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Tuesday, December 13, 2005

And Then There Were Two

by: Armie Margaret Lee

First there was 401(k) Forum (later mPower), then Financial Engines and Rational Investors joined the online advice game. Later, Ibbotson Associates -- an already well-established firm -- quietly signed on. Lastly, Morningstar jumped in with the biggest splash in late 1999.

Then Standard & Poor's purchased Rational Investors, only to sell that business to mPower, which later sold to Morningtar.

Now Morningstar is buying one of its two remaining rivals.

The Chicago-based firm said Monday that it will buy Ibbotson Associates for $83 million in cash, in a deal that would make the Chicago-based investment research firm one of the largest independent providers of managed retirement accounts. The transaction is expected to close in the first quarter of 2006.

The deal makes sense by stock market logic. Ibbotson had $37.2 million in revenue for its fiscal year ended June 30, 2005. That means that Joe Mansueto & Co. are paying just 2.2 times sales for Ibbotson. Yet, their own shares trade at roughly 6.4 times trailing sales.

So, the folks at Morningstar use part of their IPO hoard to put one of their two rivals out of the game and they are able to goose revenues for the stock market.

Morningstar officials also said they expect to realize approximately $10 million in cash tax benefits in connection with payment for the cancellation of Ibbotson’s stock options.

Calling the acquisition a "logical move," Morningstar chairman and CEO Joe Mansueto said the deal would further boost Morningstar’s institutional and advisor businesses.

"Ibbotson’s expertise in asset allocation and Morningstar’s expertise in security selection and investment research is a powerful combination," he said.

Ibbotson oversees $3.5 billion in assets for participants in 401(k) and other defined contribution plans and manages assets on behalf of several major retirement plan providers. Meanwhile, around 12 million retirement plan participants have access to Morningstar’s stable of retirement planning services through about 69,000 plan sponsors and 30 plan providers.

Morningstar plans to offer Ibbotson’s asset allocation software and services through its existing global platform, according to the news release.

Professor Roger Ibbotson, Ibbotson’s founder, and Mike Henkel, president, plan to stay on with the merged company. It was not known, however, which titles they will assume.

"Ibbotson is a good fit with Morningstar’s culture," said Ibbotson, who founded the company in 1977, in a statement. "Our missions are very similar; we are both focused on solving investor problems. Joe and I both started our companies as boot-strap ventures, and we run our businesses with an entrepreneurial spirit. We have worked with each other for many years and I can’t think of a better partner for our business."

Ibbotson employs about 150 people in offices in Chicago, New York and Tokyo. The fate of its employees has yet to be determined, said Morningstar spokeswoman Julie Crothers.

"A transition team has been put in place with members from both Morningstar and Ibbotson and they’ll be looking at these issues," she said. 

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