BlackRock has drawn scrutiny for the scope of its reach throughout federal bailout programs; it helps manage many of the Treasury Department’s big investments, like AIG, the New York Times reported last month. In addition, Blackrock announced in March that it would participate in the government’s toxic-asset program [4] as a private investor. (A BlackRock managing director told the Times that the company is very sensitive to potential conflicts of interest.)

BlackRock to Buy Barclays Fund Unit for $13.5 Billion
By Sree Vidya Bhaktavatsalam, Christopher Condon

BlackRock Inc., started 21 years ago in a one-room office by former mortgage-bond trader Laurence Fink, agreed to buy Barclays Plc’s investment unit for $13.5 billion to become the world’s largest money manager.

BlackRock will pay $6.6 billion in cash and the rest in stock for Barclays Global Investors, the New York-based company said today in a statement. Barclays will hold a 19.9 percent stake in the combined company. Financing will include $2.8 billion from the sale of equity to institutional investors and as much as $2 billion in loans from Barclays and other banks.

The purchase, the biggest of a fund manager, creates a company overseeing $2.7 trillion in assets, more than the Federal Reserve. BlackRock will add about $1 trillion in investments that track market indexes, which are attracting clients at the expense of funds whose managers choose securities to buy and sell. It’s the first top-ranked firm to attempt to combine both types of businesses.

“This will bring the greatest sweep of products to our clients,” Fink, BlackRock’s chairman and chief executive officer, said in a telephone interview. “This transaction is transformational.”

Barclays, the U.K.’s third-largest bank, agreed in April to sell BGI’s IShares exchange-traded fund unit to London-based CVC Capital Partners Ltd. for $4.4 billion. The bank, which is seeking to raise capital to replenish loan losses, had until June 18 to find a better deal for IShares or all of BGI, which analysts last month valued at more than $10 billion.

Combined Value

The private-equity firm, which has until June 18 to match BlackRock’s offer, is unlikely to submit a higher bid, said a person familiar with the talks, who declined to be identified. CVC will instead receive a $175 million breakup fee. Officials at the firm declined to comment today. Barclays can no longer solicit bids for San Francisco-based BGI from other buyers.

The combined company will have a market value of more than $34 billion, Fink, 56, said on a conference call. The deal will add to per-share cash earnings by 10 percent in 2010, he said.

“It looks like a good price, a strong gain and it removes the rights issue prospect for Barclays,” said Simon Maughan, an analyst at MF Global Securities in London who has a “buy” rating on Barclays. “It will allow Barclays to redeploy capital in Barclays Capital for at least as good a return as BGI.”

Barclays will have a net gain of $8.8 billion from the sale, which will increase its core Tier 1 capital ratio, a measure of financial strength, by 150 basis points to 8 percent as of Dec. 31, 2008, the bank said in a statement.

Shares Fall

Barclays fell 12.5 pence, or 4.1 percent, to 292 pence in London. The shares have gained 90 percent this year, the best performance in the five-member FTSE 350 Banks Index.

BlackRock dropped $6.04, or 3.3 percent, to $176.56 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has gained 32 percent this year, compared with a 0.5 percent rise by the Russell 1000 Financial Services Index.

John Varley, Barclays’ CEO, and President Robert Diamond will join the board of the new company, to be called BlackRock Global Investors. Blake Grossman, CEO of the Barclays investment unit, will be a vice chairman of BlackRock.

Diamond, 57, stands to make a $26 million profit from the sale of his stake in BGI, the company said. He was awarded BGI options and bought stock before joining its board in 2005. Diamond’s payout comes from a total of about $576 million to be shared by 410 BIG executives.

Barclays will have a 4.9 percent voting interest in the company, with restrictions on the sale or acquisition of shares. It will have the right to maintain its ownership percentage if BlackRock issues additional shares in the future.

Stakes Diluted

Bank of America Corp., based in Charlotte, North Carolina, will see its stake in BlackRock drop to 34.2 percent from the 47 percent it held on March 31. Pittsburgh-based PNC Financial Services Group Inc. will own 24.6 percent, down from 32 percent.

Barclays, along with Citigroup Inc. and Credit Suisse Group AG, will provide BlackRock with a 364-day revolving credit line of as much as $2 billion. BlackRock plans to refinance any use of the credit with proceeds of term-debt financings.

