Morningstar's Realpoint Acquisition Boosts Its Credit-Rating Business

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Morningstar (MORN) has been a big beneficiary of the trend toward independent financial research. Last year, the company posted revenues of $479 million and net income of $82.5 million.

However, Morningstar has been finding it tougher to find growth. As a result, it has entered into new business categories and has made several acquisitions (the company made six deals last year for a total of $74 million).

In December, Morningstar joined the lucrative credit-ratings business. And now this week, it has made another move in that market with the purchase of Realpoint, which provides credit ratings for commercial mortgage-backed securities (CMBS), which are among the many complicated investments that imploded during the credit crisis of 2008-09.

Morningstar has agreed to pay $52 million for Realpoint, consisting of $42 million in cash and the rest in restricted stock.

The Real Deal

With a staff of 43, Realpoint uses a blend of qualitative, quantitative and legal analysis when rating CMBS deals. This involves the use of proprietary databases, third-party sources and sophisticated financial models. In all, it provides ratings for 10,000 CMBS transactions, and clients can use a Web-based system for tracking them.

It's heady stuff, but Realpoint has been able to get traction. In fact, the company received the Securities and Exchange Commission's designation for a Nationally Recognized Statistical Ratings Organization, a distinction only 10 firms in the world have been able to obtain, the three biggest being McGraw-Hill's (MHP) Standard & Poor's, Moody's (MCO) and Fimalac SA's Fitch Ratings.

Realpoint charges subscription fees to investors who want Realpoint's ratings information and provides a high level of transparency on its process. This is in contrast to the traditional approach, in which an issuer pays the rating agency for rating the issuer's securities. The apparent conflict of interest in that arrangement has certainly been controversial.

The Move to Institutions


For the most part, Morningstar's business is consumer-focused. However, to get growth moving again, the company needs to build a much larger footprint with institutional clients. This will probably mean more acquisitions -- and Morningstar has a good amount of cash it can use for deals.

The deal for Realpoint seems to be a good fit for Morningstar's strategy. With revenues of $12 million, Realpoint has shown that it can get buy-in from institutional clients (there are 225 subscribers). Plus, the company's main competitors -- which include Standard & Poor's, Moody's and Fitch -- are still trying to regain their footing. For example, the attorneys general of Ohio and Connecticut have claimed that these agencies helped cause the financial meltdown.

Interestingly enough, Morningstar has shown an ability to jump into new research markets when there has been a breakdown in the system. This happened when there was a major settlement of Wall Street research in 2003. From there, Morningstar was able to make a tidy profit by offering independent stock research reports.

In the case of credit ratings, the opportunity is likely to be much bigger. And the acquisition of Realpoint is a good start.
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