Back in April, private equity firm CVC Capital Partners Group agreed to acquire Barclays PLC's (NYSE:BLC) iShares business for $4.4 billion. At the time, the media heralded the deal as a new chapter in the history of the ETF marketer. A few months later, we've seen this isn't the case. Swooping in to steal CVC Capital's thunder is investment manager BlackRock Inc. (NYSE:BLK), which agreed on June 16 to pay Barclays $13.5 billion for all of its investment management businesses, including its iShares division. CVC Capital walks away with a $175 million break up fee; Barclays retains 19.9% ownership in BlackRock Global Advisors (the merged company's new name) while gaining some much needed cash, and BlackRock snags one of the best passive investors anywhere. On paper, the acquisition seems like it can't lose. However, anything can happen when you mix corporate cultures, casting a large doubt over its ultimate success.

IN PICTURES: Top 7 Bank Failures


The Stakes are High
The combined businesses will manage $2.7 trillion in assets, employing 9,000 people in 24 countries, and become the world's biggest investment manager, in charge of more assets than Fidelity Investments and the entire hedge fund industry combined. In addition to Barclay's 19.9% interest, PNC Financial (NYSE:PNC) and Bank of America (NYSE:BAC) will both have significant ownership positions in the new company. Is this a case of "two's a company, three's a crowd"? Time will tell.

A Clash of Ideals
Mergers and acquisition research shows that deals fail to deliver shareholder value 70% of the time, according to China Market Research Group. Those are awfully long odds for BlackRock. Its shareholders better hope CEO Larry Fink isn't just playing an ego game. While his boat may be the biggest going, it won't be for long if this marriage comes unraveled. Clearly, the key to a successful integration is fitting iShares $526 billion in exchange-traded funds, many investments in fixed income holdings into BlackRock's existing retirement and defined-benefit plans.

By doing so, it hopes to take some business away from

competitors State Street

(NYSE:STT), Northern Trust (Nasdaq:NTRS), Fidelity and others. These days it seems investors are moving away from active investments into more passive ones. Fink believes getting bigger through this specific acquisition makes too much sense to pass up. Maybe so, but you would think the top brass at BlackRock view the task of investing in a completely different manner than those at Barclay's. Bringing the two mindsets together as one won't be easy.

Retail Investors Won't Benefit
This deal isn't going to benefit average investors who own mutual funds and ETFs in their 401(k). Rather, it's about providing the broadest range of products and services humanly possible to pension funds and institutional investors that handle these retirement plans. It's a matter of convenience for these firms and consolidation helps make this possible. The classic example is Jarden Corp (NYSE:JAH). Its CEO, Martin Franklin, believes a greater range of products to bring to larger retailers like Wal-Mart (NYSE:WMT) simplifies the buying process, saving the world's biggest company time and money. It's supposed to be a win/win situation. Unfortunately, in the case of mutual funds, economies of scale aren't resulting in lower fees. In fact, the opposite is true. Vanguard Group, known to many as the house Jack (Bogle) built, recently increased the annual management fee that it charges for its U.S. Value fund (VUVLX) by 24%, from 37-46 basis points, and it did this after losing 35% in 2008. Do you still think this deal is about the little guy?

The Bottom Line
In a conference call on June 12, Fink told analysts, "This is in the forefront of a big consolidation wave in the asset-management business." He's definitely on a mission, and ultimately he might be proven correct. But is the toll the integration will take on the two companies worth the cost, financially or otherwise? (Learn about how to invest in companies before, during and after they join together in our article The Merger - What To Do When Companies Converge.)

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  3. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  4. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  8. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  10. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  4. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  5. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  6. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  4. What are the best ways to use your 401(k) without a penalty?

    The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>
  5. Can I take my 401(k) in a lump sum?

    Establishing a retirement savings plan during your working years is a necessary part of comprehensive financial planning. ... Read Full Answer >>
  6. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!