BlackRock and Merrill Lynch merge to create USD 1 trillion powerhouse

As predicted in Hedgewire two weeks ago, BlackRock and Merrill Lynch are to merge, creating a global investment management firm with AUM of USD 1 trillion.

After weeks of market speculation, BlackRock, Inc. and Merrill Lynch unveiled an agreement to merge Merrill Lynch's investment management business, Merrill Lynch Investment Managers (MUM), and BlackRock to create a new independent company that will be one of the world's largest asset management firms with nearly USD 1 trillion in assets under management.

On a combined basis as of 31 December 2005, the proposed company managed USD 286 billion in equity/balanced, USD 415 billion in fixed income, USD 208 billion in liquidity, USD 38 billion in alternative and real estate investments, and USD 44 billion in retail separately managed accounts.

"Joining forces with Merrill Lynch Investment Managers represents a truly transformational opportunity - the combined company will have broad investment and risk management capabilities and extraordinary global scale that will enhance our collective ability to serve individual and institutional investors worldwide," said BlackRock CEO Larry Fink. "MUM and BlackRock are highly complementary, in terms of both expertise and culture. Together, we will benefit from a singular focus on investment and risk management, as well as a deep pool of talented professionals who share a commitment to teamwork, excellence and integrity. We will also benefit from an ongoing strategic partnership with Merrill Lynch as we work together to serve our shared clients. Lastly, we will move quickly to establish a robust operating platform that leverages our BlackRock Solutions capabilities and ensures a seamless transition for BlackRock and MUM clients."

As a result of the transaction, The PNCFinancial ServicesGroup,Inc. (NYSE:PNC) - which bought BlackRock in 1995 and currently owns 70% of the company - will maintain a 34% share in the combined company, and approximately 17% will be held by employees and public shareholders.

Merrill Lynch's stake will go to 49.8%, and it will have a 45% voting interest in the combined company. The new company will operate under the BlackRock name and be governed by a board of directors with a majority of independent members.

The combined company will offer a full range of equity, fixed income, cash management and alternative investment products with strong representation in both retail and institutional channels, in the US and in non-U.S. markets. It will have over 4,500 employees in 18 countries and a major presence in most key markets, including the US, the UK, Asia, Australia, the Middle East and Europe.

The transaction, which has been approved by the boards of directors of both companies, is expected to close in the third quarter of 2006. To ensure continuity of management and levels of service to clients of both companies, Laurence (Larry) D. Fink, CEO of BlackRock, will serve as Chairman and Chief Executive Officer of the combined company, and Ralph L. Schlosstein will continue to serve as President and a Director.

Robert (Bob) C. Doll, President and Chief Investment Officer of MUM, will become a Vice Chairman, CIO of Global Equities, and Chairman of the Private Client Operating Committee. Doll and Robert S. Kapito, Vice Chairman and Head of Portfolio Management of BlackRock, are both expected to become members of the combined company's Board of Directors, subject to the Board's approval.

"We have a team of outstanding investment management professionals who look forward to becoming partners with the BlackRock team," said Bob Doll. "Both firms have very similar cultures, emphasizing teamwork, integrity, operational excellence and superior client service as they seek strong investment returns. We will build one company that reflects the best of both organizations. The combined company will leverage each organization's strong momentum and will be well positioned to expand its products and distribution capabilities."

Stan O'Neal, Chairman and Chief Executive Officer of Merrill Lynch, and Gregory J. Fleming, President, Global Markets & Investment Banking, Merrill Lynch, are expected to serve as Merrill's designees on the Board.

"Having an expanded presence in the asset management business has been a strategic priority for Merrill Lynch for some time," said Stan O'Neal. "By merging MUM with BlackRock, Merrill Lynch will realize a major objective - the transformation of our asset management unit into a major component of what we believe will be one of the world's preeminent, diversified global money management organizations. We will gain what amounts to a half-interest in a firm twice the size of our unit, with enhanced growth prospects, both organically and through potential acquisitions, with its own publicly traded stock. Additionally, this transaction frees up significant capital for Merrill Lynch, which we can deploy to further enhance shareholder value."

New BlackRock to build scale, scope and product range

The new, enlarged BlackRock will provide a wide range of investments, including significant offerings in every major asset class, encompassing equity, fixed income, liquidity, and alternatives.

Capabilities will include US and non-US products in each asset class, including products created in investment centers in the U.S., London, Edinburgh, Tokyo, and Australia. In order to best serve clients' needs, various products will be available as separate accounts, open-end funds and closed-end funds.

BlackRock and MUM complement each other in distribution platforms. MUM's significant retail presence in the US and its strong reputation in Europe and Asia match well with BlackRock's global institutional client base. MUM has a strong mutual fund platform with 154 mutual funds globally. In the US, MUM manages 108 open and closed end stock and bond funds, 42 of which are rated 4-or 5- star by Morningstar. These will join with BlackRock' s group of more than 100 funds to give investors a broad array of choices in equity, fixed income and liquidity funds.

BlackRock will also continue to provide risk management and advisory services to a wide variety of major institutional clients through BlackRock Solutions.

Terms of the Transaction

The transaction is subject to various regulatory approvals, client consents, approval by BlackRock shareholders and customary conditions. Under the tenns of the agreement, Merrill Lynch will have certain restrictions on the sale or acquisition of shares in the new BlackRock, but will have the right to maintain its ownership percentage in the event of BlackRock' s issuance of additional shares in the future.

The transaction will result in a gain to Merrill Lynch, net of certain transaction-related expenses, based on the value of the BlackRock stock received at closing. Based on BlackRock's closing price on February 14, the net after-tax gain would amount to approximately USD 1.1 billion. Additionally, Merrill Lynch expects that the elimination of goodwill associated with the MLIM segment will free up a significant amount of equity capital to be redeployed into growth initiatives or share repurchases.

Following closing, Merrill Lynch expects to reflect its investment in the stock of the combined company in its financial statements using the equity method of accounting, and will record its proportionate share of the new BlackRock's net earnings as a component of net revenues.

In 2007, Merrill Lynch expects the transaction to be slightly dilutive to its earnings and earnings per share. In 2008, once transaction synergies are fully realized, Merrill Lynch expects the transaction to be neutral to its earnings and earnings per share assuming no redeployment of equity capital freed up by the transaction, and accretive assuming redeployment of capital.

In connection with the transaction, Citigroup Corporate and Investment Banking acted as exclusive financial advisor and Skadden Arps provided legal counsel to BlackRock.

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