MSCI Inc. Form 8-K Summary: Acquisition of RiskMetrics Group
Business Context and Reporting Period
This Current Report on Form 8-K, dated June 1, 2010, details the completion of MSCI Inc.'s acquisition of RiskMetrics Group, Inc. ("RiskMetrics"). The transaction was executed via a merger with Crossway Inc., a wholly-owned subsidiary of MSCI, with RiskMetrics continuing as the surviving entity. The filing also documents the entry into a new credit agreement to finance the transaction and the termination of prior credit facilities.
Key Financial Metrics and Capital Structure
Acquisition Consideration:
- Cash Component: Approximately $1.1 billion paid to former RiskMetrics stockholders.
- Equity Component: Approximately 12.7 million shares of MSCI Class A common stock issued.
- Exchange Ratio: RiskMetrics shareholders received 0.1802 MSCI shares plus $16.35 cash per share.
- Option Conversion: Approximately 4.2 million additional MSCI shares reserved for the conversion of RiskMetrics options at a 0.7260 exchange ratio.
Debt and Liquidity:
- New Term Loan: $1,275 million senior secured term loan facility maturing in June 2016. The full amount was borrowed on June 1, 2010.
- New Revolving Credit: $100 million senior secured revolving credit facility maturing in June 2015, including a $25 million letter of credit subfacility and a $10 million swingline loan subfacility.
- Interest Rates: Borrowings bear interest at Base Rate or LIBOR plus an applicable margin based on leverage ratios. LIBOR has a floor of 1.50% per annum; Base Rate has a floor of 2.50% per annum.
- Collateral: Obligations are secured by a lien on substantially all assets of MSCI and its subsidiaries, including 65% of voting equity interests in first-tier foreign subsidiaries.
Financial Statements: The filing incorporates RiskMetrics' audited financial statements for years ended December 31, 2009 and 2008, and unaudited statements for the three months ended March 31, 2010. Unaudited pro forma combined financial statements for MSCI and RiskMetrics are filed as Exhibit 99.2.
Material Changes Versus Prior Period
Debt Restructuring: MSCI terminated its existing credit agreement dated November 20, 2007, and RiskMetrics terminated its existing credit agreement dated January 11, 2007. All outstanding indebtedness under these prior facilities was paid in full with no material early termination penalties incurred.
Executive Leadership: David M. Obstler, formerly CFO of RiskMetrics, became MSCI's Chief Financial Officer, succeeding Michael K. Neborak. Mr. Obstler's base salary was increased from $350,000 to $400,000 effective June 1, 2010.
Compensation Grants: Significant Restricted Stock Unit (RSU) awards were granted to key officers (David C. Brierwood, C.D. Baer Pettit, Gary Retelny, and David M. Obstler) valued between $1 million and $2 million each, contingent on performance metrics for fiscal years 2010-2012.
Guidance, Outlook, Risks, and Covenants
Covenants: The new Credit Agreement imposes strict affirmative and negative covenants, including limitations on additional debt, liens, mergers, asset sales, dividends, and capital expenditures. The Company must maintain a maximum leverage ratio and a minimum interest coverage ratio.
Events of Default: Standard events include non-payment, breach of covenants, cross-default, bankruptcy, change of control, and ERISA defaults.
Outlook: The filing does not provide specific forward-looking revenue or earnings guidance for the combined entity beyond the pro forma financial statements filed as an exhibit.
Investor Verification Checklist
- Review the Unaudited Pro Forma Condensed Combined Financial Statements (Exhibit 99.2) to assess the immediate impact of the acquisition on MSCI's leverage and earnings.
- Verify the Interest Coverage Ratio and Leverage Ratio compliance under the new Credit Agreement to ensure no immediate covenant breaches.
- Examine the Pro Forma Debt Service obligations resulting from the $1,275 million term loan and its impact on future cash flows.
- Confirm the Integration Plan and synergies expected from combining MSCI's index business with RiskMetrics' risk management solutions.
- Monitor the Performance Vesting Metrics for the newly granted RSUs to understand management's financial targets for 2010-2012.