskMetrics’ common stock prior to closing.
In
the presentation that we put up on the website in page 17, there is a page which
illustrates the number of MSCI common shares and equivalents expected to be
issued in the transaction.
Assuming all vested
options convert, MSCI will issue approximately 14 million fully diluted common
share equivalent, assuming only certain options convert, MSCI will issue
approximately 16 million fully diluted common share equivalents.
The total
transaction value is $1.55 billion that represents $21.75 per share,
consideration multiplied by the fully diluted RiskMetrics common shares
outstanding. At closing, the cash to repay all existing debt at both RiskMetrics
and MSCI and the cash required to pay the cash component of the purchase price,
will be provided by a new fully committed $1.275 billion term loan B, senior
credit facility and $642 million of existing cash at both companies. The
transaction is subject to approval by RiskMetrics shareholders and antitrust
clearance. Closing is expected to occur sometime in our fiscal third
quarter.
After the
transaction closes, MSCI will have approximately $150 million of cash, $1.275
billion of outstanding debt, and a $100 million undrawn revolver. The pro forma
net leverage ratio at November 30 is 3.6 times. Including synergies, that figure
is 3.1 times. We are very comfortable with that leverage. The combined company
had significant recurring revenue, high margins, and substantial free cash flow.
We can delever very quickly. The debt can be paid down in full sometime during
2013.
The transaction is
financially attractive. On page 13, in the presentation, I refer to that because
of quite a few numbers meant to provide a roadmap to some important modeling
assumptions using the 2009 income statements for both companies. There are
revenue synergies, as Henry mentioned, and we have not included them in our
analysis.
Approximately $50
million of cost synergies are expected to be realized fully by year 2012. The
$23 million of intangible amortization expense on RiskMetrics’ 2009 income
statement will be replaced by
intangible
amortization created by this transaction. For modeling purposes, assume this
transaction adds approximately 60 million of annual amortization expense from
intangibles.
The interest
expense of both companies is eliminated and replaced by interest expense from a
new $1.275 billion committed term loan B facility. A good working assumption
based on today’s rates is an interest rate of 5% to 5.5% on that new debt.
Interest income will decline from lower cash balances held after closing and I
might also add here from calculating MSCI’s cash EPS, which for 2009 was $1.11,
we add back the following to our reported GAAP net income. We add back the
after-tax cost of intangible amortization and the after-tax cost of
non-recurring stock-based compensation, which for us is our founders
grant.
If
you goes through the assumptions that I laid out there, the new combined cash
earnings for the company assuming no synergies is $141 million. And the new
share base of the company, assuming 16 million shares are added to the 102
million average shares that were outstanding, the fully diluted calculation in
2009 gives you accretion of 8% as Henry referred to earlier in the presentation
as mid-to-high single digits for 2009.
And with that, I’m
going to turn the presentation back over to Henry.
Henry
A. Fernandez, Chairman, Chief Executive Officer and President
Thanks, Mike.
Before we open up the call to Q&A, I would like to reiterate why the
management teams and the Board of Directors of both MCSI and RiskMetrics are so
excited about this deal. This combination is about bringing two providers of
industry standard investment decision tools. The combination of our two fast
growing risk management businesses will deliver immediate benefits in the form
of product enhancements and cost savings.
Longer term,
putting together RiskMetrics and MSCI, brings us a giant step closer to our
vision of providing a seamless view of risk across our clients’ investment
processes. That goal, which I am confident we will achieve, will add enormous
value to our clients and be a powerful engine of growth and profitability for
our combined company.
And now, I would
like to take your questions. Operator?
— QUESTION AND
ANSWER SECTION
Operator: Thank
you, Mr. Fernandez. [Operator Instructions]. We’ll take our first question from
James Kissane, Bank of America.
<Q – James Kissane>:
Thank you. Congratulations, everyone, on a great transaction, I think.
Henry, can you comment on the margin profile maybe of the analytics business
over time compared to your traditional index business?
