BlackRock & BGI: Why Everyone Loves The New Giant On The Block
In an industry under fire for lousy management practices, dodgy accounting, and doing deals which don't make long-term financial sense, BlackRock's potential acquisition of Barclays Global Investors stands out as having gained the market mob's approval.
Thursday, mutual fund leader BlackRock announced that it was in talks to buy BGI in a deal which would value the indexing giant at around $13.5 billion, and create a combined corporate umbrella managing $2.8 trillion in assets. In other words, a united BlackRock-BGI would be more than twice the size of the entire hedge fund industry.
The deal is a bigger gamble to take than it usually would be for BlackRock, coming at a time when largeness is not exactly in vogue in the financial services industry. And now it appears that Barclays's president Robert Diamond Jr. will personally net $26 million from the deal. Large payouts to senior management cannot be said to be well-received right now, either.
But reception to the deal has been broadly positive. Mostly, this is because a combined BlackRock-BGI is a textbook example of the purpose M&A departments should serve.
BGI's iShares EFT products are hugely popular with investors, and account for around half of the U.S. ETF industry. ETFs are seen by many as a fundamentally lower-risk way to gain volatile exposure to niches of global and domestic economic growth. Around $1 trillion of BGI's $1.5 trillion in assets are in indexed products. That contrasts with BlackRock's pick-and-choose approach to investing.
In addition, management synergies between the two are expected to be fairly strong. Barron's reports Monday that while the combined firm will have more than 9,000 employees in 24 countries, BGI has been using BlackRock Solutions software for fixed income for seven years, so many BGI employees won't have to learn a whole new tech system.
In addition, while BlackRock has an active management team, BGI's is more passive. But that presented no challenge for BlackRock when it bought Merrill Lynch Investment Managers two and a half years ago, writes Barron's Tom Sullivan. Apparently, personnel integration and the product lineup for the newly-combined firm was well thought-out before the merger went ahead. There is expected to be about 80 percent synergy between BlackRock's and BGI's products.
That's a refreshing change from many deals in the financial services sector, where both of these factors often create hair-raising problems for employees and customers alike. Consider the ill-fated acquisitions of Dean Witter's Discover Financial Services by Morgan Stanley, or Citigroup's recently divested (to Morgan Stanley) Smith Barney unit.
BlackRock's acquisition of BGI will also give it a leg up in the white-hot emerging markets and in commodities -- two areas which will stop the firm's growth from stagnating for some time. Growth stangnation is a situation that befalls most major money managers.
In a nutshell, the deal gives BlackRock the opportunity to consolidate its own asset management products with BGI's, and give investors more of what they want. It's a win-win scenario for company and customer alike -- which is definitely a rarity in big M&A deals.