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Rating:How Many Pounds Does It Take a Brit Exchange to Buy a Yank Indexer? Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, May 13, 2014

How Many Pounds Does It Take a Brit Exchange to Buy a Yank Indexer?

Reported by Tommy Fernandez

It's a sign that, in a world where asset managers increasingly jump through hoops for gatekeepers, people are starting to pay attention to the people who make the hoops, i.e. the indexers.

So, we now know the London Stock Exchange is late-stage bidder for Russell Investments.

But we all have a few questions, such as:
1. How much could Russell cost?
2. What would the LSE do with Russell? (Also, what will happen to Russell?)
3. Can LSE pull it off the deal?


Here's our thoughts on the matter.

Question 1: The Price
A Reuters report by Freya Berry and Clare Hutchinson pegs the total price for Russell at over $3 billion, with the firm's indexing business valued at over $2 billion and the $260 billion asset management (read manager of manager) arm worth just $1 billion.

This valuation has a certain logic to it. Index giant MSCI has a market cap of nearly $5 billion, around 8 times revenue. Valuing the index business at around $2 billion would peg at roughly 10 times revenue.

The asset management, manager of manager of arm, at around $1 billion, would be cheap, less than half a percent of total AUM. However, the squeezing of managers of managers is a known predicament.

Russell has a third business, as an investment consultant, though. It's not completely crystal the best way to value this piece.

Question 2: What would the LSE do with Russell?
Well, the indexing piece would offer obvious benefits to the London Stock Exchange, which is the parent of its own well-established indexing business, FTSE.

The LSE is offering indexing products at a number of exchanges throughout Europe, and increasingly, Asia. Having another well established brand like Russell will increase the credibility of its indexed products and allow it to vastly expand its clientele. Consider how well Nasdaq is doing as an incubator of sorts for a growing variety of ETFs.

Morningstar equity analyst Gaston Ceron had this to say about the utility of Russell's indexing business:

LSE has made moves into indexes previously, as the company about 2.5 years ago bought the remaining stake in FTSE. So I believe the index business holds appeal for the company. FTSE is close to 15% of LSE’s total income (this is a top line measure) so it doesn’t dominate the business but it is a sizable slice of the pie. The two most recent large deals I would point to are that one (the FTSE deal) and the acquisition of a majority stake in LCH.Clearnet. I would say in both cases the company is making progress—FTSE revenue has grown nicely--but I wouldn’t give management a final grade yet.  The devil is in the details, but at a high level I would say that LSE’s interest in Russell is consistent with LSE’s pursuit of a diversified revenue stream, one that is less dependent in secondary market trading than in the past.

  As far as the acquisition track record, it must be noted that in the 2009 fiscal year LSE booked a large non-cash impairment charge related to a previous deal, with Borsa Italiana. So obviously that doesn’t look great for the company, though for proper context it must also be noted that that transaction was completed before the arrival of the current CEO and CFO. And it’s hard to say that LSE should necessarily have anticipated all of the things that went wrong in Europe during the last several years.  But there you have it.

Question 2 1/2: What will happen to Russell?
This is a slightly different twist on the second question. What would happen to Russell after it is acquired by the ravenous LSE?

One possible scenario: not too much.

Consider this. Russell has been owned by Northwestern Mutual since 1999, and the insurer is well-known for its laissez faire attitude to the indexer/asset manager.

And Northwestern is an American financial firm, with assets among others things. The LSE is a British exchange operator, based in London, with a variety of holdings in venues all around Europe and elsewhere.

It's possible that Russell would become a portfolio holding for LSE, with its index arm getting a lot, lot more clients.

Question 3: Can the LSE pull it off?
Remember, three weeks ago there were at least six suitors for Russell, none of them slouches. They include CIBC, the aforementioned MSCI, and private equity firms CVC Capital, Silver Lake, Warburg Pincus and TPG Capital.

None of these are to be considered slouches in the realm of big game hunts.

So, how would the LSE fare in this battle?

It's entirely conceivable that these Brits could kick some serious ass.

The LSE is an aggressive, quick-moving, resourceful and adaptable deal maker.

In the past seven years, the LSE has conducted at least five full or partial acquisitions: MillenniumIT, Turquoise, FTSE International Limited, LCH.Clearnet Group Limited. and GateLab.

It has gone through at least two mergers: with the Borsa Italiana and TMX Group's fixed income business.

The LSE has also entered into at least two joint ventures, with the Mongolian and Tokyo stock exchanges.

In many of the acquisitions, the LSE pulled stock deals.

The exchange operator also has a track record out maneuvering its opponents. It fought of a takeover attempt by Nasdaq in 2007, and in 2009 bought 60 percent of Turquoise, a dark pool trading platform that had been launched two years before with the precise goal of messing with the LSE. 

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