<A – Henry Fernandez>:
Good question, Jim. Currently, in MSCI, we’ve got two businesses in
analytics. We have the equity portfolio risk business, which has fairly good
margins and we have the risk management business, which is fast growing, but in
which we currently lose money. When you combine our fast growing, but high cost
infrastructure risk management business with RiskMetrics already developed, fast
growing and high profit risk management business, and you take out some of the
cost synergies or you assume some of the cost synergies, then it creates a
pretty powerful platform of high growth and high profitability in the risk
management business. And then, when you integrate, in a seamless way from the
front office to the back office, that new profitable, high growth risk
management business with a now re-energized front office portfolio management
risk business, we believe that the latter will grow faster and the combined
profitability of the entity will be a lot higher. We also believe that the
margin that we can obtain in this combined analytics business could be similar
to the margins that we have in equity indices than over time. There is no reason
not to get there. It’s just a question of building scale on revenues to spread a
cost infrastructure, a common cost and fixed infrastructure over that higher
revenue base.
<A – Ethan Berman>: Jim,
as you know, RiskMetrics, we are in the low 40s at percent margin on the risk
business and obviously, we get the advantage of synergies here. That business
has been growing quite rapidly over the last four years. So to reiterate Henry’s
comments of where margins in that business can go, I think it certainly can go
significantly higher than where we actually are already today.
<Q – James Kissane>:
That’s great. And not to put you on the spot, Henry and Ethan, but maybe
your thoughts on the ISS/governance business over time and maybe how it
fits?
<A – Henry Fernandez>:
That’s a good question as well, Jim. In our view, a lot of the core
businesses that we want to build in the combined company are equity performance
indices, portfolio management tools, our fixed income portfolio and portfolio
management tools and the risk management tools. We have an incredible amount of
organic growth and obviously through this acquisition further growth to achieve
that. When you look at the ISS business in the context of that, it obviously
becomes less core, less mainstream to us. Having said that, the ISS business is
a great business. It has held up really well during the downturn in the last two
years. What Ethan and his team have been able to do in investing in the
technology to be able to automate that business and take out some costs, which
is now just beginning to happen, will provide significant higher margins and
profitability in that business.
<Q – James Kissane>:
Great. Thank you.
Operator: Then
we’ll take our next question from Peter Appert, Piper Jaffray.
<Q – Peter Appert>: So
Henry, just to make sure I understood the response to the last question. The
intention is then to keep the ISS business?
<A – Henry Fernandez>:
The intention is to recognize that it is non-core to what we do today and
to try to continue to benefit from the cash flows of that business, particularly
in order to delever fast.
<Q – Peter Appert>: I
got it. Thank you. And then Henry, you anticipating an extensive antitrust
review? What do you think the issues might be there?
<A – Henry Fernandez>: I
think like any other business combination, we intend to proceed to file our
regulatory filings with the nearest antitrust authorities around the world, but
particularly in the U.S. and the European Union. We expect -- I am highly
confident that there will be obviously a fast process there and we don’t expect
any significant issues, particularly because our two risk management businesses
are only a small percentage, very small percentage of the overall risk
management tools that exist in client organizations around the
world.
A
lot of what they do has been organically built. A lot of the internal systems
have been provided, sometimes consultants or pension firm consultants and the
like have provided a lot of this to the pension funds. So we have a small
percentage of the overall market and we hope that therefore that it is a great
benefit in that process.
Secondly, the
overlap in our risk management business in BarraOne with RiskManager from
RiskMetrics is very, very small. A lot of what RiskMetrics has been able to do
is grow fast in the hedge fund space, which is pretty attractive to us and some
of the mutual fund complexes, particularly in Europe, having to do with use of
three regulations. A lot of our forte at MSCI with BarraOne has been with asset
owners, pension funds and several wealth funds around the world and many of the
asset managers, particularly asset managers of defined benefit plans. So not a
lot of overlapping of what we do today.
Operator: And
we’ll go next to Ed Ditmire, Macquarie.
<Q – Edward Ditmire>:
Good morning, guys. I have a question on -- you talked about how you have
the opportunity to deleverage fully over the next three or four years. But can
you talk at all about what you might see as a target financial leverage? It
doesn’t seem – you know I guess there is some debate probably about what level
is desirable. Any thoughts on that?
<A – Henry Fernandez>:
Good question. Both companies are standard and some of the companies with
a high degree of leverage and we are pleased to point out that -indicate that we
both delevered very fast even in the worst possible crisis of a few generations
in the world today. So that MSCI, we are now in a position of a net cash -- when
you take the cash minus the debt and RiskMetrics is not there yet, but very,
very close to a breakeven level from that point of view over the last two years.
So the combined companies cash flow, free cash flow and the ability to generate
synergies will provide enormous ways to delever.
