Deutsche Boerse CEO Theodor Weimer has finally managed a great deal. After several false starts, it announced on Tuesday that it would buy 80% of Institutional Shareholder Services, for about $ 1.8 billion. While the US group’s business advising investors on how to vote is unexciting, its ability to rate companies on their environmental, social and governance (ESG) credentials has potential. It is also an increasingly crowded field.
The acquisition is Deutsche Boerse’s largest since 2007, and with Weimer. Despite the promise to expand through mergers, this year it lost the opportunity to acquire Borsa Italiana for the benefit of Euronext. The 2019 attempt to buy Refinitiv’s FXall currency trading platform for 3.5 billion fizzled after the LSE swooped on it.
ISS is not cheap. Deutsche Boerse’s offer values it at 2.3 billion, eight times the expected revenue for this year, 280 million. It’s more than triple the 720 million the owner, Genstar Capital, paid for it in 2017, although ISS has made acquisitions since then. There is not much room for cost savings, but Weimer expects to raise revenues that will raise ebitda by 15 million euros by 2023. That is equivalent to 18% of that expected by ISS this year.
Much of it will come from using ISS intelligence to take advantage of the responsible investing craze. Assets in ETFs and index tracking products that meet ESG criteria will skyrocket from $ 170 billion to $ 1.3 trillion in 2030, predicts State Street Global Advisors. Deutsche Boerse may use the ISS data to create ESG indices, as well as investment products that are listed on its platforms.
But it faces stiff competition. MSCI, Sustainalytics or S&P Global already compile ESG indices. BlackRock also seeks to build portfolios based on ethical criteria, rather than just capitalization. Getting on the train seems sensible; but it will not be an easy journey.