BlackRock: Attractive, Stable Option for Investing in the Financial Industry

BlackRock, Inc. (BLK) made headlines late last week as the company announced a blockbuster acquisition. The firm will pay roughly $13.5 billion in cash and stock for Barclays (BCS) Global Investors (the Barclays division which includes the ETF platform known for its iShares products). The deal is a cash and stock offer with BlackRock ponying up 37.8 million shares along with $6.6 billion in cash. Impressively, despite the huge investment, BlackRock was only down a bit over 3% on the news. For large transactions like this, typically the acquiring company trades down sharply on the news as investors fear dilution of their investment.

The deal is likely to go through although there is a third party who had originally made an offer for the iShares platform and now has 5 days to match BlackRock’s offer. Shareholders will also be required to approve the deal and the companies do not expect the deal to close until the fourth quarter. It will be interesting to see if the government steps in to review this deal. Since Barclays could certainly use the capital, it would seem prudent to let the deal go through, but at the same time, global regulating bodies are carefully watching financial firms to make sure that we do not build up systemic risk similar to the scenario which brought the financial industry to a screeching halt late last year.

Financing for the deal appears to be in place with BlackRock raising a significant amount of cash through offering securities to institutional investors (an agreement is already in place) as well as drawing from a new credit facility which has been established with a syndicate of banks. While the company is confident that it can raise this necessary capital, we have seen how quickly financial firms can renege on agreements especially with the changing industry dynamics.

Following the deal, Barclays will own roughly 20% of BlackRock, which could present interesting synergies for the two companies to work together. It is assumed that Barclays will be able to leverage the relationship between the two firms in order to offer BlackRock’s financial products and investment services to both institutional and retail clients. It will take several years to determine if these business lines are compatible, but it appears to be a sound strategy in the early stages. One wildcard will be financial regulation for the entire industry. With Obama making it very clear that financial institutions will not be allowed to grow to a level where they have the potential to bring down the financial system in a manner similar to AIG, growth of large firms in this area could be hampered.

BlackRock is currently trading in a healthy pattern after rallying from a support area around $90. While the firm has certainly not escaped the economic difficulty over the last few quarters, the stock has been stable compared to many of its peers and looks to be in good shape. The company is expected to earn $7.65 next year which puts the PE at roughly 23 times future earnings. It is unclear exactly when synergies from the acquisition will kick in, but these estimates could prove to be conservative if BlackRock is able to create value from this announcement.

While a PE of 23 is a bit higher than I would normally be comfortable with, the conservative nature of the estimates appears to support the stock price. Debt levels are currently very attractive and while the company will increase those liabilities, their ability to raise capital quickly in this type of market is certainly a positive. Over the next year we should see estimates increased and the potential for a higher stock price. At this point, BlackRock looks like an attractive, stable option for investors wanting to participate in the financial industry.

Disclosure: Author does not have a position in BLK.