Then the question
becomes, as we are delevering fast and have an opportunity to accumulate cash,
the old dilemma that we have at MSCI right now, which is we are sitting on a lot
of cash, but we are also sitting on equity with a negative carry, what do you do
with that? Do you keep accumulating the cash and keep the lever or do other
things? I think ultimately there is an argument to be made that companies like
ours which is extremely stable revenue base, fast-growing, is very strong free
cash flows, should have a minimal amount of debt. What is that number? I don’t
know, probably between one and two times, somewhere in there, in order to lever
the equity returns and provide better shareholder value.
<Q – Edward Ditmire>:
Okay, thank you. I’m sorry if you have already answered this, but are
there any revenue dis-synergies between the multi-asset class business of legacy
MSCI and RiskMetrics?
<A – Henry Fernandez>:
Yes, RiskMetrics those there in MSCI and some revenues on our index data
on that. That obviously goes away, gets flushed out in the process. Besides
that, we can’t think of almost any other revenue dis-synergies of the combined
company.
Operator: And
we’ll take our next question from David Scharf, JMP Securities.
<Q – David Scharf>: Good
morning. I apologize, I am in the car, I hope you can hear me okay, Henry. Can
you possibly share maybe some of the lessons you picked up since the integration
of Morgan Stanley buying Barra I guess six, seven years ago? I know at that time
you were attempting to integrate those sales forces, you ended up the better
part of the last couple years rebuilding the BarraOne. As we
think about those
50 million of cost synergies, can you get a little bit more granular about where
it comes from and what the strategies are for sales force integration or just
leaving them standalone?
<A – Henry Fernandez>:
Yes, the lesson that we learned from the Barra integration was that there
were a few lessons that turned -- that will turn this integration very
positively. The first one is it is just amazing the amount of synergies we can
-- that can be created on building a common infrastructure in these businesses,
a common data set that is clean, that is robust, a common data production
factory in which you take the market data, combine it with the models to produce
the right data, the common ID infrastructure that runs that factory, the common
software platform to be able to write applications on top of that, the common
client service around the world, a common salesforce. So what we learned in
Barra with MSCI and at that point, these were two distinct businesses, was there
were enormous opportunities to combine this into a common set and build revenues
on top of that for enormous expansion of margin. We believe that, given that we
are already in the risk management business with BarraOne, that we are already
in the equity portfolio risk business compared to when we acquired Barra, that
that will bode very well for us in this area. And that was one lesson
learned.
The second one is
that when you combine two companies, even though they have similar cultures and
we believe that MSCI Barra have similar cultures with RiskMetrics, it is not one
culture or the other one that survives. It is a question of shaping and building
a new culture, bringing the best from the two places and that’s something that
we are extremely focused on and ultimately what happened with MSCI and Barra. In
terms of specifically the identifiable synergies, the cost synergies on page 8
of the presentation, we have about $20 million of what we call non-compensation
expense savings these have to do with the combination of data centers, data
network, the market data spend of the combined companies, office occupancy
around the world. We have a significant overlap of office space around the
world, other general and administrative expenses and also clearly, we now have
one public company rather than two, so we save some money there. That’s about
$20 million of the 50. Another $30 million is compensation expense savings and
that is clearly the elimination of a lot of overlapping positions and the
support functions at the combined company from finance, to HR, to infrastructure
and technology and the like. There is the opportunity to combine and the
combination of the ,of our development organizations and obviously a little bit
of synergies and the combination of our salesforce and our client service
functions. But again, a lot of the – and lastly I should say the opportunity to
continue to build our footprint in emerging market centers that provide
extremely high quality of personnel at a reasonable expense ratio to compared to
the developed markets. So overall, I think that the effort, those are the
details that we can highlight.
<Q – David Scharf>:
Great. Thank you very much. Congratulations.
<A – Henry Fernandez>:
Thank you, David.
Operator: And
we will take our next question from Suzi Stein, Morgan Stanley.
<Q – Suzanne Stein>: Hi,
congratulations. Can you just address your capacity and your desire to do
additional acquisitions or is this it just for a while? I know you have been
looking for something in the equity index business and if something were to come
up, would you be able to pursue it at this point?
<A – Henry Fernandez>:
Definitely, absolutely, yes. The equity index business is a business that
we have all learned to love for its high growth, high margins, very sticky
around the world, very client-based, great brands and the like and 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
should there be the properties available out there that we can combine with and
generate the same levels of revenue and cost synergies that we are trying to do
here. For now, given that we don’t see yet any identifiable properties out
there, our main focus is in completing this transaction and delivering on the
promise that we are making to all of you that we will create significant
shareholder value from this combination.
