Thanks to Stephen Davis of Davis Global Investors for allowing us to blog this article from a recent issue of his “Global Proxy Watch“:
“Behind the scenes, the world’s two biggest proxy advisors are in a fit of restructuring that promises again to reshape the global governance industry and, possibly, ignite a regulatory backlash, GPW has learned. Among fast-paced developments:
Xinhua Finance (XF) has secretly decided to sell Glass Lewis (GL) just nine months after buying it for US$45 million. The move comes hard on the heels of the Shanghai-based firm’s own in-house governance scandal, which triggered a stock plunge and brand damage at XF, and key staff and client defections at GL (GPW XI-21, 22, 25, 27). CEO Fredy Bush has apparently hired a merchant banker to shop the proxy advisor, with eyes on a deal as early as next month. The frontrunning contender so far: none other than RiskMetrics (RM), owner of rival industry giant Institutional Shareholder Services (ISS). At least one other unidentified company is also mulling a bid, while a private equity firm has pushed Xinhua to sell it GL at about half the purchase price.
RiskMetrics has the cash and ISS the motive to take over GL. Ex-CEO John Connolly had made serial efforts to buy the four-year old competitor. But if ISS and GL now combine, the unit will dominate more than 80% of the market—gaining potential new pricing power and clout. Experts predict such a deal would likely draw scrutiny by securities regulators, antitrust authorities and politicians in North America, Europe and, possibly, Australia. They could join those in the market worried that a single US firm could hold a near monopoly in the highly sensitive business of advising how shareowners vote on everything from board elections to mergers and acquisitions worldwide.
Still, GL-ISS nuptials could boost proxy firms that remain—such as Proxy Governance and Egan-Jones in the US, and ECGS in Europe. Equally, a takeover could spur market interest in specialist stewardship firms such as F&C, Governance for Owners and Hermes EOS. They would all be trolling for fund clients bent on service alternatives to the industry leader.
RiskMetrics, meanwhile, is rumored to have taken another transformative step. Sources say it opened confidential talks with US Securities and Exchange Commission officials in advance of filing formal IPO documents that would allow it to launch as a publicly traded company. Perhaps in preparation, RM will inform clients Monday that, as part of internal integration, all its products will carry the RiskMetrics label as of Sept. 17. The move, in effect, demotes the 27-year old ISS brand. Governance services will now be marketed under the RiskMetrics name.
Expect an IPO to rekindle debate about whether public ownership—or another buyer—might affect the quality or content of RM advice. Last month the US Government Accountability Office (GAO) concluded in a report that “potential conflicts of interest can arise” at proxy firms, but that the SEC had “not identified any major violations.” It also asserted that it is relatively easy for rivals to enter the industry, so fears of ISS monopoly power are overblown. Some industry watchers dismissed the GAO report as superficial. But expect its findings to fortify defenders of any RM takeover of GL.”