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Impact Investing

IPE special report May 2018

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Making of a mega-manager

The decision of BlackRock, an independent New York based asset manager, to merge with Merrill Lynch Investments Managers (MLIM), the asset management arm of the US investment bank Merrill Lynch, took many observers by surprise.
The move, which will lift BlackRock from one of the top 20 asset managers in the world to one of the top 10, with $1trn (e821.8bn) assets under management, wrong-footed those who thought that BlackRock was itself an acquisition target.
It also raised the eyebrows of those who had always regarded BlackRock as a company that preferred to grow organically rather than through acquisitions.
The acquisition of State Street Research in 2004 and the lift-out of the European equities team from Scottish Widows Investment Management in 2000 seemed to be the exceptions that proved the rule.
Yet Barbara Novick, the head of new business development at BlackRock and a member of the merged companies’ transition steering committee, says BlackRock has always considered mergers and acquisitions: “We have always looked at deals, not just at companies but pieces of companies, and even team lift-outs. But we won’t take them further if we decide this is not a good fit.”
To be considered a good fit, a merger partner or acquisition has to satisfy a test of three, she says: a cultural fit, a business fit, and a product fit.
“We are not a company that needs to acquire to grow. We have demonstrated our ability to grow organically. So we can always say no to companies that are not a good fit.”
MLIM, however, was a natural partner for BlackRock, says Novick. “An example is the way they manage equities. They have what they call ‘boutiques with backing ‘. We have discrete teams with ownership and accountability centralised. That’s why we like them. We have similar approaches,” she says.
“There are so many dimensions where we are saying the same thing. We are both very client-minded firms where the fiduciary duty is very important. We never forget it’s the client’s money we’re managing.
“Talking to MLIM it became so clear that that they share the same philosophy. The mindset, if not identical, is very similar.”
Novick says the broad attraction of the merger with MLIM was the fit between retail and institutional business and between product lines. MLIM’s leading retail presence in the US and strong reputation in Europe and Asia slots neatly into BlackRock's global institutional base.
“The fit was so right. We are strong institutional. Merrill Lynch is strong retail, both US and non US. Plus there are areas where we are a bit of both.”
The merger also fitted in well with BlackRock’s own business plan, she says. “We had a business plan in 2005 and part of it was to be in centres like London and Tokyo. We even took a lease in London. What does MLIM have? Investment centres in London and Tokyo. We broke the lease.”

Access to local currency products in London and Tokyo was also an attraction. “Without currency you have only a limited desirability to clients in these countries. We have only a few local currency mandates. MLIM have a lot of sterling and yen.”
It was important to build a bigger presence in the UK, which BlackRock sees as a key non-US market. she says. “MLIM has a presence in the institutional market in the UK, where the preference has been for balanced and UK bond and equity mandates. These are things we didn’t have.”
The main attraction of the merger is that it enables BlackRock to expand its distribution platform for retail equity products in one giant leap, she says. “Building a retail business is very different from building institutional business, and one of the things that we have learned over the years is that building a retail business from scratch is extremely challenging. You have the enormous costs before you are paid a dollar.
“These costs have all gone up in Europe as well as the US, so the barriers have been raised. You need not only the right legal entity to be able to offer a product. You also need a contract between yourself and the bank distributing the product.
“It would take us years to get from where we are to where MLIM is today.”
MLIM offered a large number of ready-built platforms, with some 10,000 agreements to sell their retail funds. “That’s a business that has been built up over years, and they have the infrastructure to support it,” she says.
“On our side we have an excellent reputation in the institutional space. We have special products and servicing for insurance companies , for example. That was an area MLIM was looking to develop. They were interested in managing assets for insurance companies.”
MLIM won a large slice of European institutional business last year when it acquired the Philips Pensions Competence Center, the in-house manager of the Dutch electronic firm’s €12bn pensions scheme. This could lead to further mandates, although Novick did not speculate.
The merger with MLIM has put the hands of the clock forward, she says. “It will push us forward five years in things that we wanted to do anyway.”
Despite the neat fit of businesses, the merger is likely to be a highly complex operation, she says. “It will be real integrating, mix and match story.”
Fortunately Black Rock, which prior to the merger had assets under management of $425bn, can draw on the experience it gained from its acquisition of State Street Research. There are important differences between the two deals. State Street was more an acquisition than a merger, while the MLIM deal is more a merger than an acquisition, she says. The acquisition was also on a smaller scale – $50bn rather than $500bn.
Yet the acquisition provided some pointers for the MLIM integration, she says. “We found that the acquisition of State Street went more smoothly than we had expected. We brought over a large number of assets and people, and it worked very well. Having done that, we knew we could do the same with MLIM and we knew the steps we had to take.”
There are no set target dates or deadlines for completion of the merger; she says. “ We are going to take as long as it takes to get there. It’s going to be a thoughtful process.”
One of the first tasks of the integration steering committee will be making the BlackRock name better known outside the US. Although BlackRock is a household name in the US, it is hardly known in Europe, in spite of its operation in Edinburgh.
Novick says BlackRock is now looking at all ways of raising its profile outside the US. “Branding is going to be quite a big issue.”

In the US, BlackRock will re-brand MLIM retail products with the BlackRock name. This will enable intermediaries and distributors to sell MLIM retail products to US banks without creating a conflict of interest, says Novick.
“Merrill needed a new name in the US without an ownership structure. It was a strong brand but the competition didn’t want it on their systems Now Merrill has got a new name and a new ownership structure. This means the competitor banks can have access to MLIM products with attractive performance.”
Yet branding is not everything, Novick adds. “Institutional investors care about the people in the asset management firm. They are going to look a lot deeper than the logo at who is managing their money.”
BlackRock is proud of the fact that it is an independent firm in ownership and governance. In the new structure, there are no majority owners, Merrill Lynch will own the largest stake at 49.8%, PNC which owns 70% of BlackRock today will hold 34% and employees and public will hold the remaining 17%.
Novick says this plays to US investors’ preference for independent firms. “Just as there are different tastes about size there is different tastes about governance. In the US there is an institutional and retail bias again asset managers that are owned by any entity, and a bias towards independent asset managers.”
Investors should be unaware of the progress of the merger, she says. “Our goal is seamless transition.” Yet they should be aware of the benefits, she adds. “One of the things we have done at BlackRock is to create a single platform for everything. We would want to get to that point with the integration.”
Could BlackRock and MLIM reverse out of the merger if the fit between the two proved less comfortable than expected? Novick says the possibility does not exist. “It’s a strong commitment, and we can overcome any problem that comes up.”

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