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