<Q – Suzanne Stein>:
Okay, thanks. And can you just talk about how senior management will be
structured after the transaction?
<A – Henry Fernandez>:
Yes, Ethan Berman will stay on for a period of time as an adviser to our
company, helping us in the integration, for helping us obviously in identifying
a lot of the areas in the business that we can grow and stabilize and helping us
in the integration of the company. Beyond the role of Ethan as an adviser, there
are no decisions made at this point as to various roles and responsibilities of
the combined management team.
<Q – Suzanne Stein>:
Okay. Thank you.
<A – Henry Fernandez>:
Thank you Suzanne.
Operator: We’ll
go next to Andrew Fones, UBS.
<Q – Andrew Fones>: Yes,
thank you. I was wondering if we could just talk about the timing regarding the
closing of the deal and the synergies. I apologize if I’ve missed when you
expect the deal to close, but also I think you said you expect the $50 million
of synergies by the end of ‘11. Just wondering if you could give a sense of
where you expect to be by, for instance, the end of 2010? Thanks.
<A – Michael Neborak>:
Sure, Andrew. This is Michael Neborak. So we said that closing is
anticipated in our fiscal third quarter. So that will be some time after May 31,
June, July. And in terms of synergy timing, I think these are approximate
numbers, but for 2010, $5 million to $10 million. In 2011, 25 million to 35
million and then in 2012, the full 50 million.
<A – Henry Fernandez>:
Run rates. Run rates for account.
<A – Michael Neborak>:
Well, those were what I gave you there are accounting numbers for 2010,
2011 and obviously in 2012, both a run rate and an accounting number because we
will achieve it at the beginning of 2012.
<Q – Andrew Fones>: Got
it, thanks. And then to help us as we think about revenue synergies, can you
talk about the client overlap? You talked about cross-sell and up-sell
opportunities. Just wondering to what extent you have kind of independent
clients and can cross-sell each other’s products into those?
Thanks.
<A – Henry Fernandez>:
There is extremely little client overlap between our two organizations.
If you look at the risk business of RiskMetrics, that’s about 530 clients. About
a quarter I think are hedge funds, more or less and the rest are a number of,
for example, European asset management companies in the continent that have
subscribed to RiskManager as a tool to evaluate risk, complying with the use of
three regulations in Europe. So when you look at the footprint, particularly of
our combined risk businesses, it is extremely complementary. We don’t have a lot
of hedge fund clients, we don’t have a lot of bank clients, we don’t have a lot
of insurance clients. They do. They don’t have a lot of pension fund clients,
wealth fund clients. We do.
Clearly, a lot of –
we do a lot in the asset managers for defined benefits, mutual fund complexes,
they don’t. Quite an incredible complementarity, and then when you go beyond the
risk business, that’s even more more because they’ve got a 1,000 corporations of
clients, other professional organizations and the like in which we don’t have as
clients at all and we could benefit from mining that client base.
<A – Ethan Berman>: And
even within – this is Ethan – even within the clients, I think we often sell to
a different part of the client base, so MSCI Barra has been very front-office
focused. We have been more middle-office focused and so we think we can take our
middle-office sales to the front-office of those firms and the front office
would be Barra sales primarily to the middle-office risk management solutions
from RiskMetrics.
<A – Henry Fernandez>:
That’s a great point that Ethan just mentioned because, even when there
is one name on the client list, ABC asset management company, we are
traditionally both in equity indices and equity portfolio of risk. In the equity
portfolio management office of that organization and RiskMetrics may be in the
risk management office of that organization. And in the past, those two things
were relatively separate functions, but there is an increasing demand by this
client base to integrate those two functions so that the RiskManager has the
same information set, the same models, the same data, the same software that the
portfolio managers are having. Even within clients that are the same, the
overlapping functions is minimal.
Operator: And
we will go next to Robert Riggs, William Blair & Co.
<Q – Robert Riggs>: Good
morning, everyone. Thanks for taking my questions. I know it’s not a core piece
of the deal at this point, but just wanted to quickly follow-up on the corporate
governance piece. Were there any – I guess looking out over the next couple
quarters – any investments that you had deemed kind of necessary to make, be it
IT or in the salesforce? And also I am assuming the corporate governance piece
will be serviced by a separate salesforce, is that correct?
