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Fund Times: Merrill and BlackRock Discuss Merger

Plus, news on Selected, ABN AMRO, Westcore, Alliance, PIMCO, and more.

Morningstar Analysts, 02/17/2006

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Merrill Lynch MER is in talks with BlackRock BLK to exchange its asset management business for a 49% stake in BlackRock, according to reports on Dow Jones and other news services. The deal could close as soon as September.

The merger would create an industry giant with combined assets under management of about $1 trillion, putting the new firm in the leagues of top asset managers like Fidelity and Capital Group. Merrill's 49.8% stake in the combined firm would be worth about $9.3 billion based on market closing prices Tuesday. This price equates to 1.7% of Merrill's assets under management and about 15.9 times its 2005 pretax earnings, which is in line with the typical range for asset-management deals.

Although it's still too early to know many details, all Merrill retail funds will assume the BlackRock label. That move helps Merrill sidestep the controversy surrounding its previous plan to rebrand its funds under the Princeton name. According to a BlackRock spokesman, fund shareholders shouldn't expect to see a spate of fund mergers. However, given BlackRock's bond-managing prowess, we wouldn't be surprised to see fund mergers on the fixed-income side. The equity operations will be housed in Boston and in New Jersey.
The head of Merrill's money-management group, Bob Doll, will join BlackRock as its global equity CIO and chairman of the private-client group. BlackRock's Keith Anderson will remain global fixed-income CIO, and BlackRock's Rob Kapito will continue as head of all portfolio management.

Both sides have something valuable to offer. Merrill Lynch has significantly upgraded the quality of its funds under Doll, but it remains locked into its own broker network. Joining BlackRock would open new sales channels for Merrill Lynch Investment Management (MLIM) and enable it to reduce the conflict of interest inherent in proprietary fund shops selling through their own brokerage networks. In addition, belonging to a pure asset manager may benefit MLIM because it would be a part of a group where managing money is the top priority for a change.

For BlackRock, the deal would provide access to Merrill's broker network. Although BlackRock is a giant in the institutional fixed-income business, it hasn't been able to translate that into retail sales as well as PIMCO has. This deal could change that. In addition, BlackRock would get a broad equity lineup that has improved under Doll.

If it does go through, the deal would be the second case of a brokerage firm exiting the asset management business. Citigroup sold its asset management group to Legg Mason.

Settlement Is Final Hurdle in Citi/Legg Mason Deal

A dissident shareholder reached a settlement with three closed-end funds formerly run by Citigroup C, closing the final chapter on the long and hostile proxy wars tied to the company's asset swap agreement with Legg Mason LM, according to Dow Jones.

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