BlackRock to become world's biggest money manager

Ending weeks of speculation, U.S. investment manager BlackRock Inc. said Thursday it will purchase the asset management arm of British investment bank Barclays PLC for $13.5 billion in cash and stock, to become the world's largest asset manager.

Barclays Global Investors, active in both in the index and exchange-traded funds markets, had approximately $1.5 trillion of assets under management as of Dec. 31 and 3,000 institutional clients. New York-based BlackRock, which will pay $6.6 billion in cash plus 37.8 million shares currently worth about $6.9 billion, said its takeover of BGI will create a firm with combined assets under management of more than $2.7 trillion and a market cap of more than $34 billion.

By comparison, rival money manager State Street Corp., based in Boston, reported assets under management of $1.96 trillion at the end of March. Mutual fund giant Fidelity Investments, also Boston-based, had total managed assets of $1.18 billion at Feb. 28.

Barclays had planned to sell its San Francisco-based iShares exchange-traded fund, which generates half of BGI's profits despite managing a quarter of the operation's assets, to CVC Capital Partners for $4.4 billion. But under a "go shop" clause in the agreement, CVC now has five business days to match or top BlackRock's bid for the whole Barclays unit or will have to walk away with a $175 million breakup fee.

BlackRock said the deal will allow it to better tailor portfolios for retail investors by marrying its global mutual funds to the iShares' ETF platform. An exchange-traded fund is a type of investment vehicle which can be traded on exchanges in the same way as shares, and gives inexpensive and broad access to other kinds of investments.

Barclays' sale of BGI is part of its effort to raise capital after it declined to take part in a multibillion pound bailout of the struggling British banking system last year alongside Lloyds Group and Royal Bank of Scotland. The bank instead raised billions from Middle Eastern investors and agreed to sell iShares. After passing a "stress test" of its assets by regulators, the bank also chose not to participate in the government's Asset Protection Scheme to underwrite potential losses on toxic assets.

The deal gives Barclays a 19.9 percent stake in the new BlackRock Global Investors, representing a 4.9 percent voting interest. There will be certain restrictions on Barclays buying or selling BlackRock shares, but the British bank will have the right to maintain its ownership percentage if BlackRock issues additional shares in the future.

BlackRock founder Laurence D. Fink remains chairman and chief executive of the combined firm. Blake Grossman, CEO of Barclays Global Investors, will serve as a vice chairman, head of scientific investing, and a member of the Office of the Chairman. Barclays Chief Executive John Varley and President Bob Diamond will join BlackRock's board.

At closing - expected in the fourth quarter - BlackRock will have more than 9,000 employees in 24 countries.

BlackRock said it will fund the cash portion of the purchase price through a mix of existing cash, debt facilities and proceeds from issuing 19.9 million shares to a group of institutional investors for $2.8 billion.

A group of banks, including Barclays, Citi and Credit Suisse, has committed to provide BlackRock with a new 364-day revolving credit facility of up to $2 billion, which would be repaid by any capital raising efforts and refinanced with the proceeds of term debt financings.

The transaction is subject to approval by Barclays shareholders and regulators.

Citi and Credit Suisse served as lead financial advisers to BlackRock. Banc of America Merrill Lynch Securities, Morgan Stanley, and Perella Weinberg Partners provided additional financial advisory support. Skadden, Arps, Slate, Meagher & Flom served as legal counsel.

Shares of BlackRock closed earlier up $4.08, or 2.3 percent, at $182.60. Barclays shares ended up $1.25, or 6.7 percent, at $19.90 and added 35 cents in aftermarket electronic trading.