<A – Ethan Berman>: That
is – this is Ethan – that is correct. As you may know from looking at our
company, we have made the investments in the technology over the last two years
and we are reaping the benefits of that now. We’ve rolled out our new voting
platform. We are in the process of finalizing the integration of the three
ES&G companies that we put together. So actually, we reap the benefits of
the investment, not investing those in that segment of the
business.
<A – Henry Fernandez>:
And actually I would add that the timing of this transaction is actually
ideal from the investment point of view because we were – we have, on the
governance part of the business, Ethan and his management team are just coming
off that investment. Not yet, but hopefully this quarter and the following
quarters, beginning to reap the benefit of that investment in technology for
expansion of margins. Now in the risk business, Ethan and his team have put in
their forecast a significant investment in the next two to three years in the
risk business. I think it is upward of 100 people, Ethan, that you were looking
to do and same thing with us. We obviously have gone through our own investment
but our continuing to invest in the BarraOne product line. So now on a combined
basis, we can benefit from the strategic direction of that combined investment
on one set of products to serve one set of clients around the
world.
Operator: Now
we are going next to Drew Caputus with Davenport.
<Q – Drew Caputus>: Good
morning, gentlemen. I just have a question regarding the selling process and the
differences between MSCI and RiskMetrics specifically. What percentage is sold
to existing clients versus new clients? And secondly, how should we think about
the combined salesforce over the longer term? Are these products significantly
different so that the majority of the salesforce will likely be retained over
the long term? Thank you.
<A – Henry Fernandez>:
Good question and again, this is also ideal from that point of view.
Ethan and his team just recently developed a specialty salesforce by product
line that they started when they acquired ISS. They started just like us with
general sales people selling all products and just recently began a process of
specializing in sales and in ISS and other kind of other areas. For MSCI, when
we bought Barra in 2004, we also started with a generalist salesforce selling
all products. It served us well, just like it served well to Ethan and his team.
And about a year or plus ago, given that we were large and had a good footprint,
we started then specializing into basically four salesforces. We have the equity
indices, the equity portfolio risk, the multi-asset class risk and then our
energy and commodity analytics. So the beauty of this transaction is that we can
then take Ethan’s risk salespeople and combine it with our own salespeople in an
easier way rather than if we had different models between us.
I
think our up-selling and cross-selling revenues of our new sales are about 85%,
80% to 85%. I think in your case, it’s more like 50% in RiskManager. So that
tells you – and by the way, 85% is combined into an equity and business equity
portfolio risk and multi-asset class. If you were to take the sales to
new
clients on our risk
management platform, it’s probably not dissimilar to Ethan’s because obviously
it’s a wide-open field with a significant number of new clients.
Operator: And
we will go next to Aaron Teitelbaum, KBW.
<Q – Aaron Teitelbaum>:
Hi good morning. I was actually just wondering if you could discuss a
little bit about how this deal might impact MSCI’s long-term financial targets
if at all it doesn’t seem like it might be preliminary but any color would be
helpful.
<A – Henry Fernandez>:
Not at all I think our growth revenue growth target in the mid-teens
continues to be in place. If anything we probably could accelerate some of that
given the high-growth addition of the risk management business of RiskMetrics.
And in terms of profitability I think it will be in terms of growth and
profitability it will probably accelerate our profitability because Ethan and
his team have been having an expanding margin in the risk business and will
begin to have an expanding margin in the ISS business. We have had a fairly good
margin and growing fast on our equity index and equity portfolio of risk but
obviously we’ve been losing the money because of the build-up of the
infrastructure in risk management. And now when we begin to consolidate that it
should give us high margin, high growth.
Operator: And
we’ll take our next question from Kelly Flynn, Credit Suisse.
<Q – Kelly Flynn>: Hi,
this is [indiscernible] for Kelly. Good morning. A quick question for Ethan
maybe even Henry just around the timing of this transaction. Is there anything
we should read into the competitive environment how that may have changed that
may have accelerated this transaction?
<A – Henry Fernandez>:
Repeat the question again.
<Q – Kelly Flynn>: Yeah
could you just on the timing of when this transaction happened could you tell us
if there is anything that changed in the competitive environment that may have
caused this deal to happen faster than it may have? Just give us your thoughts
on the competitive dynamics?
