BlackRock's BGI acquisition 10 years ago fuels rapid growth

Ten years ago today, BlackRock took a giant step toward becoming the world's largest money manager, announcing it would acquire Barclays Global Investors.

In a deal that rocked the global investment industry in the early aftermath of the great financial crisis, New York-based BlackRock agreed to pay $13.5 billion to acquire the investment management business of London-based Barclays.

When the deal closed on Dec. 1, 2009, BlackRock more than doubled its worldwide assets under management to about $3.29 trillion from $1.44 trillion and became the world's largest money manager, a status it has retained.

Worldwide assets under management have since increased 98.2% to $6.52 trillion from Dec. 1, 2009 to March 31.

BlackRock struck the deal with Barclays to broaden the firm's investment capability with passive and quantitative investment strategies, particularly exchange-traded funds, Chairman and CEO Laurence D. Fink said in an interview.

The BGI acquisition gave BlackRock "a unique platform that no other firm had ever had because at that time there was a belief that the cultures of active and passive managers were so diametrically different that you could never have a firm have both. And my answer to that nonsense was 'Why not? Our clients use both,'" Mr. Fink said.

The BlackRock-BGI deal was "a game changer because it showed the industry what real scale can achieve with the successful merging of active and passive management under one roof. It also demonstrated why scale is becoming essential for asset management firms' survival in a turbulent environment," said Daniel Sondhelm, CEO of Sondhelm Partners, Alexandria, Va., a firm that advises money managers on marketing and distribution strategies, in an email.

Mr. Fink said the "foundational context" of BlackRock's acquisition of BGI was to address client demand for outcome-oriented portfolio strategies.

"Clients were looking for complete solutions. BlackRock was able to offer active products and risk technology with our Aladdin systems," Mr. Fink said, but noted that the firm also needed to be able to offer institutional and other investors a full spectrum of investment strategies, including passive and quantitative approaches.

Mr. Fink said BlackRock already had a "very strong" relationship with BGI prior to deal negotiations in 2009. In fact, he said that after "very in-depth conversations" with Barclays in 2004 about acquiring BGI, BlackRock "walked away" from the deal.

At that time, BGI would have been BlackRock's first acquisition since its founding in 1988 and Mr. Fink said he "wasn't quite confident enough" to go through with the deal, noting "I didn't think BlackRock had the DNA to make an acquisition" at the time.

However, after the acquisitions of State Street Research & Management in 2005 and Merrill Lynch Investment Managers in 2006, Mr. Fink said the successful integration of those firms gave him and the executive committee the confidence to go through with the BGI deal.

In 2007, BlackRock studied the role of ETFs in investor portfolios, Mr. Fink said, and went on the lookout for an opportunity to acquire a large passive manager rather than try to build a large-scale practice organically.

"I think over the last 10 years, we disproved the naysayers," Mr. Fink said, stressing that BlackRock's theory that a firm could combine alpha and beta production turned out to be "a correct assumption."

BlackRock has owned the top spot on Pensions & Investments' ranking of index managers beginning in 2010. BlackRock managed $4.15 trillion of worldwide assets in passive strategies as of June 30, 2018, the most recent data showed. BlackRock managed very little in passive strategies prior to the acquisition of BGI, BlackRock spokeswoman Melissa Garville said.

"The acquisition of BGI was a brilliant coup for BlackRock and enabled the firm to carve out its position in the oligarchy of passive managers alongside Vanguard Group and State Street Global Advisors," said Michael S. Falk, managing partner at manager consultant Focus Consulting Group Inc., Long Grove, Ill., in an interview.

Of those passive assets, the most important driver of BlackRock's growth in passive management came from the addition of BGI's iShares family of exchange-traded funds.

Worldwide assets managed in iShares ETFs totaled $1.92 trillion as of March 31, up 287% from $495.5 billion when BGI was acquired on Dec. 1, 2009.

