Shock And Awe

June 12, 2009

BlackRock’s $13.5 billion deal raises the valuation bar.

ETF and index people the world 'round are smiling today. $13.5 billion is a big number. And this BlackRock deal is big not just for the index/ETF industry, but the financial sector in general. It underscores just how big basis-point-linked passive assets have gotten.

As I said a couple days ago in my blog titled BlackRock IS the Buyer (Paul Amery has a nice follow-on blog there as well), this is a powerhouse deal. It’s a deal that minces no words, and says what it means. And what it means is we’ve suddenly got a global behemoth, THE global behemoth of an asset manager, with $2.7 trillion in assets. Good lord. And frankly, on paper at least, it’s a marriage made in heaven, with BGI in a dominant position where BlackRock is mostly absent: ETFs and institutional indexed asset management.

So, wow.

There are a lot of questions that come to mind. Here are a few of them, which I’ll leave you to ponder:

  • How did this deal go from $4.2 billion to $13.5 billion? The short answer is that it included not just iShares (it now makes that piddly $175 million buyout of the CVC Capital Partners deal seem like an afterthought). Still, the reported bids for the entire BGI entity were just $6 billion-plus. We’ll dig around some more (more than double is a BIG difference), but there was either misreporting, or this is apples-to-oranges. The other deals that were announced were highly leveraged. That is certainly one factor.
  • Did this deal just come up from out of the blue? No. Other comments of note are that, according to the New York Times article posted this morning, the merger/takeover has been in certain people’s minds for 6 years. Also of interest is that much of the funding came from Middle Eastern investors – an interesting angle (you can see why in Paul’s earlier reporting on the transaction).

Here are some other big questions I DON’T have the answers to (thanks to Matt Hougan, whom I’d discussed this with yesterday, as Dagen McDowell was queueing up a Fox Business News interview with BlackRock CEO Larry Fink and had asked for our thoughts):

  • Will BlackRock commit to keeping the iShares expense ratios at or below their current levels?
  • How will this deal affect the launch (or not) of actively managed ETFs? iShares was certainly looking at it. Does this deal accelerate that process or put it to a grinding halt?
  • Will there be significant layoffs as the two operations combine and find economies of scale?
  • How much autonomy will existing iShares and BGI people have in the new organization?
  • Will the added scale of a combined BGI and BlackRock allow them to lower the cost of quality management? (Presumably the answer is yes; the question is how much of that efficiency will be transferred to investors and how much to the BlackRock bottom line.)
  • Where does BlackRock consider the future of asset management to be ... with active funds, a passive core with active satellites or passive funds applied actively?
  • Does BlackRock feel like it is getting a deal ... finding a gem amid the financial crisis wreckage?
  • What is more intriguing to BlackRock - BGI or iShares?
  • Given BlackRock's (very) active tilt, how strongly do they believe in passive management? After all, they suddenly became the largest index player in the world. Do they believe in the business or do they just want the share lending revenue?
  • How active a role will Barclays (now approximately a 20% stakeholder in the new combined entity) play in shaping what BlackRock does? Remember, also, that Bank of America (through Merrill Lynch) has a significant stake in the merged group (35%, according to today’s Financial Times).

There is no shortage of interesting questions to look at.


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