Standard & Poor's announced last week that it has acquired Portfolio Management Data LLC, a private company with which the rating agency has had a strategic alliance since 1997.
The acquisition of the four-year-old leveraged finance research company happened at a surprisingly fast pace of just under two months, although the two firms have been working together closely for the past three years on PMD's flagship credit loss database and other products.
"From the day we started the company, we were thinking about an exit," said PMD's co-founder Steven Miller. "It was part of our strategy when we first created our business plan. We weren't thinking of leaving [the company] to the kids or doing an IPO."
Miller and David Keisman, who were PMD's principals, will become managing directors in S&P's corporate ratings group headed by Steven Bavaria. While Miller and most of the 20-member PMD team will stay on at the company's original office, Keisman and his group, who will continue to develop the credit loss database, will move to S&P's office starting around June or July.
"The people at PMD are a big part of what we're buying," says Bavaria. "The company is successful because of the talent and vision of the whole team." To illustrate how important the research firm is to the rating agency, on the day of the acquisition announcement, S&P's senior management took the time to meet with the entire staff of the smaller company.
The alliance between the two groups has had a positive impact on bankers and investors. In addition to the credit loss database, PMD developed the leveraged comps system, a product designed to help level the playing field for smaller banks by giving them access to information about the overall market. "[This database] allows smaller syndicators to compete on a more even keel with larger banks," Bavaria said.
The immediate and long-term benefit to S&P is what PMD's human resources and specialized products can do for the rating agency's main goal, which is to evolve from rating public companies into a full provider of risk management services.
At the forefront of that change is the CreditPro analytical tool, which, since its inception in late 1997, has grown into an instrument that bankers and investors can use not only to calculate the default probability of any company, but then to determine the recovery rate in case default does occur.
"There's a tremendous thirst in the market for this data," says S&P's director of new products Stewart Braman, who is part of the agency's financial institution group. "Whenever people make estimates of default probability, an equally important factor is the recovery rate."
When CreditPro first came into the market, it did not have this second capability. But the most recent version, released on Tuesday for the first time, incorporates all the features of the credit loss database.
The combined tool is at the heart of what S&P is trying to become. "From our point of view, it compliments what we provide - ratings and analysis," explains Bavaria. "Now that we own PMD, we will use the leveraged comps, ratings, reports and other products to make us more of a one-stop shop. It's soups to nuts."
The benefit flows both ways. Miller expects PMD, under the umbrella of S&P, to increase its customer base from 55 to 100 and expand coverage into regional and foreign banks. "We're looking to grow globally and into Europe, the secondary market and the middle market," Miller said.
Expansion into foreign and middle markets is the responsibility of Jeremy Taylor, a 20-year veteran entrepreneur with banking experience who was one of the original investors in PMD. He is now leading the company's charge into those areas.
If the melding of PMD into one of the largest ratings agencies seems almost effortless, both Miller and Bavaria say that's because it was. Back in March, when Miller and his group approached S&P, the two partners were ready and willing.
"We said [to S&P] that we're reaching a point where we think it made sense to be part of a bigger company," Miller recalls. "They agreed. The only issue was the terms of the deal."
Although neither side would reveal the financial terms of the agreement, Bavaria concurs with the feelings at both companies: "It was pretty much a mutual thing. It was a long-term courtship, not a shotgun wedding."