BlackRock Lands iShares for $13.5 Billion: Who's Next?

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.

Gone Shoppin'

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.

Who's Next?

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.

Comments

[Living4Divi...:]

Great article ! I own Barclays so that's good for me.

Jun 12 12:39 PM

[Marco Hickey:]

Nicely written. I am regretting selling my call options on Barclays which I got in near the bottom now... Sigh

Jun 12 02:04 PM

[Between The...:]

I love ETFs, they are a great way for a sponsor company to do basically nothing and then pass the savings on to the investor. They make sense for all types of investors and investment goals, so continued growth in the industry is likely for years to come considering that ETFs are still only a small slice of the mutual fund pie. I'd love to see some more targeted bond ETFs come on the market, and there is still lots of room to grow in the non-equity ETF markets (commodities, real estate, bonds, etc). PowerShares has really made some waves with their leveraged indexes (not that they don't come without issues), and WisdomTree's offerings are creative and try not to replicate existing ETFs exactly. Both would be a great play for companies that could afford to buy them without going crazy on the leverage (because tends to AUM grow slowly and ETFs can't charge fees to make big margins).

Jun 12 05:32 PM

[Moon Kil Woong:]

For some reason I feel like we are, once again, breeding an new to big to fail institution. I suppose regulators will not comment. Any deal is a good deal for them. Even if it's a too big to fail bank buying up another too big to fail bank (does that make it a four big to fail bank?).

Jun 15 06:59 AM

[Mad Hedge F...:]

It is big. “It’s hard to believe that with more regulatory oversight and less leverage permitted, that return on equity is not going to fall,” said Bob Doll, co-chairman at Black Rock, the world’s largest money manager.

Jun 15 11:15 AM