Index unit’s planned IPO sparks concerns about conflicts

Aug 13, 2007 @ 8:57 am

By David Hoffman

PHILADELPHIA — Morgan Stanley’s plans to take its MSCI Inc. index unit public is raising concerns about conflicts of interest that may arise when an index company must answer to shareholders. As a stand-alone public company, MSCI would face new and greater pressures to make money for shareholders, said Herb Blank, founder and president of QED International Associates Inc., an industry consulting firm in New York. “It opens many possibilities on the indexing frontier,” he said. “It can be very dicey and treacherous.” Pressure to meet shareholder demands for earnings could lead an indexer to look for new, creative ways to make money such as creating a system in which a “platinum” subscriber would get index information ahead of other market participants, Mr. Blank said. There could be regulatory issues with such a move, he admitted, but regulators have taken a very “laissez-faire” view of indexing, he said. Morgan Stanley of New York filed papers with the Securities and Exchange Commission last month signaling its plans for an IPO of MSCI — formerly Morgan Stanley Capital International — a subsidiary that specializes in publishing a wide variety of market indexes. Morgan Stanley will sell a minority interest in MSCI, which does business as MSCI Barra, via Class A common stock, according to the July 31 filling. The Wall Street wirehouse left open the possibility, however, of selling all of its interest in MSCI if market conditions warrant. The filing means MSCI could soon become the first publicly traded company whose core business is indexing, industry experts said. More indexes? MSCI’s public offering is likely to lead to the creation of new indexes that are even more specialized than the indexes now underlying exchange traded funds, said Jeff Tjornehoj, a Denver-based senior analyst with Lipper Inc. of New York. While that isn’t necessarily a bad thing, it could lead to more ETF failures, because ETFs based on niche indexes may find it tough to attract assets, he said. Another industry veteran, however, said he didn’t think Morgan Stanley’s move to spin off MSCI is all that earth shattering.

“My initial reaction is really ‘ho-hum,’” said Gary Gastineau, managing director of ETF Consultants LLC in Summit, N.J. “I don’t see any enormous advantage or disadvantage.”

As part of a public company, MSCI already has had to deal with the pressures associated with public ownership, he said.

That may be true, but the reality is that as a subsidiary, MSCI is removed from many of the pressures that directly face its parent, Mr. Tjornehoj said.

Regardless, if MSCI’s offering is successful, other companies are likely to also shed their indexing operations, he said.

Sale speculation

For years, there has been industry speculation about whether The McGraw-Hill Cos. Inc. of New York might try and put Standard & Poor’s on the block, Mr. Blank said.

And now that New York-based News Corp. has agreed to buy Dow Jones & Co. Inc., also of New York, it remains to be seen what will happen to Dow Jones’ indexes, he said.

With all the demand for new indexes — much of it being generated by ETFs — now seems as good a time as any to contemplate the sale of an index provider, Mr. Tjornehoj said.

“There’s licensing revenue to be made,” he said.

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