Bigger is better

The recent acquisition of Barclays Global Investors by BlackRock created the largest asset management firm in the world. The US$13.5bn deal has produced an equity and fixed income shop to rival any in the industry and enabled BlackRock to sweep up Barclays' fast growing exchange traded funds business, iShares, with assets of over $300bn. However, the move has left some consultants and trustees wondering, "What's in it for me"?

BlackRock chairman and chief executive Laurence Fink said his goal was to create a one-stop-shop for clients looking for full portfolio solutions. He said the deal would allow the firm to increase its focus on asset allocation, multi-asset class solutions, fiduciary management, risk management and advisory services.

While the strategies will undoubtedly help the new BlackRock Global Investors expand its footprint, some consultants and trustees are not convinced the deal will significantly benefit existing clients.
One UK-based investment consultant that works with clients across Europe said the deal adds breadth, but not necessarily depth, to BlackRock's offerings. He declined to be named because company policy prevents him from speaking about specific managers to the media.

He said: "What's in it for my clients? Our clients are all driven by performance. Where does this (acquisition) suggest it will raise performance? It doesn't really."

Wurts & Associates director of research Eric Petroff also said having a marketplace of offerings doesn't necessarily translate to better returns.

"I take exception to the whole ‘one-stop shopping' concept. That doesn't have any sort of intellectual backing from an investment standpoint," he said. "It is an operational convenience argument, which has nothing to do with prospective returns."

In discussing the deal, BlackRock's Fink said the new firm would offer customers a more wide reaching service. He said BGI's "deep risk management and analytical capabilities... will help us really bring a stronger equity and quantitative approach to our BlackRock Solutions space, hopefully enriching our alpha generation capabilities."

He added that clients are looking to have fewer managers on their rosters, and want those managers to be able to provide more comprehensive strategies. In a conference call with analysts on June 12, he said, "Having these services and these products in the passive side in both fixed income and equities, in the scientific platform in fixed income and equities, bringing that together with the strength of our active fixed income platform, our strength in equities will bring this unparalleled company to our clients."

He pointed to a recent $10bn win from a client that wanted both equity and fixed income exposure and a $20bn mandate that spans the credit spectrum and equities, as examples of the new services clients want.

Integration
However, while the deal has undoubtedly raised some concerns in the industry it's important to note that the detractors are relatively few. Indeed many trustees and consultants have confidence in Fink's ability to integrate the two companies.

BlackRock has a history of growing through large acquisitions, most notably from its $8.3bn buy of Merrill Lynch Investment Management in 2006. Before that, Fink acquired State Street Research & Management and the funds of funds business from Quellos Group. The Merrill merger was widely seen to be a success and existing clients and market watchers are hoping for a repeat performance.

"Larry Fink is the Babe Ruth of the home run acquisition," said US-based merchant bank Grail Partners' managing director Donald Putnam. "However tempting it is to anticipate that he and his team will be overwhelmed by the challenge, the facts say otherwise. Again and again he has made success appear easy - and in acquisitions past performance is the only indicator of future performance," he said.

Silver Lane Advisors' managing partner Elizabeth Nesvold agreed.

"Larry Fink has always done good deals. He has a strong track record of acquiring good businesses," she said. "It looks like another great buy."

The biggest mistake Fink can make while merging the two companies is disrupting the investment process, said Nesvold, adding it was an unlikely scenario.

"They (BlackRock) know how the gatekeepers tick. Clients don't take lightly to those kinds of changes."

The UK consultant said there was little impact on the UK equities portfolio run by Merrill when BlackRock took over.

"Where there was overlap was on the fixed income side. We saw some key personnel changes and some processes were changed," he said. "That's what we'd expect given BlackRock's capability in fixed income."

Overlap
Product overlap between Barclays, an equity index behemoth, and BlackRock, a member of the US oligopoly of fixed income managers (they compete fiercely with Pacific Investment Management Co. and Western Asset Management Co.) is relatively low. However, overlap does exist in exactly the area Fink is looking to expand - the solutions business.

Officials at BGI would not say how large its solutions business is but BlackRock analyses over $7trn through its solutions platform.

Grail Partners' Donald Putnam said: "There is overlap in alternatives, the solutions business and in a few other areas, but investors should only worry about solutions - it is a crucial expansion initiative and the opportunity is bigger than both teams: it would be a damn shame if they lost a single talented person when the market needs not $100bn but $1trn of this product."

Meanwhile, for BGI, the deal provides an opportunity to get out from under the umbrella of former parent company Barclays Capital and to continue its growth as an independent firm.

Barclays president Bob Diamond said that even before this deal, over 50% of the 50 largest asset management firms in the world were independently owned, up from 30% ten years earlier.

He added: "The rate of growth in assets under management has been double for the independents versus those that are bank owned."

He also said US Employee Retirement Income Security Act and other regulations hampered growth at both BGI and Barclays since the two were prevented from doing business with each other, but that the regulatory hurdles will be removed once the two firms are separate.

The deal still has some way to go and the new firm will have many challenges to face. Fink has admitted the integration could take two years and it will be interesting to see how it will work.

"There are some very big challenges to this deal," said one principal at a New York-based mergers and acquisition advisory shop that specialises in asset management firm, who declined to be named.

"The combined size of this operation doesn't obviously mesh well together," he said. "Is it a deal too far for BlackRock?"

While Mercer worldwide partner Nick Sykes admitted "we don't yet know how they're going to combine the firms." He did point to an unexpected upgrade: having both managers in their line-ups may give clients leeway to negotiate lower fees.