Yesterday, the Justice Department filed suit against S&P (owned by McGraw Hill) alleging that the largest U.S. rating firm "falsely" represented that crisis-era credit ratings on complex securities "were objective, independent" and "uninfluenced by any conflicts of interest." Deal Journal has some excellent excerpts from the complaint. 1
As a result of this news, the stock prices of both McGraw Hill (MHP) and Moody's (MCO) have declined by 23% and 19.3% respectively. A couple billion of market cap has been wiped away in the span of two days for each company.
Great investors like Chuck Akre and Jeff Ubben have owned MCO for the past three or four quarters. Michael Price has owned MHP since the beginning of 2008. I doubt they have been selling. Despite the renewed risk of litigation, both companies still operate in an oligopoly and both will still be able to maintain their enviable profitability metrics. I don't think the intrinsic value of the companies have declined nearly as much as their market values. I suspect there is an opportunity here for investors who are able to stomach some short-term volatility.
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- US v S&P: Talking Heads and Highlights From the Suit