MSCI Inc. is acquiring GMI Ratings, an ESG research provider, for $15 million in cash, representing a bargain price of about 1.5x revenues. The transaction price signals we are still in a buyer’s market for acquisitions despite recent improvements in the market environment.
GMI Ratings was formed in 2010 through the merger of three ESG research firms: The Corporate Library, GovernanceMetrics International and Audit Integrity. One of the objectives of the merger was to obtain critical mass for a sale. However, the merger presented both technical and cultural challenges as the three firms integrated products and staff. The firm has had three different CEO’s in the three and a half years since the merger.
MSCI’s ESG unit, which operates as a wholly owned subsidiary MSCI ESG Research Inc, is itself a collection of smaller ESG firms: KLD and Innovest, which were acquired by Riskmetrics, and IRRC (Investor Responsibility Research Center) which was acquired by ISS prior to its purchase by Riskmetrics.
Meanwhile, MSCI has spun off two related properties: ISS and CFRA, a forensic research firm. ISS was sold for $367 million, representing about 3x revenues. Terms for the CFRA sale were not disclosed.
It is likely MSCI has entertained thoughts of spinning off its ESG unit, and may ultimately do so. However, unlike with ISS and CFRA, MSCI maintains indices tied the intellectual property in the ESG unit.
We estimate GMI’s revenues as being between $9 and $10 million, and profit between $1 and $2 million. This suggests a revenue multiple between 1.5x and 1.7x and an EBITDA multiple around 10x.
The low multiples suggest that the sellers of GMI were more motivated than the buyer. For MSCI, the acquisition adds critical mass to its already significant ESG unit, making it the largest independent source of ESG research. However, the business has lower margins than MSCI’s core index business and its ultimate place in MSCI’s portfolio remains in question.
ESG research has been the coming thing for many years now. It has been especially hard for ESG research firms to get traction in the US, where asset owners less concerned about sustainability issues than their European counterparts. Demographics and climate change support the case for future growth in the demand for ESG research and perhaps MSCI will have the patience to wait for it. Getting a bargain price should help steady its nerves for the duration.