IShares has remained the largest manager of ETFs since BlackRock acquired BGI, and currently has a substantial lead on its nearest rival, Vanguard Group, Malvern, Pa., which had $1.03 trillion as of March 31, Morningstar data showed.

The addition of iShares ETFs in 2009 "established BlackRock as the dominant leader in the emerging ETF market where they weren't even a participant," said Mr. Sondhelm.

"The timing couldn't have been better as it was the (at) the beginning of a decadelong surge of inflows into passive investments that saw (global) ETF assets balloon from just over $1 trillion to nearly $5.5 trillion," Mr. Sondhelm added.

Mr. Fink admitted that he "never expected" iShares AUM to grow as fast it did, but acknowledged that the stock market's long rally since the BGI acquisition "worked tremendously well" to buoy the firm's assets.

BlackRock shareholders also profited from the firm's decade of strong AUM growth. BlackRock shares closed at $443.81 on June 10 compared to $178.52 on the same date in 2009.

That BlackRock paid $13.5 billion to take BGI off Barclays' balance sheet in 2009 when banks globally were being closely scrutinized by regulators "took courage," said Kevin P. Quirk, principal at Casey Quirk, a business of Deloitte Consulting LLP, who is based in Darien, Conn., in an interview.

"Looking back over 10 years, the deal looks great. But at the time, during the crisis, it was a large, scary deal. It was a prescient move by BlackRock, which transformed the company. The speed of the impact of passive investing on the firm was astonishing. No other firm had done it before," Mr. Quirk said.

The deal "transformed BlackRock and propelled the firm into the future. We were seeing the future faster than the rest of the industry … we made a bold move in the midst of a panic when there was blood in the streets," said Mark K. Wiedman, senior managing director and head of BlackRock's international business and corporate strategy, in an interview.

Mr. Wiedman, who headed BlackRock's iShares business until earlier this year, also had oversight of the integration of BGI staff, who were mostly based on the west coast, into New York-based BlackRock.

The process was completed after about five years, he said, noting "asset management integration is hard. This wasn't an integration about cost savings. This was a cultural integration," as BlackRock brought together dyed-in-the wool active, fundamental managers and BGI's passive and quantitative investment teams.

"Churches have had schisms over much less," Mr. Wiedman said.

After 10 years, 25% of BGI employees who were with the money manager prior to the acquisition still work for BlackRock; 36% of pre-merger BlackRock employees are still with the firm.

As for the next decade, Messrs. Fink and Wiedman shared a long list of priorities for BlackRock ranging from the need to refashion retirement saving and investment to be more convenient and transparent as younger generations join the workforce to dealing with fee sensitivity for institutional and retail investors in public market strategies.

Investment strategy development will continue to focus on meeting investor demand for alternative investments, Mr. Fink said, noting that the allocation to private market securities is approaching 20% in many institutional investor portfolios. Investor fee sensitivity is much lower for alternative investments, a trend that's likely to continue, Mr. Wiedman said.

BlackRock's internal solutions unit will remain focused on meeting demand for multiasset portfolios and customized strategies for institutions as the "shift in investor consciousness from products to portfolios" gains strength, Mr. Wiedman said.

BlackRock will continue to expand and innovate within its ETF business, Mr. Wiedman said, noting that the ETF industry is "a long way from maturity." BlackRock will continue to meet growing user utilization with new funds likely including factor-based, fixed-income and sustainable investment strategies, he said.

Mr. Fink said greater investment in technology will be required as BlackRock enhances its Aladdin risk management system to become "the engine that will transform" the firm's investment processes as well as data analysis and operations. Mr. Fink said he anticipates that parlaying Aladdin's risk management system to other financial services companies will be a future source of revenue.

Like many other managers, BlackRock is exploring ways to enter China's huge, largely untapped retirement market where "there could be a big role" for money managers, Mr. Fink said. In addition to penetrating the Chinese market, Mr. Fink said BlackRock's future expansion likely will be "geographic" in Brazil and other growing markets.