Morgan Plans MSCI IPO: A Sink or Swim Moment For the Index Provider

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Includes: MS, MXB
by: IndexUniverse

Wednesday, Morgan Stanley (NYSE:MS) announced plans for an IPO of its MSCI Inc.(MXB)subsidiary, which operates under the name MSCI Barra . The company will sell a minority interest in MSCI via an offering of Class A common stock. Further, Morgan Stanley also said it will decide at a later date whether to divest all of its interest in MSCI based on such considerations as market conditions. It owns 96.6% of MSCI, while Capital Group International Inc. owns the remaining 0.4%.

"The initial public offering and potential separation of MSCI are consistent with Morgan Stanley's strategy to focus our people, capital and resources on our core businesses, including institutional securities, asset management and global wealth management. We believe this transaction will unlock value for Morgan Stanley's shareholders as well as release capital to redeploy into our core activities," Morgan Stanley Chairman and CEO John Mack said in the press release about the decision.

No one from Morgan Stanley or MSCI can comment on the IPO because of SEC rules, so speculation will have to run rampant without their input.

The IPO raises some interesting possibilities-it will be the first index provider to trade on an exchange on its own and not as part of a much larger company, although indexes are not the only thing that MSCI does. First of all, there's the question of revenue. How much does MSCI bring in? They're one of the oldest index providers and probably the first one to parlay it into a money-making venture. Just how much do they make in licensing fees? Going public will also give the rest of the indexing industry a better understanding of the company's business model and how it is structured. In a way, MSCI could become a benchmark itself against which other index providers could measure themselves and assess their own performance.

Index providers are typically small cogs in large machines, with information about things like revenue streams obscured by their inclusion in larger company divisions-MSCI has been a part of Morgan Stanley, with its operations folded into the parent company's institutional operations, Dow Jones Indexes is a division of Dow Jones, FTSE International is owned by the Financial Times, and S&P's index business is a just a small part of McGraw-Hill's operations. One cannot help but wonder what the exposure provided by an IPO of just one provider will do to the indexing industry as a whole.

What's more: How will MSCI respond to shareholder demands for quarterly revenue growth and profits. The pressure to produce strong result after strong result pushes public companies to search for growth, even when it means expanding into new areas. Will MSCI feel compelled to broaden its business or take other steps to feed the maw of public shareholders/ Time will tell.

Interestingly, the IPO of MSCI is just one new variable that has the potential to roil the world of indexes. At about the same time as the Morgan Stanley announcement, Rupert Murdoch, head of News Corp., reached an agreement with the Bancroft family, whose members own a controlling share in Dow Jones Indexes' parent company Dow Jones & Co. The acquisition of Dow Jones could have an interesting impact on its index operations: Will Murdoch see it as a valuable part of the Dow Jones media empire that he has acquired or as a noncore operation?

For MSCI, specifically, the IPO could be a sink or swim moment. As part of larger corporations, index providers generally have some access to the resources of those entities' other operations. Those other businesses can be counted on for such things as preferential deals on advertising or research and data support. If MSCI is on its own, will it continue to thrive without the backup of a large parent company?

Until more information is known, we can only wait and see.