BlackRock (BLK), considered the favorite to land highly coveted iShares, announced Thursday evening that it had agreed to acquire Barclays Global Investors (BGI), including its market-leading iShares ETF platform, from Barclays PLC. The combination of the two firms marries leaders in both active and passive asset management strategies to create one of the largest investment management companies in the world. The combined entity, which will do business under the name BlackRock Global Investors, will have assets under management (AUM) of approximately $2.7 trillion.
Barclays had previously agreed to sell its iShares platform (separate from the rest of BGI) to CVC Capital Partners for $4.4 billion. But the terms of that preliminary deal included a "go shop" clause that allowed Barclays to search for a more competitive offer until June 18. With several of the world's leading asset management firms having missed out on an early entry to the ETF game and now looking to play catch-up, speculation swirled around a number of potential buyers in recent weeks. Although CVC has the right to make a counteroffer at this point, the private equity firm isn't expected to have much interest in matching the blockbuster offer now on the table. CVC won't walk away empty-handed though - the firm is entitled to a $175 million breakup fee if iShares ends up in the hands of another bidder.
Under the terms of the cash/stock deal, BlackRock will acquire BGI for 37.8 million shares of stock and $6.6 billion in cash, amounting to a total price tag of approximately $13.5 billion. The stock component will represent a 4.9% voting interest and an aggregate 19.9% economic interest in the combined firm. While BlackRock is no stranger to growth through acquisition, this deal represents its largest transaction to date, topping the 2006 acquisition of Merrill Lynch Investment Managers for $9.6 billion. BlackRock shares have soared in recent weeks in anticpation of a deal, rising 15% since the start of June and more than 35% on the year.
Although BlackRock was widely expected to snare iShares in recent weeks, many other active management powerhouses, including Charles Schwab, Northern Trust, Fidelity, BNY Mellon, and Vanguard, had been rumored to be in hot pursuit as well. Having missed out on iShares, it's unlikely that these firms will retreat to the sideline and watch the ETF boom continue without them. The numerous new fund launches and substantial fund inflows are a testament to the tremendous potential and staying power of the industry. While management fees don't come close to what can be earned in the active arena (hence the popularity of ETFs), there is no doubt money to be made in ETFs. The trends are difficult to ignore, especially for companies with little or no interest in passive management strategies.
So don't be surprised if the iShares deal sets off a wave of M&A activity in the ETF arena. The grand prize may be gone, but there are a number of well-established fund sponsors that would allow a potential acquirer to accelerate their entry into the ETF industry. The takeover candidates left on the market include:
- State Street Global Advisers: SSgA maintains more than 80 ETFs, including the trailblazing and ultra-popular SPY. Although the sponsor has expressed no interest in selling, State Street Corporation (STT), already a participant in the Troubled Asset Relief Program (it recently announced plans to repay TARP funds), could potentially find themselves looking to raise capital if the financial industry hits another rough patch.
- PowerShares: Although not typically mentioned in the same breath as iShares and SSgA, PowerShares has quietly become a major player in the ETF industry, with more than 120 funds having a total market cap of more than $25 billion. Known for its innovative ETFs and widely-held QQQQ, an acquisition of PowerShares would certainly allow an outsider to make a splash in the ETF arena.
- WisdomTree: Known for its non-traditional index weightings, WisdomTree is a smaller ETF sponsor that could attract takeover interest. With about 50 funds and total AUM of more than $3.8 billion, WisdomTree could be a modest acquisition for a firm trying to gain a foothold in the industry.
Disclosure: No positions.