A group of undisclosed investors agreed to buy 19.9 million new shares for about $140.70 each, BlackRock said. That’s a 10 percent discount to the 10-day moving average of the stock price prior to the agreement, Fink said on the call.

BlackRock, currently the No. 3 fund company, and Bank of New York Mellon Corp. were the main bidders for BGI and its $1.5 trillion of assets, the most in the industry.

Fink’s Edge

Fink was able to win BGI partly because the company’s stock price has risen 36 percent this year, compared with a gain of 2.2 percent by BNY Mellon. State Street Corp., which has $1.44 trillion in assets, mostly in index-based products, probably was hindered by antitrust concerns.

The BGI deal pushes BlackRock past State Street and widens the lead over Fidelity Investments, an active manager with $1.25 trillion in assets. Both rivals are based in Boston.

BGI is Europe’s biggest hedge-fund firm, Canada’s largest independent manager of pension-fund assets and Japan’s No. 1 firm with discretion over client holdings, according to the company. Barclays Global’s pretax profit fell 19 percent to $595 million last year as financial markets plunged.

The fund industry is split between companies that actively manage investments and those that try to match the performance of indexes such as the Standard & Poor’s 500.

Marriage of Styles

There has never been a marriage on this scale between managers with differing investing styles, said Geoff Bobroff, president of Bobroff Consulting Inc. in East Greenwich, Rhode Island, who advises mutual-fund companies.

The deal will build on Fink’s $8.5 billion takeover of New York-based Merrill Lynch’s investment unit in 2006, which enabled BlackRock to add stock funds.

BlackRock managed $1.28 trillion as of March 31, including $474 billion in bonds, $322 billion in cash products, $266 billion in stock funds and $52 billion in alternative investments such as hedge funds. BlackRock also advises clients on $169 billion in assets including distressed-debt and mortgages.

The company is known mainly for its active stock and bond funds, such as those overseen by Robert Doll, global investment chief of equities, and Scott Amero, chief investment officer of fixed income.

Asset Mix

BGI’s assets included $829 billion in stocks, $427 billion in bonds and $159 billion in cash as of Dec. 31, the most recent breakdown on its Web site. More than 70 percent was tied to indexes, including IShares exchange-traded funds. The firm has more than 2,800 funds that track about 250 indexes worldwide.

The combined company will have more than 9,000 employees in 24 countries.

ETFs accounted for $375 billion of BGI’s assets as of May 31, giving it 48 percent of the market, according to a June 7 research report from BGI. ETFs typically track indexes and trade throughout the day like stocks.

The ETF business will give BlackRock an advantage over Pacific Investment Management Co., its biggest fixed-income rival. The Newport Beach, California-based firm, founded by Bill Gross, is starting to build an ETF roster.

Fink is adding funds at a time when customer redemptions and market declines have slashed assets under management at BlackRock and its competitors. First-quarter net income fell 65 percent to $84 million.

Index Funds Gain

While investors withdrew a net $230 billion from U.S.- registered stock and bond mutual funds in 2008, they added $34 billion to index funds, according to the Investment Company Institute, a Washington-based trade group. Exchange-traded funds, which aren’t included in the institute’s mutual-fund data, added $177 billion.

Diversified U.S. equity index funds declined 38 percent in 2008, edging out their active peers, which fell 39 percent. That helped persuade more investors to move to passive investing.

Active funds have performed better this year. Diversified active U.S. equity funds returned an average 10 percent through June 10, compared with a gain of 7.3 percent for diversified equity index funds.

BGI was created in 1996 when Barclays bought Wells Fargo Nikko Advisors and merged it with its BZW Investment Management unit. Wells Fargo Nikko had been a joint venture between San Francisco-based Wells Fargo & Co. and Tokyo-based Nikko Cordial Securities Inc.

BlackRock will receive a $45 million termination fee if CVC doesn’t match the BlackRock offer and Barclays’ shareholders don’t approve the deal, the bank said in its statement.

Citigroup and Credit Suisse served as lead financial advisers to BlackRock. Bank of America’s Merrill Lynch unit, Morgan Stanley and Perella Weinberg Partners provided additional advice. Skadden, Arps, Slate, Meagher & Flom was legal counsel.