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Private Equity Wins the Day with US$3.4bn Acquisition of Interactive Data; Breakup on the Cards?

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As predicted by Reference Data Review back in January, the likeliest candidate out of Interactive Data’s array of potential suitors has stepped up to acquire Pearson’s stake in the business and the common stock from shareholders for a total of US$3.4 billion. Private equity houses Silver Lake and Warburg Pincus are equal equity partners in the transaction, which has already been approved by the vendor’s board of directors and, according to an insider who was involved in the transaction, could potentially see the splitting of Interactive Data’s business into two separate entities.

The deal itself was negotiated by a special committee of four of Interactive Data’s independent directors appointed to deal with the “strategic review”, Pearson and the two private equity houses. It has netted Pearson roughly US$2 billion for its 61% stake in the vendor, which it has been keen to divest itself of for some time in a bid to exit the financial services market.

Interactive Data’s stockholders will also receive US$33.86 in cash for each share of the vendor’s common stock they own, which is approximately 32.9% over the closing share price on the last trading day before the strategic review was announced (14 January 2010). Completion of the transaction is expected to occur by the end of the third quarter of 2010, following regulatory approvals and all the other usual closing conditions.

Interactive Data is certainly a classic private equity buy out opportunity: it is a cash generative business that doesn’t have a lot of baggage in the way of debt. Moreover, Warburg Pincus and Silver Lake have a long history of investments in financial services technology firms, including the former’s investment in Wall Street Systems back in 2006 and the latter’s numerous investments in firms such as SunGard Data Systems, Thomson and Instinet (to name just a few), so their decision to acquire the data vendor comes as no great surprise.

What may be surprising is what is potentially on the cards next for the vendor: the new owners are seemingly keen to break the business into two. According to an insider involved in the transaction, the private equity owners are keen to split the real-time data business from the pricing and valuations solution set. The decision to acquire Interactive Data in its entirety, rather than just the 61% share on offer from Pearson, gives the private equity firms free rein to do what they please with the business, after all.

The Real-Time Market Data & Trading Solutions business could then be spun off as a standalone business based on its recently acquired 7ticks high performance trading infrastructure, which it bought back at the end of last year. The proximity hosting platform could then sit in the middle of the business as the vendor’s jewel in its low latency crown.

As for the vendor’s Pricing and Reference Data business, this could be easily packaged for a trade sale to any of Interactive Data’s potential suitors on that side of the business, including McGraw Hill and the other ratings providers seeking to diversify further. The acquirers could then leverage their own platforms and delivery technologies to make best use of the Interactive Data offering.

If such an acquisition opportunity presented itself, the same list of vendor suitors would likely come into the frame to acquire the valuations and reference data business. Again placing McGraw Hill, which owns Standard & Poor’s, into pole position, due to its financial position and appetite for growth in the valuations business. Its subsidiary business lines, in particular the Fixed Income Risk Management Services (FIRMS) led by ex-Thomson Financial and Bloomberg heavyweight Lou Ecclestone, would be a good fit for the Interactive Data offering.

Of course, there has as yet been no mention of such restructuring publicly. Rona Fairhead, chairman of Interactive Data’s board of directors, has indicated that the private equity firms are “committed to supporting its global expansion” and president and CEO Ray D’Arcy indicates that he hopes the deal will mark a new chapter in the vendor’s development. Just how dramatic this new chapter will be is yet to be seen. In the meantime, D’Arcy says he is looking forward to “accelerating our momentum and further enhancing our capabilities, delivery platforms and technical infrastructure”.

The private equity houses financed the deal with their own equity funds and debt financing provided by Bank of America Merrill Lynch, Barclays Bank, Credit Suisse Securities (USA) (which acted as the lead financial advisor) and UBS Investment Bank. Goldman Sachs acted as financial advisor and Morgan, Lewis & Bockius acted as legal advisor to the vendor.

Following the completion of the transaction, Interactive Data will remain headquartered in Bedford, Massachusetts and maintain its offices around the world. The new acquirers have also indicated that they will not be effecting a management shake up and the executive team will remain the same; whether or not all the current incumbents choose to stay is another matter, however.

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