New York – Increased mergers and acquisitions activity is moving valuations higher, but independent research firms looking for exits should not get too excited. While multiples are improving, they remain below pre-crisis levels, and we think it is difficult for investment research firms to command premium valuations.
A recent newsletter from M&A boutique Marlin & Associates lists valuations for segments of the information industry it follows. We have included below the multiples for the sector Marlin refers to as ‘Data and Analytics – Financial Services’, which is the most relevant to investment research.
Of the publicly traded firms listed MSCI (Riskmetrics) and Morningstar include equity research in their product portfolio, and Moody’s and Fimalac (Fitch) can be considered to include fixed income research. Even so, the group is only a proximate guide to valuations for investment research firms. Revenue multiples average around 3.9x on 2010 revenues, with a range from 1.2x for theStreet.com and CoreLogic to 7.9x for MSCI.
The historical revenue multiples for the ‘Data and Analytics – Financial Services’ group fell from an average of 4x to 5x pre-crisis to 2x to 3x during the crisis, now rebounding between 3x and 4x.
These valuations may be overstated for investment research, however. A good recent benchmark is Majestic Research’s sale to ITG for $56 million in October 2010. ITG discussed the transaction during its 3rd quarter 2010 earnings call. ITG management expected Majestic’s revenues to be $26 million in 2010, up 25% over 2009, implying a revenue multiple of 2.2x on 2010 revenues and 2.9x on 2009 revenues. Majestic’s margins were said to be at 15-20%, so the EBITDA multiple would have been around 14x on 2010 profit and 19x on 2009.
Majestic is an important strategic acquisition for ITG, helping ITG increase the ‘share of wallet’ with its customers by diversifying from execution only commissions. Majestic offers highly differentiated ‘primary’ based research (with minimal insider trading risk), grew at a healthy clip in 2010, and has critical mass (most investment research firms are below $5 million in revenues). Nevertheless, Majestic commanded a revenue multiple under 3x. Majestic’s EBITDA multiple of 14x on 2010 profit is more encouraging for other investment research firms, registering at the upper end of Marlin’s comparables which average between 10x and 13x.
The terms of last Thursday’s announcement of Ticonderoga Securities’ purchase of Soleil Securities (first discussed here on February 11th) were not disclosed, but are not likely to improve the outlook for research multiples. Securities firms tend to sell for low multiples (1x or less), and as we discussed earlier, the Soleil experience is not likely to whet Bain Capital’s appetite for further investments in the research industry.