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BlackRock (BLK)
BlackRock Just Wasn't Big Enough for Larry Fink
For about 10 years after he founded the asset-management firm BlackRock, Larry Fink was not a fan of mergers claiming that they don't work most of the time. Well, it's fair to say that he has come around on that a little bit. Fink took BlackRock from being a respected, decent-sized name in the asset management world to a major presence with about $1.3 trillion under management via deals in the mid-part of the decade with the likes of MetLife (MET: Charts, News, Offers) and Merrill Lynch. But yesterday, Fink took things to a new stratospheric level by buying Barclays' (BCS: Charts, News, Offers) asset management division for $13.5 billion. This creates the largest money-management business on the planet with a balance sheet bigger than the Federal Reserve's. Will Fink be able to manage this thing?
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BlackRock started off as a fixed income money manager, as Fink was one of the pioneers of the mortgage-backed securities model. Then the firm expanded into equities by buying Merrill's investment management business in 2005 for about $9 billion and now BlackRock has just made itself the biggest player in the world of index investing and passively managed funds by buying Barclays' Global Investors (BGI) unit for $13.5 billion ($6.6 billion will be in cash and the rest in stock). Barclays was looking to sell off its well-known iShares ETF business in order to raise cash and stay away from having to borrow money from the British government. It reached a deal to sell iShares for $4.3 billion to CVC Capital Partners but then BlackRock swooped in and decided to buy the entire unit that housed iShares. Prior to the deal, BlackRock had about $1.3 trillion under management (most of it is actively managed) and now it is putting that together with the $1.5 trillion at BGI, which takes the combined balance sheet well above that of the Fed which is at $2.03 trillion.
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The broad rationale behind the deal makes sense. A lot of money is moving away from the active-management arena to the realm of passive-management (i.e. index investing). Retail investors are loath to pay fees for active management given the uneven performance and conflicts of interest. The bear market cycle has made things worse. Most of BGI's $1.5 trillion is in index funds and other passive investments, so there is very little overlap with BlackRock's active management model. Asset management businesses also tend to grow faster outside the purview of a large bank such as Barclays which means BlackRock, being independent, could probably grow BGI faster.
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However, the challenges for BlackRock lie in the execution of this merger. It might look like a slam-dunk on paper but more than doubling the assets you are responsible for in one deal creates its own set of problems. Plus, BlackRock has very little experience in the arena of passive management so they are buying something they are not experts at. Additionally, index investing is a much lower margin business, which is going to hurt the overall profitability of BlackRock. One also has to question the price of the deal. Barclays was dying for more capital so they weren't in a very strong bargaining position. Most analysts had valued the BGI unit at around $10.5-$11 billion, so $13.5 billion is indeed a very handsome price and somewhat eye-raising especially when there couldn't have been too much real competition. BlackRock hasn't been hammered by the financial crisis and very few other firms could have pulled off a deal of this size at this time. But, Larry Fink has a track record of delivering and that is going to him afford a large amount of latitude from the street. Either way, boy he has to be glad that he didn't bite when the top Merrill job was offered to him in December of '07 and stayed put at BlackRock.
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