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Morgan Stanley Believes in Barra
By Nathan Slaughter
April 7, 2004

Here's today's pop quiz (you won't need a No. 2 pencil). Owners of international mutual funds often see their funds' performance pegged to the MSCI-EAFE index. Quick, what does the acronym stand for? If you answered "Morgan Stanley Capital International -- Europe, Australasia, and Far East," proceed to the front of the class. Bonus points if you knew the index returned 39% last year.

MSCI, primarily owned by financial services giant Morgan Stanley (NYSE: MWD), is making news with the planned acquisition of investment analytics firm Barra (Nasdaq: BARZ) for $816.4 million. The all-cash deal, announced yesterday, equates to $41 per Barra share, or roughly a 9% premium over Monday's close.

California-based Barra is a premier provider of risk-management software. Each of the world's 10 largest asset-management firms, as well as a thousand other money managers, pension funds, and traders, use Barra's proprietary portfolio analytics to conduct both equity and fixed-income risk modeling. Barra's industry-leading databases contain risk assessments compiled from more than 100 data sources, on securities across all major global markets and asset classes. Institutional money managers use the firm's software to help evaluate, quantify, and control portfolio volatility. Along with a steady stream of predictable, recurring subscription-based revenue, Barra brings a spotless balance sheet to the merger, including $10 a share in cash.

MSCI has spent the past 30 years constructing the most widely used international stock, bond, and hedge fund indices. Including the popular EAFE index, MSCI tracks securities in 23 developed and 27 emerging markets worldwide. According to estimates, more than $3 trillion in assets is benchmarked to MSCI indices.

The union should benefit MSCI's institutional clients, whose compensation typically is a function of their performance relative to a given benchmark. In an interview with Reuters, MSCI CEO Henry Fernandez said, "[I]t helps them assess how much risk to take if they were to deviate from the market indexes."

News of the buyout, which is expected to close within the next 60 to 120 days, quickly drove Barra shares close to the $41 mark. While the Barra name is well regarded inside the investment management community, don't expect the acquisition to have much of an impact on Morgan Stanley's bottom line. The investment banking and full-service brokerage conglomerate recorded $35 billion in 2003 revenues, easily enough to swallow Barra's $150 million without blinking.

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Fool contributor Nathan Slaughter owns none of the companies mentioned.

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