BlackRock: Global Dominator or Hulking Leviathan?

We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile. � The Borg, Star Trek: First Contact

Employees of the former State Street Research and Merrill Lynch Investment Management organizations probably feared as much when they first heard their firms were to be acquired by BlackRock (in 2004 and 2006, respectively), a place known for its tightly run institutional bond management and no-nonsense CEO, Larry Fink. In fact, that seems to be almost exactly what they got. To hear members of the team tell it--over and over again--the model of "One BlackRock" is no joke.

If those folks are to be believed, though, the next crew destined for assimilation from Barclays Global Investors should keep their heads up (and not just because many stand to be enriched by selling their 11% stake in BGI as part of the deal). So-called "legacy MLIM" employees marvel at just how efficient, functional, and communicative the organization is relative to what they had grown used to in their prior work lives. Dik Blewitt came to BlackRock along with early-2009 acquisition R3, but he's been in the industry for more than 20 years and says BlackRock is "the smallest huge place I've worked in my entire life."

Dennis Stattman and his team seem to agree. They run  BlackRock Global Allocation (MDLOX), and in hindsight it seems almost miraculous that they stuck around MLIM as long as they did. Under Merrill Lynch and tucked away in its junior-college style office park outside of Princeton, the group was like an arctic outpost relative to Mother Merrill's otherwise mammoth, New York-based brokerage. Stattman's group is visibly thrilled to now be part of a dedicated asset-management firm that, instead of ignoring it, first asked what resources the group needed to better do its job.

A Massive Game of Speed Chess
There are two messages here, each critical in its own right. One is that BlackRock appears to have done an incredible job of integrating its past acquisitions, whether or not all of the positive talk we've heard is sincere. Successful asset-management mergers are extremely few and far between, and it's difficult to think of any that have avoided managerial disasters or wholesale departures as completely as BlackRock has. State Street Research and MLIM were absorbed so swiftly and efficiently that scant room was left to allow for trouble to percolate.

That was no forgone conclusion either, as some of the worst cautionary examples were cases in which Merrill bungled its own asset-manager acquisitions. There was a subtle hint of which way things would go, however, when terms of the deal were announced, giving Merrill Lynch (MLIM's former parent) slightly less than 50% ownership in the combined company and only 45% voting rights. With Larry Fink running the combined entity, nothing short of majority legal control would likely be enough to overcome his influence. That stake has since transferred to  Bank of America (BAC) (thanks to its acquisition of Merrill), which will soon own something closer to 34% of BlackRock, alongside a 25% stake held by  PNC Financial Services (PNC), and  Barclays' (BARC) 20% share. Those numbers belie a different picture of control, though, as PNC will have a 32.8% voting interest, while 24% will reside with a group of "new institutional investors," and Bank of America and Barclays will take up the rear with 3.4% and 4.9%, respectively. Translation: Larry Fink shouldn't have to worry too much about meddling from BlackRock's newly minted owners.

What One BlackRock Really Means
More critical to investors in BlackRock's funds, though, are the past and future implications for how those assets are managed. The firm has suffered a few black eyes during the financial crisis thanks to some bad bets on residential and commercial mortgage securities in its core bond portfolios, and modest showings among its more credit-sensitive offerings such as  BlackRock High Yield Bond (BHYAX).

Yet unlike the case with some rivals, the response has been anything but incremental. The high-yield group has a new skipper in Jim Keenan, who has only good things to say about the acquisition of R3, which has permitted the assembly of a more vertically integrated team of analysts and managers, in contrast to a more silo-like legacy-MLIM system with poor communication and duplicative managerial efforts. There's no question, meanwhile, that the team of analysts and managers that focuses on securitized assets such as non-agency residential mortgages and asset-backed securities is a lot more robust under R3's Dik Blewitt. He notes that the group is chock-full of new additions with more experience and expertise in digging all the way to the bottom of securities whose AAA ratings were once relied on more readily, and by a much smaller team of analysts whose time was split with other responsibilities.

North, South, East, and West
What's shaping up at BlackRock, though, is much more than just a few sector-team repairs and improvements. The acquisition of BGI could prove to be one of the single most transformative events in the asset-management industry. By combining BlackRock's existing active management business with one of the largest and most popular platforms for passively managed strategies (BGI and its iShares ETFs), the resulting company will have a meaningful footprint in whichever of the two areas investors choose to concentrate. And while similar attempts to build "scale" have almost always been transparent for their focus on empire building rather than the delivery of quality services, this one holds greater promise thanks to BlackRock's historical emphasis on risk management and investment results.

If BGI adds to the company's breadth, its Multi-Asset Portfolios Strategies group enhances its depth. Formed when BlackRock quietly took six asset-allocation teams and combined them in 2007, MAPS has a so-called Chinese Wall to protect it from conflicts of interest, and the group handles several functions, including the assembly, asset allocation, and management of "open-architecture" portfolios that can include both in-house and externally managed accounts. It has already built a considerable stable of assets and threatens to challenge major players such as Russell Investments and SEI once the BGI acquisition brings the group's total book of business to more than $130 billion. In effect, MAPS promises to be the capstone on a more "vertically integrated" asset-management business that will easily be the world's largest. The trick, of course, will be making it the world's best. That's an awfully tall order, and others have tried and failed miserably. Few, however, were as good as BlackRock when they started.