<A – Ethan Berman>: Yeah
let me start on that, it’s Ethan. Clearly there were two things that drove
timing from us. Number one was just how big we thought the risk issue had become
in the marketplace and that it was quite important to get scale quickly. And the
second was this theme that both Henry and I have spoken about, about taking the
risk management process in the middle office to the front office and from the
front office to the middle office. And so the need to provide a complete
solution to large global players in an area that was clearly on top of
everyone’s mind the word risk made the combination so compelling at this
particular time.
<A – Henry Fernandez>:
And I think we are very unique extremely unique as a company that there
are two sides to every investment. There is return and there is risk. Return we
call performance and obviously risk we call risk so that we are now combining a
company that is extremely focused on delivering solutions on equity performance
and equity risk. And now combining it with a company that is focused on
delivering solutions on multi-asset class portfolio risk there is -- there
wasn’t any competitive pressure to do any of this whatsoever. It was more driven
by the very wide-open opportunity in the marketplace to be a premier provider of
solutions in the marketplace and it’s so exciting to do that.
Operator: Okay
Mr. Fernandez at this time, I would like to turn the conference back over to you
for any additional or closing remarks.
Henry
A. Fernandez, Chairman, Chief Executive Officer and President
Well again we thank
you very much for all of you taking the time this early Monday morning in your
schedules to listen to what we have to say and hear us explain the wonderful
news and the wonderful things that this combination can achieve for us. We thank
you very much. We will be updating you as the weeks and months progress on
progress on getting all the regulatory approvals, shareholder
approvals
and the like. And
we will welcome we always welcome any views or feedback or questions that you
have starting immediately. We are a very open and transparent company and that
has served us well. That is our philosophy and we love questions and feedback
from all of you. Thank you very much.
Operator: And
again that does conclude this MSCI conference call. We do thank you for your
participation.
Important
Information for Investors and Shareholders
This communication
does not constitute an offer to sell or the solicitation of an offer to buy any
securities or a solicitation of any vote or approval. MSCI will file
with the Securities and Exchange Commission (“SEC”) a registration statement on
Form S-4 that will include a proxy statement of RiskMetrics that also
constitutes a prospectus of MSCI. MSCI and RiskMetrics
also plan to file other documents with the SEC regarding the proposed
transaction. A definitive proxy statement/prospectus will be mailed
to stockholders of RiskMetrics. INVESTORS AND SECURITY HOLDERS OF
MSCI AND RISKMETRICS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND OTHER
DOCUMENTS THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN
THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION
ABOUT THE PROPOSED
TRANSACTION.
Investors and
stockholders will be able to obtain free copies of the proxy
statement/prospectus and other documents containing important information about
MSCI and RiskMetrics, once such documents are filed with the SEC, through the
website maintained by the SEC at http://www.sec.gov. Copies of the
documents filed with the SEC by MSCI will be available free of charge on MSCI’s
internet website at www.mscibarra.com or by contacting MSCI’s Investor Relations
Department at 866-447-7874. Copies of the documents filed with the
SEC by RiskMetrics will be available free of charge on RiskMetrics’ internet
website at www.riskmetrics.com or by contacting RiskMetrics’ Investor Relations
Department at 212-354-4643
MSCI, RiskMetrics,
their respective directors and certain of their executive officers may be deemed
to be participants in the solicitation of proxies from the stockholders of
RiskMetrics in connection with the proposed transaction. Information about the
directors and executive officers of RiskMetrics is set forth in its proxy
statement for its 2009 annual meeting of stockholders, which was filed with the
SEC on April 29, 2009. Information about the directors and executive officers of
MSCI is set forth in its proxy statement for its 2010 annual meeting of
stockholders, which was filed with the SEC on February 23, 2010. Other
information regarding the participants in the proxy solicitation and a
description of their direct and indirect interests, by security holdings or
otherwise, will be contained in the proxy statement/prospectus and other
relevant materials to be filed with the SEC when they become
available.
