ITG Acquires Ross Smith


New York – Investment Technology Group (ITG) has announced that it has acquired Ross Smith Energy Group (RSEG), for $38.5 million in cash. Ross Smith, which currently has 200 clients, is expected to add 60 new equity asset management clients to ITG’s existing client base. According to the statement, Ross Smith’s revenues last year were $15 million.

This follows upon ITG’s purchase of Majestic Research for $56 million in October. In that deal, Majestic was valued at a 2.2x multiple of expected 2010 revenues and 2.9x 2009 revenues. This deal appears to value RSEG at a somewhat lower 2.6x multiple of previous-year revenues. Both of these deals are useful markers for the valuation of research companies. It’s rare to get such public disclosure of revenues in an industry that’s dominated by private owners.

This deal is also interesting in terms of its effect on the competitive positioning of agency brokers. According to Bloomberg, daily U.S. volume averaged 7.6 billion shares in the first five months of 2011, down 21 percent from the same period in 2010. As agency brokers struggle to maintain their business model in an environment where equity volumes have declined significantly, independent research becomes a more important component of their value proposition.

ITG is just one of several agency brokers who have realized that adding research services to their offering is going to be a significant competitive differentiator in this environment. Instinet and BNY Convergex were two of the early movers in terms of providing independent research to their agency brokerage customers. Interestingly enough, Ross Smith previously had an exclusive distribution arrangement with Instinet.

This deal seems to confirm ITG’s move away from a pure execution-only “agency brokerage” model into a category that might seem indistinguishable from a traditional bundled commission model. Effectively, some agency brokers seem to have come to the conclusion that in the face of declining volumes, the only way to maintain revenues is to effectively increase the pricing for trades. Offering a bundled research and execution service allow these firms to justify a higher price to buy-side heads of trading.

As agency brokers attempt to navigate this challenging environment, high quality research providers stand to benefit. Valuations may be somewhat depressed compared to where they were a few years ago, but this means that for any discerning acquirer, there are good deals to be had.

The full press release follows:

ITG Acquires Ross Smith Energy Group
Expands Research Platform with Data-Driven Analysis of the Oil and Gas Sector

Investment Technology Group, Inc. (NYSE: ITG), a leading agency research broker and financial technology firm, today announced that it has acquired Ross Smith Energy Group Ltd. (“RSEG”), a Calgary-based independent provider of research on the oil and gas industry. Going forward, RSEG will be rebranded as ITG Investment Research and the research offering will be an integrated part of the ITG platform.

RSEG provides detailed technical and financial analysis of North American resource plays, public and private corporations, as well as coverage of international and macroeconomic energy issues, for more than 200 clients in North America and Europe, including more than 60 equity fund managers who are new clients for ITG. RSEG’s team of approximately 40 staff includes professional engineers, technologists and financial analysts. With the addition of RSEG, ITG Investment Research will provide differentiated views into the exploration and production activities of North American and international energy companies.

“This acquisition marks a significant expansion for the ITG Investment Research platform,” said Bob Gasser, CEO and President of ITG. “With the addition of energy sector coverage, ITG is even better positioned to offer alpha-generating insights to our clients and to work towards our goal of being a leading partner in both research and execution on a global scale.”

Jim Jarrell, President of Ross Smith Energy Group, said, “ITG’s focus on providing differentiated research and building relationships within the institutional investment community make it a natural fit for us. We share a vision. My colleagues and I are excited about bringing the ITG platform to our existing clients and our collective expertise and service to a broader set of investors.”

Transaction Details:

RSEG, a privately held firm, was founded in Calgary, Alberta in 1998. RSEG revenues for the trailing twelve months ending in April 2011 were approximately US$15 million. Adjusted pre-tax margins, excluding non-operating expenses which will not continue beyond the acquisition, were approximately 25% for the trailing twelve months.

The purchase price for RSEG was US$38.5 million in cash. The transaction is not expected to add materially to earnings in 2011 due to one-time acquisition and integration charges, however, ITG estimates the transaction will add $0.08 to $0.10 per diluted share of earnings in 2012. In addition, the structure of the transaction is expected to result in a 15-year tax benefit to ITG’s cash flow with an estimated present value of US$7 million. ITG management will discuss the transaction in more detail during the Second Quarter 2011 earnings call on August 4th.

In reliance upon New York Stock Exchange Rule 303A.08, ITG granted inducement awards pursuant to which an aggregate of 362,951 time-vesting stock units (“RSUs”) were awarded to 15 employees on June 3, 2011. Each of these employees was previously an employee of RSEG who joined ITG as a result of the acquisition. The RSUs vest over a three-year period.

ITG also announced that it entered into a $25.5 million, four-year term loan secured by certain fixed assets to help preserve its balance sheet flexibility following the acquisition.

For more information about RSEG and the expanded ITG Investment Research platform, visit

About ITG

Investment Technology Group, Inc., is an independent agency research broker that partners with asset managers globally to improve performance throughout the investment process. A leader in electronic trading since launching the POSIT® crossing network in 1987, ITG takes a consultative approach in delivering the highest quality institutional liquidity, execution services, analytical tools, and proprietary research insights grounded in data. Asset managers rely on ITG’s independence, experience, and intellectual capital to help mitigate risk, improve performance, and navigate increasingly complex markets. The firm is headquartered in New York with offices in North America, Europe, and the Asia Pacific region. For more information on ITG, please visit

ITG Media/Investor Contact:
J.T. Farley(212) 444-6259
SOURCE: Investment Technology Group, Inc.
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