Talk of the $8 billion deal between BlackRock and Merrill Lynch is only the latest, if not the largest, example of Wall Street firms shedding asset management arms in order to avoid potential conflicts of interest, and broaden distribution channels.
According to the pending agreement, Merrill Lynch would agree to pass its asset management business to BlackRock, in exchange for a 49.8% stake in the money manager.
"They want to cut ties between their brokerage and asset management businesses to reduce conflicts of interest," Craig Woker, an analyst at Morningstar, told Marketwatch.
Meanwhile, at institutional investing-heavy BlackRock, "they have a small retail presence," Woker said. Partnering with Merrill Lynch allows them to tap into the giant's retail network.
The deal would allow Merrill Lynch, which has been struggling to sell its funds under different brand names outside of its own network, to focus on its stronger businesses. In 2005, Merrill Lynch Investment Managers contributed only 8% to its parent company's bottom line, according to data from the Financial Research Corporation in Boston.
The Merrill-BlackRock marriage mimics last year's sale of Citigroup's asset management business to Baltimore-based Legg Mason. In September, Pioneer Investment Management of Boston announced that it had absorbed AmSouth's mutual fund business from the Birmingham, Ala., headquarters. First Tennessee announced plans to merge its First Funds Family with Goldman Sachs Asset Management last December.
Analysts expect more to come.
"You are going to see a flood of deals from insurance companies and banks that started proprietary fund families and have been unable to successfully distribute them through their captive sales organizations," said Burton Greenwald, an industry consultant based in Philadelphia.
Reverberations are expected to travel north of the border, too, according to the Toronto Globe and Mail. In 2001, Royal Bank of Canada sold off its pension arm, RT Capital, to UBS. Toronto-Dominion traded ownership of discount broker TD Waterhouse for 39% interest in Ameritrade.
The danger of such deals is always in the integration, mutual fund consultant Geoff Bobroff told Marketwatch. "The major difficulty is the cultures," he said. While BlackRock will beef-up its retail business through the merger, it is, at its core, built around institutional fixed-income clients, he said. Now Merrill, which offers underwriting of bonds, would have a compelling interest. "It just raises the question," he said.