The two companies got their wishes when they sealed a deal today for BlackRock to buy Barclays Global Investors for $13.5 billion in cash and stocks. Barclays will take a 19.9 percent stake and get two seats on the board of the newly enlarged group to be called BlackRock Global Investors.
San Francisco based BGI's $1.5 trillion in funds will give BlackRock a total of $2.8 trillion in assets under management. This will be twice the assets of its nearest rival State Street.
Barclays decided to sell its BGI assets for two reasons. One was to raise needed capital so it didn't have to take money from the government. The second was greater regulatory pressure to separate asset management businesses from investment banking businesses. Customers also prefer independent fund managers.
Other banks are expected to follow Barclays lead and sell asset management businesses so they can keep the more lucrative investment banking businesses.
"There are a number of pieces of empirical evidence saying this is a way the industry is trending, that's partly a consequence of client preferences and partly a consequence of regulation," Chief Executive John Varley told Reuters. "It's amplified in our case by the fact that the Lehman transaction has changed the scale of Barclays Capital." Barclays bought the U.S. investment banking business of Lehman Brothers in September 2008.
John Varley and Barclays President Bob Diamond will both get seats on the BlackRock board. Barclays employees will also get cash for the deal. In fact, Diamond will make $36 million before any deductions for shares he holds in BGI. He paid $10 million to acquire those shares since 2003, Barclays reported. Other BGI staff will see a windfall as well because BGI had a lucrative employee share ownership plan.
This deal likely kills the planned $4.4 billion sale of iShares to CVC. CVC had until June 18 to improve its offer, but it is unlikely to try to match BlackRock's offer because it only wants iShares not all of BGI, according to Reuters sources.
Lita Epstein has written more than 25 books including Trading for Dummies.