By Sree Vidya Bhaktavatsalam and Jon Menon
June 8 (Bloomberg) — BlackRock Inc., the bond boutique co- founded in a one-room office by Laurence Fink in 1988, is a step closer to becoming the world’s biggest money manager after emerging as the leading bidder for Barclays Plc’s fund unit.
Fink has moved ahead of contenders for Barclays Global Investors including Bank of New York Mellon Corp., three people familiar with the talks said June 6. London-based Barclays, the U.K.’s third-largest bank, is seeking more than $12 billion for BGI, and may keep a 20 percent stake in the combined company, one of the people said.
Barclays Global, which oversees $1.5 trillion, would be Fink’s biggest acquisition, building on his 2006 takeover of Merrill Lynch & Co.’s asset-management business. That deal pushed the New York-based company deeper into actively managed stock funds. BGI would add passive investments where rivals such as Pacific Investment Management Co. aren’t as competitive.
“This could be a transformational deal,” Burton Greenwald, a mutual-fund consultant based in Philadelphia, said in an interview.
The talks between Barclays and BlackRock aren’t exclusive, according to the people, who asked not to be identified because the auction is private. An agreement could be announced this week. BlackRock is in contact with Mideast investors about providing equity financing for the deal, one of the people said.
BlackRock’s shares rose $3.31, or 2 percent, to $167.05 at 10:06 in New York Stock Exchange composite trading. The shares have advanced 25 percent this year, compared with the 0.4 percent decrease in the Russell 1000 Financial Services Index.
BNY Mellon rose 51 cents, or 1.8 percent, to $28.73. Barclays declined 5.5 pence, or 1.9 percent, to 279.5 pence in London.
“The discussions are not yet concluded and there are a number of significant open issues which could affect the nature and terms of any transaction,” Barclays said today in a statement.
Barclays agreed in April to sell iShares, BGI’s exchange- traded fund business, to London-based CVC Capital Partners Ltd. for $4.4 billion. It has held talks on additional offers for iShares, the bank said in the statement. Barclays has until June 18 to find a better deal for iShares, the world’s largest manager of exchange-traded funds, or all of San Francisco-based Barclays Global.
Alistair Smith, a spokesman for Barclays in London, and Bobbie Collins, a spokeswoman for BlackRock, declined to comment.
Barclays, which shunned U.K. government funds, is seeking to raise cash after $18.6 billion of credit losses and writedowns. The bank’s capital adequacy ratios lag behind those of London-based Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc of Edinburgh, which accepted state control in return for taxpayer assistance.
A purchase of BGI, the world largest money manager, would give BlackRock, currently No. 3, about $2.81 trillion in assets and more customers outside the U.S. It would surpass State Street Corp., which managed $1.44 trillion as of Dec. 31, and Fidelity Investments, with $1.25 trillion. Both companies are based in Boston.
BGI is Europe’s biggest hedge-fund manager, the largest independent manager of pension-fund assets in Canada and Japan’s largest discretionary investment manager, according to the company.
Redemptions, Market Declines
Fink, 56, is in a position to gain funds at a time when customer redemptions and market declines have slashed assets under management at money-management firms. First-quarter net income fell 65 percent to $84 million, mirroring declines at other firms.
BGI’s ETF business would help BlackRock compete with Pimco, its biggest rival in managing fixed-income. The Newport Beach, California-based firm, co-founded by Bill Gross, is in the early stage of building a roster of ETFs.
“We could see BlackRock open a number of ETFs in the fixed-income space that they specialize in,” consultant Greenwald said.
BlackRock has a division called BlackRock Solutions that advises clients such as banks, pension funds and governments on risk-management. BlackRock has been hired by the U.S. government to help evaluate distressed portfolios since the onset of the credit crisis in 2007, including those previously managed by insurer American International Group Inc. and Bear Stearns Cos.
Industry’s Biggest Deal
The company has also applied to be one of at least five asset managers of the U.S. government’s Public-Private Investment Program, which aims to buy mortgage-related assets from banks to help revive lending stabilize the financial markets.
The BGI transaction would be the largest acquisition of an asset-management firm, eclipsing the previous record set by Fink’s $8.5 billion purchase of New York-based Merrill Lynch’s fund unit. Merrill Lynch ended up with 49.8 percent of BlackRock following the 2006 transaction, a stake now owned by Bank of America Corp., based in Charlotte, North Carolina, after its acquisition of Merrill Lynch in January.
Fink joined with Ralph Schlosstein, a friend and managing director at Lehman Brothers, in 1988 to start the firm that would become BlackRock. It began life as Financial Management Group within private-equity firm Blackstone Group LP. Blackstone, based in New York, provided an office, a telephone line and a $5 million line of credit in return for a 40 percent stake in the company.
BlackRock parted company with Blackstone in 1994 after PNC Financial Services Group Inc. of Pittsburgh bought Fink’s group for $240 million. BlackRock went public on Oct. 1, 1999, at $14 a share.
BlackRock has since climbed almost 12-fold. The company is the largest publicly traded asset manager in the U.S.