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Rating:Merrill Lynch Fund Arm is in Play Not Rated 0.0 Email Routing List Email & Route  Print Print
Monday, February 13, 2006

Merrill Lynch Fund Arm is in Play

by: InvestmentWires Staff, 

Did The Wall Street Journal get spun by Merrill Lynch? A close reading of its Monday morning article sure makes it look that way. The paper seems to have taken a straightforward sale of Merrill Lynch's asset management arm and transmogrified it into a purchase by the brokerage giant.

In the upside-down world created by that successful spin, the shares of BlackRock rising as much as 14 percent on word of the deal even though the shares of a buyer typically fall on the news of a purchase.

The bottom line on the deal, though, is that it would add $538 billion of assets to BlackRock's pot and move Merrill Lynch out of the asset management business. That looks like a sale to these eyes.

Even more, at $8.4 billion for the pot, BlackRock looks to be getting a steal. That price works out to just 1.8 percent of assets in a market that often sees asset management firms sold at 4 percent of assets under management or more.

That Merrill Lynch would sell its asset management arm is not a surprise, in fact, that it is planning to do so has been the rumor du jour since MLIM was rebranded as Princeton Portfolio Research & Management last month.

The sale of the unit would allow Merrill Lynch to sharpen its distribution focus and remove a perceived conflict in the eyes of its brokerage clients that comes with being both a fund manufacturer and distributor.

Meanwhile, BlackRock would presumably gain favored access to Merrill Lynch's 15,160 brokers, something the institutionally-focused asset manager desperately needs if it is to successfully break into the retail fund world.

The deal also brings BlackRock immediate heft and credibility in the equity management business (its institutional business is almost entirely focused on fixed income mandates).

Finally, Rhode Island consultant Geoff Bobroff points out that the deal would enable BlackRock CEO Laurence Fink and other top insiders to reset their price on shares and options.

The deal could also allow Fink to take more control over the firm since he would no longer have to deal with an outsider holding a controlling stake. Currently PNC Bank owns 70 percent of BlackRock. The account in the WSJ suggests that BlackRock will issue new shares to Merrill Lynch to pay for its asset management arm. That would roughly double the shares in the firm, driving PNC's stake to just 35 percent. Meanwhile, Merrll Lynch will hold just 49 percent.

That ownership structure would allow Fink to set the firm's course in cases in which PNC and Merrill are divided.

BlackRock would also take some talent from Merrill Lynch, including MLIM chief Robert Doll who would serve as vice chairman and chief investment officer for equities.

There are downsides for BlackRock in the deal. The biggest is whether it can retain Merrill's clients. Many institutions automatically kick off an search for a new manager when they hear of a deal (or a potential deal).

Another potential hurdle will be melding BlackRock's staff with its institutional background with the employs from Merrill Lynch who are used to dealing with a retail-focused business.

If talks with BlackRock do not pan out (the WSJ reports stresses that the deal could still fall apart), look for MLIM to remain in play.

Bobroff points out that a similar deal could be struck with fixed-income manager PIMCo, which has a majority owned by Alliance. Like PNC, Allianz may see a deal as a way to lessen its U.S. investment and like BlackRock, PIMCo's headstrong management may see a deal as a way to gain more independence.

Otherwise, the most likely buyer for MLIM would be another publicly traded firm that is able to use stock rather than cash to fund the deal. Likely suspects would include Nuveen and T. Rowe Price, according to Bobroff. 

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