Deutsche Boerse AG has agreed to buy a majority stake in Institutional Shareholder Services Inc., a transaction that aims to seize on the growing appetite for sustainable investing.
The deal for an 80% holding values the corporate governance adviser at $2.3 billion and will see the German exchange operator pair ISS’s services with its index business, according to a statement. In total, revenue synergies are expected to result in an additional 15 million euros ($18 million) of earnings by 2023.
The acquisition will boost Deutsche Boerse’s product offering servicing the growing popularity of climate-focused investing. It’s the biggest purchase under Chief Executive Officer Theodor Weimer’s almost three-year tenure and the latest in a string of deals that is reshaping the industry. It underscores how exchange groups are adding data businesses and penetrating asset managers in the quest for growth.
“This transaction is really transformational,” Stephan Leithner, a member of Deutsche Boerse’s executive board, said in an interview. “It puts us at the top of the ESG story and opens up every major institutional investor.”
ISS provides customers with recommendations on how to vote on shareholder proposals, as well as environmental, social and governance research, fund services and data and analytics. It was founded in 1985 and has more than 4,000 clients and nearly 2,000 employees across 30 U.S. and international locations. Backer Genstar Capital LLC and current management will retain a stake of approximately 20%. ISS competes with Glass Lewis & Co. in corporate governance services and MSCI Inc., in ESG data.
The acquisition highlights how Deutsche Boerse is adding institutional investors as clients, who are demanding direct access to a range of services, Leithner said. Deutsche Boerse added 400 buyside clients when it bought Axioma Inc., last year and ISS gives it a further 2,000. Traditionally, stock exchanges service banks and brokers.
Deutsche Boerse will use ISS’s ESG data for its Stoxx index business and analytics arm Axioma to help investors better measure the risk of green investments. The data also complements the German exchange’s ESG derivatives offering and carbon certificate trading business. Companies spend about $1 billion per year on ESG data, Leithner said.
Analysts at Citigroup Inc., said in a note that the acquisition is another example of Deutsche Boerse diversifying into less cyclical income streams, which potentially offers higher growth rates based on long-term trends in ESG & passive investing.
CEO Gary Retelny will continue to lead ISS, the statement said. The transaction is expected to close in the first half of 2021. Goldman Sachs Group Inc. advised ISS while Ardea Partners advised Deutsche Boerse.