Published June 13, 2009

World's biggest asset manager is born

BlackRock buys Barclays Global Investors for US$13.5b to vault ahead of rivals

By NEIL BEHRMANN
IN LONDON

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BLACKROCK'S agreement to buy Barclays Global Investors (BGI) for US$13.5 billion, equally in cash and BlackRock shares, will create by far the world's largest asset manager.

MR DIAMOND The Barclays president stands to gain around US$26 million from the deal

The deal alters the multi-trillion asset manager rankings and is likely to presage further consolidations in firms that were damaged in the global bear market that lasted from October 2007 to March 2009. BlackRock Barclays Investors, as the new firm will be called, will manage an awesome US$2.7 trillion, about 3-5 per cent of the global asset management industry, Barclays said in a press conference. It is a giant step forward for BlackRock, a 21-year-old company which relied heavily on acquisitions to grow from a one-room bond investment firm into the largest publicly traded US money manager.

The new entity will be well ahead of rivals State Street Global, Allianz Group, AXA Group and Fidelity Investments, which, following the bear market, manage assets well below US$2 trillion. More importantly, it will give BlackRock global reach as BGI has operations in 15 countries.

According to a presentation to investors, North and South America account for two-thirds of BlackRock Barclays assets under management; Europe, Middle East and Africa a quarter; and Asia-Pacific 8 per cent. Asia-Pacific accounts for 13 per cent of 9,000 employees worldwide. Barclays executives said that Asia was a growth area and the merger was unlikely to result in layoffs there.

For Barclays, which had earlier refused government assistance despite rocky times that saw investors such as Temasek Holdings sell their stake, the deal is a god-send. It will strengthen its balance-sheet and expects a net gain on sale of US$8.8 billion. Barclays president Robert Diamond will not do too badly from the deal himself, and stands to gain around US$26 million.

The combined group manages a vast array of products from fixed income, equities, hedge funds, private equity and real estate and commodity funds. It will be especially strong in the fast growing Exchange Traded Fund (ETF) product and index range which account for US$526 billion or about a fifth of total assets, according to a BlackRock presentation. These low-cost funds are very popular with retail investors who have become disenchanted with higher cost mutual funds that lost money in the bear market.

Institutional clients such as pension funds, insurance companies and sovereign wealth funds account for around US$2.2 trillion.

BlackRock, predominantly in institutional business and fixed income products, benefits because of Barclays wider retail base. Its rival, Pimco, is now at a disadvantage because of the BlackRock entry into ETFs. BlackRock and BGI have a strong offering of hedge funds which is a lucrative money spinner for asset managers because of their high fees.

BlackRock has expanded rapidly via acquisitions - three years ago, it purchased Merrill Lynch's fund unit for US$8.6 billion.

The deal exceeds an earlier agreement of Barclays Bank to sell just the iShares exchange-traded-fund business of BGI to private equity group CVC Capital. Unless CVC, a private equity business, can come up with a better offer, it will receive a break fee of around US$180 million from Barclays, a director said.

Instead of fully owning BGI, Barclays Bank will now have a 19.9 per cent stake in the enlarged business.

The money received from the deal substantially improves Barclays Bank's capital base to take pressure off an institution which lost considerable amounts from non-performing assets. It will boost the bank's tier 1 capital ratio, a key measure of a bank's ability to pay debts of all types, to 8 per cent.

Such was its plight last year that its shares collapsed on concerns that the UK government would take a major stake in the bank.

Barclays' Mr Diamond added that the sale would allow the group's Barclays Capital investment banking arm to do more business with the fund manager. Previously, Barclays Capital had been restricted in the deals it could do for BGI because they were part of the same group, he noted.

Barclays fell 1.6 per cent in morning trading yesterday, having soared by around 17 per cent in recent days. BlackRock's stock is up by 15 per cent since the start of the month and 36 per cent since the beginning of 2009.

BlackRock chief executive Laurence Fink said that the combined companies' market capitalisation would be about US$34 billion.