New York – Euromoney Institutional Investor PLC, an international publishing, events and information group based in London, announced earlier this week it has acquired an initial 87% interest in Ned Davis Research Group (NDRG), a US-based provider of financial research to institutional investors.
The price of the transaction was approximately US$112 million. According to Euromoney’s press release, “the remaining interest in NDRG will be acquired under an earn-out agreement, in two equal installments, based on the profits of NDRG for the years to December 31 2012 and 2013. The maximum amount payable for a 100% interest in NDRG is US$173 million.”
Euromoney’s maximum purchase price for Ned Davis Research represents approximately 14.7 times the firm’s 2010 pre-tax profits. We estimate that NDR’s purchase price represents approximately 2.5 to 3.0 times revenues. Based on these metrics, we think that Euromoney’s valuation of NDR seems to be quite reasonable – particularly given the current market environment.
Euromoney’s acquisition of Ned Davis Research marks the third major purchase of an independent research firm in the past nine months. In October, 2010, ITG acquired Majestic Research for $56 mln. This was followed by ITG’s $38.5 mln purchase of Ross Smith Energy Group earlier this month. This raises the question whether we might see more acquisitions in the research industry in the coming months. We suspect that the difficult market environment that currently exists in the financial services market would favor buyers.
Euromoney’s interest in investment strategists has been evident in the last few years. In 2006, Euromoney acquired BCA Research, a Montreal-based provider of investment strategy research. BCA’s acquisition has apparently been a success story. Not only has BCA found a strong distribution partner, but it has also added key products, services and personnel to its ranks – remember the addition of Dr. Peter Berezin ex-Goldman Sachs and ex-IMF in 2010. As we reported at the time, BCA has expanded substantially to cover international trends and strategies, global economic developments, commodities, foreign exchange, equities and fixed income securities.
It is very likely that Euromoney is seeking to replicate BCA’s success story with Ned Davis Research. The firm is already a reputable shop in North America. In 2008, Integrity Research conducted an in-depth study of the investment strategy research space in which we compared the players and identified the best available options for investors. In our study, we interviewed 181 buy-side analysts, portfolio managers, and directors of research globally. Their feedback led us to select Ned Davis Research as Top Pick for the category of Hybrid-Based Strategy Firms (those that use a variety of macroeconomics, quantitative and technical analysis to provide their research services).
In our 2008 study investors were particularly complimentary of Ned Davis Research’s exceptional “Analytical Strength” as well as its overall “customer satisfaction”. This led the firm to place within the top ten in every category – and as number one among nine in the Hybrid-Based Strategy Firms category.
A few questions remain as to whether BCA’s success can be replicated with Ned Davis Research. In the first place, NDR is pretty well established in North America and investors who are not using it already might not need it. In other words, it is unclear how efficient Euromoney’s distribution model can be with a firm like Ned Davis in North America. However, we suspect that Euromoney could really help NDR grow its customer base outside of North America – particularly in Europe and Asia where NDR has less market penetration. Of course, Euromoney will also need to be careful of potential cannibalization – where NDR clients supplant BCA users, or vice-versa.