BGI deal puts BlackRock on top of world

The BlackRock Inc.-Barclays Global Investors deal might rank as the worst-kept secret in money management, but the acquisition announced late on June 11 rocked the industry, creating the world's largest investment firm.

Citing BlackRock's track record in digesting previous acquisitions, fans of Chairman and CEO Laurence D. Fink argue that BlackRock is uniquely positioned to pull off the biggest money management integration in history.

Detractors, however, see a buyer not content to leave well enough alone that could disrupt one of money management's most successful investment cultures.

The deal — which calls for London-based Barclays PLC to sell BGI for $13.5 billion in cash and BlackRock stock — is unprecedented in terms of scale and scope. (CVC Partners, the private equity firm that had previously agreed to buy BGI's iShares business for just under $4.5 billion, has five business days to top BlackRock's offer for all of BGI, but Mr. Fink expressed confidence his firm's bid would prevail.)

BlackRock, best known until now as one-third of the industry's fixed-income “oligopoly,” would in one fell swoop become the industry's unchallenged 800-pound gorilla, with more than $2.7 trillion in client assets, including an industry-leading $300 billion in exchange-traded-funds.

The latest in a string of sizable acquisitions by BlackRock fulfills Mr. Fink's goal of making his firm a “supermarket,” offering a full complement of investment strategies, noted an executive with another money management firm, who declined to be named.

Executives at both firms said they had talked about a possible deal six or seven years ago, but the timing wasn't right.

In a June 12 conference call, Mr. Fink said a bulge-bracket BlackRock Global Investors, with its sweep of products, would be able to meet the needs of institutional clients increasingly looking for “fewer managers, and more comprehensive relationships.”

He cited as an example a $10 billion allocation BlackRock won that covers a range of credit and equity investments.

He also said the firm is competing for two new allocations of $18 billion and $20 billion.

In pursuing the acquisition of BGI, Mr. Fink noted that BlackRock reached out to clients, who ultimately contributed $2.8 billion in equity toward the $13.5 billion purchase price, as part of his firm's strategy of deepening its ties.

The combined firm's range of active and passive strategies, including the powerhouse iShares ETF franchise, will enable BlackRock Global Investors to provide comprehensive investment programs for defined contribution and retail clients as well, providing further momentum for its fast-growing fiduciary outsourcing business, BlackRock officials said.

Mr. Fink also noted that BGI would help give BlackRock the global muscle it has long sought, with 9,000 employees in 24 countries and clients in more than 60 countries.

Mr. Fink would remain chairman and CEO. Robert S. Kapito, the president of BlackRock Inc., would retain that title. Blake Grossman, CEO of Barclays Global Investors, would be one of 10 vice chairmen, and also would be named head of scientific investing.

With BlackRock's rapid growth in recent years buoyed by previous acquisitions, including State Street Research & Management in 2005 and Merrill Lynch Investment Management in 2006, some market participants said they're willing to give Mr. Fink and his team the benefit of the doubt on its prospects for successfully integrating the industry's biggest money management prize ever.

“If anyone can make this work, BlackRock can,” said Paul Schaeffer, president of Reflow Management Co., a San Francisco-based firm that helps mutual fund companies manage their liquidity needs.

With BlackRock's record of successfully integrating and building on its previous transactions, Mr. Fink “is not someone I would bet against,” agreed Michael Rosen, principal at Santa Monica, Calif.-based Angeles Investment Advisors LLC.

Some clients seemed sanguine about the tie-up, noting that, with the combination of BGI's index strategies and BlackRock's active fixed-income strategies, the risk of having too much money with a single organization is less of a concern than if two active managers were combining.

Two pension funds that use both BlackRock and BGI are the $36 billion Pennsylvania State Employees Retirement System, Harrisburg, and the $8.4 billion Maine Public Employees Retirement System, Augusta.In separate interviews, Robert Gentzel, a PennSERS spokesman, and Andrew H. Sawyer, chief investment officer for the Maine fund, said issues that would arise if one of their big active managers acquired another manager in the same asset class aren't at play here.

Balancing that optimism, however, a number of market watchers say they're cautious about the prospects for successfully combining BlackRock and BGI — either because of the unprecedented scale of the resulting organization or for cultural reasons.

“Bigger is better up to a point,” but at some point, the benefits of scale will be outweighed by the frictions — of adding layers of management, budget and business plans, noting one senior investment consultant, who declined to be named.

Geoff Bobroff, president of East Greenwich, R.I.-based money manager consultant Bobroff Consulting Inc., said BlackRock's purchase of BGI will pose cultural challenges. There aren't too many examples of successful combinations of equity and bond cultures or active and passive cultures, he noted.

An executive with a quantitative equity money manager, who declined to be named, said the “strong desire” of BlackRock executives to control their organization — exemplified by their “one BlackRock” slogan — might have worked with previous acquisitions, but this will be the first time the company has “acquired somebody who is their intellectual peer or superior.” It will be “interesting to see how the two mesh,” he said.

One institutional investor who uses both BlackRock and BGI and declined to be named, predicted that BlackRock's desire to exert control over BGI is likely to hurt BGI, which has one of the strongest cultures in the money management business.

BlackRock and BGI are different animals, but “the animals doing the acquiring think they're the alpha male,” and are likely to try to bend BGI's culture to their will, the investor said.