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Morningstar Files $100 Million IPO

The company reveals that while revenue is growing, it lost money in 2003.
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Updated from 7:33 a.m. EDT

The announcement by mutual-fund rating house


Thursday that it has filed plans with the


to raise $100 million through an initial public offering drew a mixed reaction from some financial planners who use the company's online advisor services.

The Chicago-based company, famous for its star ratings for stock and bond funds, will sell the deal through Morgan Stanley, Deutsche Bank and William Blair. Proceeds will be used for working capital and general corporate purposes, including acquisitions.

Morningstar revealed in the filing that it had revenue of $139.5 million in 2003, up 27% over 2002. The company lost $11.9 million, or 31 cents a share, in 2003, compared with earnings of $446,000, or 1 cent a share, in 2002. The loss reflected big jumps in marketing and overhead expenses.

Morningstar said its revenue has increased by a compound annual growth rate of 28% over the past five years, "largely because of strong internally generated growth." The company said that at the end of 2003, it tracked more than 100,000 investment offerings, including 54,700 mutual funds and similar vehicles.

"We serve more than 3 million individual investors, 100,000 financial advisors, and 500 institutional clients and have operations in 16 countries around the world."

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Many financial advisors buy Morningstar's information and services from its website.

"They're the Bible for financial planners," says Lewis J. Altfest, CFP, CFA and president of L.J. Altfest & Co. in New York City. "If you scratch a financial planner, they'll have a copy of Morningstar."

The company, he says, is the go-to source for mutual funds with it conferences, data base and performance ranking by company size and style. "They set the standard," he said.

Some in the industry, however, wonder if going public could create conflicts of interest in the services it provides.

"Will there be increased pressure on meeting it financial targets?" asked Mark Dowling, a fee-only CFP and CFA with Dowling & Yahnke in San Diego.

For example, if the company needs ads from large mutual fund families to meet financial earnings goals, would it be less likely to be critical of them in ratings and editorial content?

Would the company be increasingly inclined to complicate the process of investing?

"Investing doesn't have to be as complex as most people make it," says Dowling. "There don't have to be as many mutual funds out there. If they said, 'We probably only need 100,' it wouldn't be good for business."

Altfest, says he recently dined with Don Phillips, Morningstar managing director, and is not worried about the firm being tempted to take lucrative business that will pose a conflict of interest, just because it goes public.

"If you pass on things when you're private, you will when you are public," he says. "They view themselves as consumer advocates."