Forward-Looking
Statements
This document
contains forward-looking statements. These statements relate to future events or
to future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause MSCI’s, RiskMetrics and the
combined company’s actual results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by the use of words such as "may," "could," "expect," "intend,"
"plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or
"continue" or the negative of these terms or other comparable terminology. You
should not place undue reliance on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors that are, in
some cases, beyond MSCI’s, RiskMetrics and the combined company’s control and
that could materially affect actual results, levels of activity, performance, or
achievements. Such risks, uncertainties and factors include, but are
not limited to: the risk that a condition to closing of the proposed
merger may not be satisfied; the risk that a regulatory approval that may be
required for the proposed merger is not obtained or is obtained
subject to
conditions that are not anticipated; the failure to consummate or delay in
consummating the proposed merger for other reasons; the combined company’s
ability to achieve the synergies and value creation contemplated by the proposed
merger; the combined company’s ability to promptly and effectively integrate the
businesses of RiskMetrics and MSCI; and the diversion of management time on
merger-related issues.
Other factors that
could materially affect MSCI’s, RiskMetrics and the combined company’s actual
results, levels of activity, performance or achievements can be found in MSCI's
Annual Report on Form 10-K for the fiscal year ended November 30, 2009 and filed
with the SEC on January 29, 2010, in RiskMetrics’ December 31, 2009 Annual Form
10-K which was filed with the SEC on February 24, 2010 and in their respective
quarterly reports on Form 10-Q and current reports on Form 8-K. If any of these
risks or uncertainties materialize, or if MSCI’s or RiskMetrics’ underlying
assumptions prove to be incorrect, actual results may vary significantly from
what MSCI or RiskMetrics projected. Any forward-looking statement in this
release reflects MSCI’s or RiskMetrics’ current views with respect to future
events and is subject to these and other risks, uncertainties and assumptions
relating to MSCI’s or RiskMetrics’ operations, results of operations, growth
strategy and liquidity. MSCI and RiskMetrics assume no obligation to publicly
update or revise these forward-looking statements for any reason, whether as a
result of new information, future events, or otherwise.
Disclaimer
The
information herein is based on sources we believe to be reliable but is
not guaranteed by us and does not purport to be a complete or error-free
statement or summary of the available data. As such, we do not warrant,
endorse or guarantee the completeness, accuracy, integrity, or timeliness
of the information. You must evaluate, and bear all risks associated with,
the use of any information provided hereunder, including any reliance on
the accuracy, completeness, safety or usefulness of such information. This
information is not intended to be used as the primary basis of investment
decisions. It should not be construed as advice designed to meet the
particular investment needs of any investor. This report is published
solely for information purposes, and is not to be construed as financial
or other advice or as an offer to sell or the solicitation of an offer to
buy any security in any state where such an offer or solicitation would be
illegal. Any information expressed herein on this date is subject to
change without notice. Any opinions or assertions contained in this
information do not represent the opinions or beliefs of FactSet
CallStreet, LLC. FactSet CallStreet, LLC, or one or more of its employees,
including the writer of this report, may have a position in any of the
securities discussed herein.
THE
INFORMATION PROVIDED TO YOU HEREUNDER IS PROVIDED "AS IS," AND TO THE
MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, FactSet CallStreet, LLC AND
ITS LICENSORS, BUSINESS ASSOCIATES AND SUPPLIERS DISCLAIM ALL WARRANTIES
WITH RESPECT TO THE SAME, EXPRESS, IMPLIED AND STATUTORY, INCLUDING
WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR
A PARTICULAR PURPOSE, ACCURACY, COMPLETENESS, AND NON-INFRINGEMENT. TO THE
MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER FACTSET CALLSTREET,
LLC NOR ITS OFFICERS, MEMBERS, DIRECTORS, PARTNERS, AFFILIATES, BUSINESS
ASSOCIATES, LICENSORS OR SUPPLIERS WILL BE LIABLE FOR ANY INDIRECT,
INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT
LIMITATION DAMAGES FOR LOST PROFITS OR REVENUES, GOODWILL, WORK STOPPAGE,
SECURITY BREACHES, VIRUSES, COMPUTER FAILURE OR MALFUNCTION, USE, DATA OR
OTHER INTANGIBLE LOSSES OR COMMERCIAL DAMAGES, EVEN IF ANY OF SUCH PARTIES
IS ADVISED OF THE POSSIBILITY OF SUCH LOSSES, ARISING UNDER OR IN
CONNECTION WITH THE INFORMATION PROVIDED HEREIN OR ANY OTHER SUBJECT
MATTER HEREOF.
The
contents and appearance of this report are Copyrighted FactSet CallStreet,
LLC 2010. CallStreet and FactSet CallStreet, LLC are trademarks and
service marks of FactSet CallStreet, LLC. All other trademarks mentioned
are trademarks of their respective companies. All rights
reserved.
|