BlackRock Cuts $13.5 Billion Deal to Swallow Barclays Global Investors

In perhaps one of the worst-kept secrets in exchange-traded funds industry history, giant asset manager BlackRock Inc. (BLK) said late Thursday it had finalized a $13.5 billion deal to buy Barclays Global Investors (BGI).

The combined company, to be called BlackRock Global Investors, will represent nearly $3 trillion in assets under management.

Interestingly, Barclays (BCS) will keep about a 20% stake in the new BGI. BlackRock will only have to fork over about half of the estimated deal amount in cash; according to reports, BlackRock is exchanging shares of its common stock to complete roughly the other half of the mega-merger.

Officially, Barclays' original buyer (CVC Capital Partners ) has about a week to try to match BlackRock's offer. But the private equity firm would face a big upgrade in terms. CVC Capital almost had a deal for all of BGI in early April. The price tag at the time was listed at $4.4 billion. But it also came with plenty of strings, including parent Barclays providing much of the financing and an escape clause for the seller if a better bid could be found by June 18. (See related story here.)

And that's just what happened. Nearly two weeks ago, reports started circulating that BlackRock had put together a package that made a deal trumping CVC Capital's highly likely. The stories even detailed Barclays maintaining a 20% stake in the new BGI and many other financing terms. (See related story here.)

Then, last week, reports emerged that pretty much stated Barclays had settled on BlackRock. (See related story here.)

What will be the combined impact on the growing ETF market? Analysts immediately afterwards are looking at the world's largest institutional money management firm and beefed-up ETF provider as dominant in both marketplaces -- especially ETFs.

But others aren't so sure that such a merger will pay huge dividends, at least right away. Some industry veterans point to a shaky history for mega-mergers between asset managers and diversified financial services firms. (Going against that trend, of course, is the fact that BlackRock by most accounts has successfully integrated the former Merrill Lynch money management arm.)

Then again, a revamped BGI faces a number of internal changes cutting at the core of the ETF marketplace. Consolidation has been taking place in both funds as well as asset managers. And many industry veterans are seeing less differences between the types of customers providers service in coming years. (See related column here.)

Still to be resolved as well -- a $175 million buyout clause that CVC is reportedly owed for breaking its original agreement.

In any event, the deal isn't expected to close, barring any unforseen regulatory hurdles such a merger might raise, until late this year.

Original post

Comments

[fwi:]

Do we never learn? Another "too big to fail" situation. BlackRock is not infallible. If it falters, will the Federal Government bail this out too? You may think this is nonsense, but would anyone have thought that Lehman Brothers would fail?

Jun 12 12:40 PM

[optionsgirl:]

What does that mean to the individual investor that invests in etf's and etn's? Would this alter the investor's risk? How?

Jun 12 12:48 PM

[Marco Hickey:]

Well written, this will certainly be interesting to see how it unfolds.

Jun 12 01:57 PM

[Moon Kil Woong:]

FWI: Great insight. Overly large consolidated financial industries are an economic detriment, not a benefit. Even if they are able to use economies of scale to shove out minor players, their premium position often leads to rampant abuse in unscrupulous hands. We should be trying to find ways to make financial companies bite sized and competitive, not growing yet another mega-institution.

Sadly, Washington favors the big. Only they can deliver the types of lobbiests that can feed insiders (rich ones with lots of dubious ways to circumvent legal restrictions).

Jun 12 02:24 PM

[Graham and ...:]

The big just get bigger. Hopefully, that doesn't mean "more efficient," because then the rest of us are doomed.

Jun 12 02:57 PM

[worrier:]

FWI and Moon Kil Woong: I totally agree with you. Think about if 1/3 of 401k is managed by one asset manager, won't any law to make this asset manager not to lose money on their gamble in the market be passed under the title of "benefiting main street"? Then who shall care about making right decision on buying or selling stocks? Who shall care about this seeking-alpha site? BlackRock realized more than anyone else of the power of government these days. Check who is managing Bear Stern, AIG toxic assets and who has the biggest exposure to MBS, CMBS, which Treasury promoted private buying by providing short-term lending to investment management firms. Used to be scary of government intervene, BlackRock is rushing itself to be a member of "too-big-to-fail" club, because although we all love capitalism, who wants to be a failure?

Jun 12 04:32 PM

[andruomail:]

Wouldn't the only risk to the ETF investor be if the fund had to liquidate all assets because the manager went out of business? Kind of like a forced sale. Maybe answers would be in the ETF prospectus as to what would happen if Blackrock failed.

Jun 12 07:30 PM

[Living4Divi...:]

Too Big to fail isn't applicable to mutual fund / etf companies.


On Jun 12 12:40 PM fwi wrote:

> Do we never learn? Another "too big to fail" situation. BlackRock
> is not infallible. If it falters, will the Federal Government bail
> this out too? You may think this is nonsense, but would anyone have
> thought that Lehman Brothers would fail?

Jun 13 06:51 AM

[Living4Divi...:]

since I own Barclays commons stock, I am happy and sad
Sad: Barclays jettisoned their crown jewel
Happy: Now Barclays is is sure to have enough money to pay their dividend.

so that's good for me.

Jun 13 06:52 AM