Merrill Lynch has agreed to merge its asset-management business with BlackRock in exchange for a nearly 50 percent stake in the money manager, the two companies said Wednesday. The move recasts BlackRock as the largest publicly traded money manager and could signal the end of Merrill’s proprietary fund woes.
The deal marks the biggest asset-management merger in history and has far-reaching implications for rank-and-file reps as well as the financial-services industry at large. By unbundling its asset-management business, Merrill is endorsing an open architecture platform, where third-party asset managers are welcomed in its 15,160-strong distribution force. In fact, Merrill seems to be distancing itself from the perceived conflicts of interest inherent in selling proprietary funds, which have not performed well historically compared to funds sold by pure-play asset managers, and have also drawn the ire of regulators. [The SEC and NASD have slapped fines and sanctions against a number of firms, including a $50 million demerit to Morgan Stanley for holding sales contests that rewarded brokers recommending house funds over non-proprietary funds without proper disclosure. (Indeed, the proprietary funds model was one of former CEO Philip Purcell’s legacy’s to Morgan; for more, see our April 2004 cover story, “Trouble In The House That Purcell Built?”)]
“Most registered representatives are uncomfortable because of real or perceived conflict of interest in selling homegrown product,” says Burton Greenwald, a mutual fund consultant in Philadelphia. “On a broader scale, it underscores the importance of asset management being the primary business of the firm rather than just one sector.” The move is also an attempt to increase Merrill Lynch Investment Managers sales in third-party channels. “This deal should accelerate our efforts to increase third-party distribution because now we don’t have to birth a brand,” says Robert Doll, president and CIO of MLIM. “We actually have a brand that has recognition with positive association in the marketplace, products to go with it and some relationships in third-party that we don’t have. It also gives us more of an appearance of independence from the financial advisor,” Doll says.
The asset swap, which is expected to close in the third quarter of 2006, would combine MLIM with BlackRock making it the No. 2 mutual fund powerhouse behind Fidelity with assets totaling about $1 trillion. The transaction comes just a few weeks after rival Morgan Stanley ended negotiations to buy BlackRock outright. Under the terms of the deal – pending regulatory approval – Merrill Lynch will receive a 49.8 percent stake in BlackRock, and it will have a 45 percent voting interest in the combined company. PNC, which now owns 70 percent of BlackRock, would own 34 percent after the deal closes. The rest would be owned by BlackRock employees. The new company will operate under the BlackRock name and have a board of directors comprised of 70 percent independent members.
One former Merrill executive who now works at BlackRock says this deal makes the money manager “more independent than ever.” The executive says he thinks this will propel BlackRock to further greatness. He points out that BlackRock had been more a closed-end shop until it bought equity manager State Street Research Corp., which gave it a true open-end fund push. As for the upshot for Merrill, he says, “Bob Doll did a great job changing 15,000-people’s perception about MLIM. This deal gives him a chance to sell to the 285,000 other financial professionals.”
The blockbuster deal also means that MLIM will shed its controversial new moniker Princeton Portfolio Research Management, which was slated to replace the MLIM brand and get more rival brokers to recommend Merrill funds. That’s a good thing for Merrill considering the name change spurred potential legal entanglements with Princeton University over whether it was trying to leverage its name to promote its funds.
Merrill’s proprietary fund lineup has struggled despite improved performance in recent years under Doll, who took the reins in late 2001. But a better performance track record hasn’t yet translated into higher sales. In fact, investors have withdrawn more than $34 billion on a net basis from Merrill’s stock and bond funds since 1998, according to Financial Research Corp. (FRC) of Boston. Assets held in long-term funds stand at $61 billion, FRC says.
But some analysts aren’t convinced that the deal will wash away conflicts entirely considering that Merrill stands to gain half the profits from Merrill brokers steering customers into BlackRock funds. “I don’t think the conflicts completely disappear but the transaction certainly helps alleviate some of that,” says Morningstar analyst Sonya Morris.
From an investment standpoint, the two companies complement each other very well, with Merrill combining its strong retail equity presence and army of brokers with BlackRock’s formidable bond fund lineup and institutional portfolio management expertise. Each will address their biggest weaknesses. “We’re able to sell into their distribution and vice versa,” Doll says.
On a combined basis, the newly married company would manage more than 254 funds worldwide with $286 billion in equity/blanced, $415 billion in fixed income, $208 billion in liquidity, $38 billion in alternative and real estate investments and $4 billion in retail separately managed accounts, as of Dec. 31, 2005.
As for its leadership, Laurence Fink, CEO of BlackRock, will serve as chairman and CEO of the combined company. MLIM's Doll will become a vice chairman, CIO of global equities and chairman of the private client operating committee. O’Neal will serve on the new company’s board along with Gregory Fleming, Merrill’s president of global markets and investment banking.
New York-based BlackRock manages 104 funds with $452.7 billion in assets. The fund shop is majority owned by PNC Financial Services Group and specializes in fixed-income, where it ranks third among bond managers behind T. Rowe Price and Legg Mason. Roughly 86 percent of its assets are in fixed-income products, including money market accounts and about 90 percent of its clients are institutional, most of which are in the U.S. PNC, which acquired BlackRock in 1995.
Merrill has been down this road before. In 1997, Merrill purchased Mercury Asset Management, which had $5.34 billion in assets, but the rebranding effort never really took off. As part of the BlackRock deal, Merrill will relinquish the Mercury name. The difference between the Mercury acquisition and the BlackRock merger are huge, however, Doll argues.
“The branding of Mercury products consisted of four maybe five products,” Doll says. “This time there will be over 100 products with the BlackRock name on it. Back then there was the sustenance of two brands, Merrill and Mercury. Everything now will be under one brand. The number of four- and five-star products that we have playing off raw performance is dozens. That give us a much better advantage that we might have had way back when.”
Execution risk is always a concern when merging two large companies. For BlackRock, there could be some attrition among its portfolio managers. “The risk lays in their equity funds,” Morris says. “They may face some challenges in retaining key talent.” Another concern is that Merrill isn’t planning to fold any of its funds into existing BlackRock funds or eliminate the poor performers as is customary in fund mergers to avoid duplicity and unnecessary cost. Having 212 funds in its stable could pose some problems down the line. “They’re going to have a pretty crowded lineup,” Morris says. That is worrisome. It will pose a marketing challenge.”
“On paper, it’s hard to find a better deal,” Doll says. “But execution is what it’s all about. If we get both sides of it right, it’s a home run.”