ISS buys EVA firm
16/02/2018
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The proxy adviser ISS has acquired EVA Dimensions LLC.  EVA Dimensions measures company performance based (as its name suggests) on the Economic Value Added (EVA) framework.

Economic value added is a measure of the underlying profitability of a company, calculated by deducting the cost of capital from the net cash generated by the company.

ISS says its acquisition will provide their clients a “holistic” means of assessing and defining performance of their portfolio companies. EVA Dimensions brands and trademarks include PRVit (the stock ranking model) and CPI (the Corporate Performance Index ranking of financial excellence). PRVit, which uses 24 measures to quantify risk-adjusted EVA performance relative to a company’s current market value, is updated daily with coverage spanning 18,000 companies globally and historical data going back two decades.

CPI is a measure of financial excellence, ranking companies against peers and the market in general on the basis of their EVA performance and the wealth they have created for shareholders. Often used as a supplement or alternative to Total Shareholder Return (TSR), CPI measures the underlying health and performance of a business, with coverage tallying 18,000 companies globally and with daily updates. You can try out the service where they rank companies by their CPI measure HERE.

ISS was recently sold to Genstar Capital (see HERE) at what seemed to be a humungous profit for its prior PE owner. The previous PE owner had seen opportunity for growth and had been steadily making acquisitions towards that end. This purchase by the new owner continues the run of bolt-on acquisitions. Along with the high multiple paid, the signs are that Genstar Capital believes there are significant opportunities for growth.

ISS refers to its “clients” for this service as institutional investors and suggests that ISS is trying to expand its market to the low end of investment professionals by saying that the EVA tools will help investment professionals to determine the intrinsic value or risk of portfolio companies. (Most investment professionals in the mid and high end would have their own proprietary tools, supplemented with standardised data feeds and tools from Reuters, Bloomberg, S&P and the like.)

Despite what is indicated in the press release, it is likely that EVA’s service will only migrate to ISS’ proxy advisory reports in an abbreviated form. This will fit ISS strategy of leveraging services for both their institutional investor services and their issuer services, with the institutional services used to catalyse purchases of corporate services (i.e. for issuers to get a better governance scorecard with institutional investors).

The EVA acquisition seems ready made for ISS’ corporate advisory business, where they make most of their money. The EVA Dimensions already provides an “EVA-based enterprise software system that helps CFOs, financial analysts, corporate planners, development officers, and IR directors make more informed decisions”.

Will its appearance in proxy adviser reports create problems for issuers? On the one hand, it will soften the blunt instrument of TSR rank in assessing CEO pay reasonableness. On the other, the algorithm derived EVA ranking measures are equally blunt, based as they are likely to be on cost of capital derivations that will fail to take account of specific company circumstances. But diversity in measurement is likely to contribute to better assessments of the relationship between executive pay and performance.

In any case, it is suggested that boards seek to review more often performance based on net cash less a charge for capital, and how this compares with incentive payments, in order to be prepared.

ISS’ announcement of the purchase can be found HERE.

© Guerdon Associates 2020
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