Inside the Big Deal Between BlackRock and BarclaysBy
Even in boom times, BlackRock's (BLK) $13.5 billion acquisition of Barclays' (BCS) investment unit, Barclays Global Investors (BGI), would qualify as a megadeal. In these trying days, it's a certified blockbuster. On June 16, Barclays accepted BlackRock's bid and will be paid $6.6 billion in cash and the rest in stock. That makes BlackRock the world's biggest money manager, overseeing $2.7 trillion in assets—more than the Federal Reserve. Four days before the deal was sealed, I talked with Barclays President Bob Diamond and BlackRock Chairman and CEO Larry Fink, who started his firm in a one-room office 21 years ago.
Thirteen and a half billion dollars is a lot of money. What's attractive about BGI, and why buy it now?
There are only a few firms we truly thought were innovative and only a few firms we thought we could put together with BlackRock, and BGI was one of them. We had conversations in 2002 to see if there was anything to do in a combination, and we both realized we were not ready but maybe there would be a time in the future. The complements of products are unique, providing BlackRock with a great position in the passive management [or index tracking] side, the scientific equity positions, and, of course, the ETF business in iShares.But you're really paying a big premium, a lot more than analysts thought you would. Did you overpay?
The market will do that test. But the market believed there was something going on between BlackRock and Barclays for weeks, and our stock has appreciated by more than 30%.Bob, certainly it's a very nice price for you. What are you going to do with this money? Did you need new capital?
No...but I must say it puts us in a very good position for capital. What we have done is we've invested in the new BlackRock Global Investors, and both [Barclays CEO] John Varley and I will be on the board and do everything we can to support the strategy and Larry and his team in terms of how they manage the combined business.Larry, you have a lot of relationships in the Mideast. Do you think that they are less risk-averse right now? Are you seeing sovereign funds and large Middle Eastern investors once again putting money to work in the markets? They did that before and got burned.
Not only sovereign wealth fund clients got burned in the market. I think anyone who invested in 2007 and early 2008 got burned. But in terms of what we are seeing from clients worldwide—from our sovereign wealth fund clients to our retail and institutional clients—I think they're saying Armageddon is behind us. They're now starting to ask questions: "What can we do to earn more than zero percent?" There is over $4 trillion sitting in money market funds. We have trillions of dollars sitting in short-term Treasuries. And we are seeing evidence now that clients are looking to take on more risk to earn a higher return. We've had a tremendous rally in credit, indicating people are looking to make a higher return, which means they are taking more risk. And in terms of our international clients, most certainly they are now engaging us with more questions as to how should they navigate their large pools of cash.You've got $2.7 trillion under management now, and you've got a lot of cultures going on here. You've got the BlackRock culture, the Merrill Lynch (BAC) culture, now you've got the BGI culture. Some people say if it gets too big, you start worrying about the Citigroup (C) problem. When does it get too big to manage?
This is so different from Citigroup. First of all, we don't have a Merrill Lynch culture. There is only one culture at BlackRock—the BlackRock culture. We are integrating two firms that are very common in their culture, the same team values, the same intellectual curiosity. And in terms of being too large, scale is not the issue because a good part of the assets are passive. This is not $2.7 trillion of actively managed strategies. I'm not even paying attention to the dollar amount of assets we manage because it's all about scale. We saw huge consolidation in the investment banking business in the last five years, a huge consolidation in the banking system. We've just begun to see a consolidation in the investment management business, and I believe we're going to be one of the leaders. I believe our clients are going to be rewarded in terms of having our scale. They're going to have an opportunity for more information and more products.Larry, let me switch gears. You've really become a lightning rod because of all the Washington programs BlackRock has been managing. How are those Treasury and Fed programs working right now?
Most of the problems that we're involved in at BlackRock are helping the Federal Reserve manage the portfolios of AIG (AIG) and Bear Stearns. We have not heard if we are a selected partner for the Treasury's PPIP [Public-Private Investment Program]. Overall, I think these programs are doing well. I believe what Secretary [Tim] Geithner did in the stress tests truly stabilized our banking system. No one would've predicted there would be $100 billion of equity raised in the banking system a few weeks following the stress tests. Our banking system is so much more solid than any banking system in the world with all this capital raised.Let me ask you about that PPIP because I feel people are backing away from it. The other day, [JPMorgan Chase (JPM) CEO] Jamie Dimon said: "Look, if I want to sell assets, I'll sell assets. I don't need a PPIP to sell assets." Maybe people worry that the rules are going to change? Maybe they don't want to invest side by side with the government. Are they walking away from the PPIP?
BlackRock and our investors are not worried. We believe the government will be a great partner. And I think there will be sellers who need to eliminate some of their troubled assets. I believe there will be a role for the PPIP.Let me ask you both where you think we are in this economic slowdown.
It was 18 months of difficulty and turmoil for the financial system, but it's in recovery mode, and I think every day it feels a lot better. So we're reasonably optimistic, but very cautious going forward. It's not going to be all better in a couple of days.Larry, how do you see it? Of course we know that consumer confidence is critical here—certainly confidence in the housing market is essential. Do you think prices for homes are still falling? Have they hit bottom, or is there more to come?
You know, there's no evidence the [housing] market is stabilizing, but the descent and the steepness of the descent is moderating. Stabilization is going to be critical, though, and one of the worries I have is that we've seen a very large rise in longer-dated Treasuries, and even with the great rally in credit, we now have a mortgage market with about 5 3/4% to 6% interest rates. Just three or four weeks ago, individuals could refinance their homes with a 5% mortgage. That's a significant difference in terms of the ability of the homeowner to reliquefy. And I think it is an issue we need to watch. The whole key to the stabilization of our economy is housing, and we need, unfortunately, lower rates to really have housing stabilized quicker. So as a result of higher mortgage rates, I think the economy is going to take longer to find its footing and grow. I know many people are thinking we're going to have maybe a positive third-quarter GDP number and certainly many people believe in a positive fourth quarter. I'm in the camp that thinks it's going to take a little longer.Final question. The Obama Administration is supporting congressional restrictions on bonuses, and it's appointing Ken Feinberg as "pay czar." How big of a chill will that cause on Wall Street, and will the new rules apply to BlackRock, given that it's partly owned by Bank of America?
We're partly owned by three banks [BofA (BAC), PNC (PNC), and Barclays], and the answer is no because all the banks have a minority interest in our firm. We have a totally independent board that is the navigator of our policies and direction. My only fear about a salary czar is if he becomes so restrictive and impacts more than just the banks, we will have a risk that companies are not going to want to go public. And one of the real differences between the U.S. capital markets and those of almost any other country is the extent that our companies have access to capital through public means. If people feel that there's so much government intrusion on compensation that it inhibits their ability to reward employees and compete, we're going to see fewer companies going public and more companies going private. Also, many companies may leave the U.S. and go elsewhere to be out from under government policies. Whatever we do, we have to make sure our policies allow our companies to compete in global markets.