ISS to change ownership?
04/11/2013
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The Board of Directors of MSCI Inc, which owns Institutional Shareholder Services Inc. (ISS), has authorized the exploration of strategic alternatives regarding ISS. The news comes shortly after a change in the ownership of arch rival, Glass Lewis (see HERE)

ISS, both in Australia and globally, still dominates the proxy advisory industry, with the major share of the Australian market, where it competes with CGI Glass Lewis, ACSI and Ownership Matters (which currently provides ACSI with research services).

While ISS is a leading provider of corporate governance solutions to the global financial community, most of its revenues and income comes from the provision of data and services to US corporations it monitors for proxy advice (note that ISS does not provide services to monitored Australian companies). This significant conflict of interest has featured in several government inquiries in the US (for an interesting perspective published last week see HERE). Proxy advisers’ dominance and influence outside of the US has also figured significantly in inquiries in several overseas jurisdictions, including the current CAMAC inquiry in Australia (still to publish its report, but see the background HERE). The European Securities and Markets Authority has recommended the establishment of a code of conduct for proxy advisers (see HERE)

The ISS announcement represents the start of a process that may eventually lead to a full separation of ISS from MSCI. Some would say that this was inevitable, given the price MSCI paid for RiskMetrics, then ISS’ parent, in 2010, and the subsequent load on its balance sheet. ISS’ substantial cash flows, margins, market dominance and its further potential for bolt on corporate services should attract a significant value. The strategic options for an IPO, trade sale to an existing multi service firm (most of which are adept at handling the dark art of others’ perceptions of conflicts of interest), or private equity are broad ranging and lucrative.

ISS has invested significantly in its technology platform and client service and, we note with particular interest, launched new and possibly “conflicted” products to its US market, including executive compensation data and analytics and QuickScore(TM).

Morgan Stanley is serving as financial advisor to MSCI and Davis Polk is serving as legal advisor.

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