Big day at BlackRock (and Merrill Lynch)
US-based asset management arm of stockbroker Merrill Lynch and investment firm BlackRock announced a merger to create a company valued at $19 billion. The new company will manage a combined portfolio of over a trillion dollars, mostly in funds. Merrill is a major player in stock mutual funds, while BlackRock is a leader in bond funds. The new company will have nearly as much under management as FMR (Fidelity), the #1 asset management company. The news of the merger comes after Morgan Stanley's failed attempt to buy BlackRock.
70% of BlackRock is currently owned by PNC Financial Services Group.. PNC Financial Services is primarily a banking company that owns Pennsylvania-based PNC Bank and recently acquired Riggs Bank (2005) and United National Bancorp (2004).
Merrill Lynch will end up owning 49.8% of the new company. The reason for the minority position was that Merrill Lynch's brokerage rivals might not want to sell the financial products of a Merrill Lynch-controlled company.
Current Merrill investment products have either the Merrill or the Mercury Advisors name. Merrill bought Mercury Advisors, a major UK-based investment firm in 1998 for $5.3 billion. Those names will be dropped in the US, while the Merrill Lynch name will be used by the company for three years abroad, where it has strong recognition in Europe.
According to a Financial Times story ("Merrill and BlackRock seal deal, 2/16/06), Larry Fink, CEO of BlackRock and of the new firm said that the motive for the merger was in a desire "to provide 'acquisition currency' ahead of 'large-scale consolidation' in the asset management industry." In other words, these companies want to get ahead of an upcoming stampede of investment firms.
One of the motives of the merger is to improve global operations. According to another Financial Times article ("Merger partners hint at further deals", 2/16/05)
Mr Fink said the merger would allow the company to take advantage of fast-growing international opportunities. '"The Merrill Lynch platform in Europe is incredibly powerful and both companies have good operations in Asia - but not great operations in Asia.
The deal represents a change in consolidation strategy for financial firms, changing from a conglomerate pseudo-synergy model to one of making ever bigger global specialists. A Wall Street Journal article written before the deal was finalized ("Funds for Funds' Sake: A Merrill-BlackRock Deal" 2/13/06) has it right:
Firms were once intent on building vertically integrated giants, which could underwrite stocks and bonds, manage mutual funds, and sell the funds to individual investors via retail sales networks. That model has essentially been curtailed, as the Wall Street firms found that their own mutual funds often underperformed independent offerings.
The other pressure, as another WSJ article ("Merrill Deal Hastens
Wall Street Retreat From Funds", 2/14/06) points out, was that the practice of brokerage firms and banks selling their own mutual funds drew the attention of regulators because of conflicts of interest.
As a result, the article points out, there has been a flurry of unloading in-house funds in the past year.
So now, many financial companies are giving up on fund management. Last summer, Citigroup Inc. swapped its money-management group for Legg Mason Inc.'s brokerage arm. Two months ago, insurer Northwestern Mutual entered a deal to sell its Mason Street Funds to American Century Investments and Federated Investors Inc. Around the same time, First Tennessee Bank decided to get out of the fund business by merging its funds into a fund group run by Goldman Sachs Group Inc. Last June, AmSouth Bancorp sold its $5.5 billion fund group to mutual-fund company Pioneer Investments.
The BlackRock/Merrill deal is yet another refinement in the search for the well-balanced oligopoly set up, not a retreat from consolidation but a rethinking of consolidation.
