New York (May 10, 2004) -- The number of shares to be offered, the price range for the offering, and the exact date are still up in the air. In fact, the company hasn’t even picked an exchange yet. But there’s still plenty to talk about: Surprising many in the financial planning industry, investment research giant Morningstar announced Thursday that it had filed with U.S. regulators for an initial public offering of up to $100 million. Morgan Stanley, Deutsche Bank Securities and William Blair & Co. will underwrite the IPO, according to the company's preliminary prospectus.

Morningstar doesn't have any specific plans for proceeds from the sale, but the money raised could go towards acquisitions or joint ventures in businesses, products, services or technologies that complement or expand its existing business, the company wrote in the prospectus. Morningstar also expressed interest in international expansion.


Some Morningstar users worry that going public will create a conflict of interest for the company. Once it is  publicly traded, Morningstar analysts will be in the unenviable position of having to rate and critique funds that hold Morningstar stock. Their analysis of those funds could ultimately have a big impact on the price of Morningstar shares.


Still, Morningstar has an impeccable reputation for independent research, and one planner said he didn't expect the company to fall into that trap. "I think they're going to do the right thing," said Michael Anderson, JDMS, and a financial adviser at Evensky, Brown & Katz in Coral Gables, Fla., which uses Morningstar research. "I'm curious to see how they address their evaluation of those funds, but I don't think [the IPO] will hurt their reputation at all. They have an excellent reputation."


Because it is in a "quiet period" after filing to go public, Morningstar declined to comment. Rival research house Lipper also declined to comment.


Most observers said they expect Morningstar's IPO to attract a lot of interest despite the fact that it has posted an operating loss in each of the past five years. In 2003, Morningstar saw revenues rise 27 percent to $139.5 million from $109.6 million in 2002, according to Securities and Exchange Commission filings. But it reported an operating loss for 2003 of $10.8 million, up from an $8.3 million loss a year earlier. Still, this is primarily due to the fact that it expenses options used to pay employees, analysts said.


"In the institutional market, they'll look at what's cash -- what's in the bank. So maybe on a GAAP accounting basis, earnings don't look that great, but institutional investors will see past that," said Tom Taulli, an IPO research analyst at Current Offerings, who wrote a book called "Investing in IPOs" for Bloomberg Press. "Individual investors won't even notice the losses. They may be attracted to the fact that this is a brand -- a product -- that they can understand," he said. The IPO will do well unless the market really tanks, he added.


"It's a significant consumer brand, and stock analysis and research is certainly coming back. They're trying to take that brand and move it into other areas," continued Taulli. "We're out of the bear market, in the early stages of an expansion, and that's a great time to go public."


-- Kristen French, FinancialPlanning.com

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