Fitch Acquires Duff & Phelps In Latest Credit-Rating Union

The Wall Street Journal - 03/08/2000

By Charles Gasparino

(Copyright (c) 2000, Dow Jones & Company, Inc.)

Fitch IBCA, the nation's third-largest credit-rating company, acquired smaller rival Duff&Phelps Credit Rating Co. for $528 million, or $100 a share.

The deal will help Fitch, a unit of Fimalac SA, Paris, better compete in several areas where it hasn't made much of a dent, including corporate bonds and insurance companies.

The move reflects broader trends in the credit-rating industry. As the business expands globally, smaller companies such as Duff&Phelps, Chicago, are facing increasing pressure to team up with larger entities or face extinction. Cost pressures also are mounting amid a sharp decline in municipal-bond and corporate-bond sales.

Officials at Fitch, New York, said the transaction helps in the firm's battle against industry heavyweights Standard&Poor's, a unit of McGraw-Hill Cos., and Moody's Investors Service, a unit of Dun & Bradstreet Corp. (Dun&Bradstreet plans to spin off Moody's as a separate public company in this year's third quarter.)

Both Moody's and Standard&Poor's dominate the credit-rating business, with a combined market share of as much as 85% of all bond deals, analysts estimate. Both firms have made major forays internationally, the new growth area for ratings agencies. Indeed, while Fitch has been growing, the company has found it difficult to supplant the industry leaders, though it recently has made some headway in rating municipal bonds.

"Fitch is trying to broaden out what they do, to include bonds in the taxable arena, which is what Duff&Phelps does," said Michael Shamosh, a bond-market strategist at Tucker Anthony Inc. "It strengthens their position as a viable option to the other two rating agencies, and there's always a need for a good informed opinion."

Credit-rating concerns assess for investors the ability of bond issuers to repay debt. The increased competition in the business has squeezed profit margins as some smaller concerns, such as Fitch, have charged less for services. Investors often have complained that credit-rating companies change their assessments too late to be significantly useful.

After the transaction closes, company officials expect some layoffs where there is overlap, such as in rating so-called structured debt, or bonds backed by mortgages and other asset classes. The combined company should produce annual revenue of close to $260 million, Fitch officials estimated. That is far less than the $500 million to $600 million of annual revenue generated by Moody's and Standard&Poor's.

Fitch officials acknowledged they paid a hefty price for Duff & Phelps. The transaction is "fully priced," said Stephen W. Joynt, Fitch's president and chief operating officer.

But investors applauded the deal. Shares of Duff&Phelps were up $18, or 23%, to $97 each in 4 p.m. New York Stock Exchange composite trading.

"If there's one thing investors keep telling us it is that we have to build our business in corporate bonds," Mr. Joynt said. "This deal also gives us a much broader staff here and in Europe."

Fitch officials also said they are looking into whether they should change the company's name to reflect Duff&Phelps's presence. They added that they don't expect additional acquisitions of smaller ratings companies in the near future.


  1. Are there any regulatory concerns in this acquisition that go beyond the usual concerns that monopoly pricing by a large supplier might reduce consumer's surplus?
  2. Can you think of any value to credit-rating firms if they always react to information that is more-or-less known in the market, rather than generating new information?  (Think of verifiability of conditions in contracts between two parties.)
  3. "... there's always a need for a good informed opinion," says analyst Michael Shamosh.  Having more than one or two opinions on the credit worthiness of a given company might be good for the market as a whole, but how do the credit-rating agencies capture the value of such availability, since it's a public good once the ratings are announced?
  4. Can one make an argument that less competition is better in the ratings industry, since competition might force raters to give unusually rosy forecasts to their clients who are being rated?