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Morgan Stanley and BlackRock: A fact file

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Is Morgan Stanley acquiring BlackRock?

Is Morgan Stanley acquiring BlackRock? That seems to be the rumor occupying NY this week, but how large is Blackrock and what would it cost Morgan Stanley?

So much for the rumor, here are the facts on BlackRock: Founded by Chairman and Chief Executive Lawrence Fink in 1988, New York-headquartered BlackRock is a leading provider of global investment management, risk management, and advisory services. As of December 31, 2005, BlackRock’s assets under management totaled USD 452.7 billion across fixed income, liquidity, equity, alternative investment, and real estate strategies.

Its risk management and consulting/advisory services combine BlackRock’s capital markets expertise with proprietary systems and technology.

Through BlackRock Solutions it offers risk management services and enterprise investment system outsourcing to a broad base of institutional portfolios that totaled USD 3 trillion as of September 30, 2005.

Where is BlackRock located?

Headquartered in New York, BlackRock maintains offices in Boston, Chicago, Edinburgh, Hong Kong, Munich, New Jersey, San Francisco, Singapore, Sydney, Tokyo, and Wilmington, and is opening a new office in London to better serve its clients.

Who owns BlackRock?

On a fully diluted basis, assuming the vesting of a performance-based long-term incentive plan and other programs, BlackRock employees and the public own approximately 38 per cent of the firm and The PNC Financial Services Group (PNC) retains a 62 per cent majority stake from its 1995 acquisition of BlackRock.  In 1999, the firm completed an initial public offering of 14 per cent of its common stock.

How did BlackRock perform in 2005?

BlackRock, Inc. (NYSE:BLK) last week reported net income for the quarter ended December 31, 2005 of USD 72.9 million, or USD 1.09 per diluted share, compared to net income of USD 49.8 million, or USD 0.75 per diluted share, earned in the fourth quarter of 2004. Third quarter 2005 net income was USD 61.1 million, or USD 0.92 per diluted share. Net income for the year ended December 31, 2005 was USD 233.9 million, or USD 3.50 per diluted share, compared to net income of USD 143.1 million, or USD 2.17 per diluted share, earned during 2004.

Adjusted earnings per share increased to USD 1.21 and USD 4.03 for the fourth quarter and full fiscal year ended December 31, 2005, compared to USD 0.72 and USD 2.69 for the fourth quarter and full fiscal year 2004, respectively, and USD 1.03 for third quarter 2005.

Fourth quarter 2005 earnings reflect performance fees of USD 87.2 million and approximately USD 8.0 million of expense associated with the launch of a new closed-end fund.

Assets under management (AUM) rose USD 24.8 billion, or 5.8 per cent, during the quarter to USD 452.7 billion at December 31, 2005. Net new business totaled USD 23.7 billion during the quarter, including USD 14.3 billion in long-dated products and USD 9.4 billion in cash management portfolios. For the full year, BlackRock recorded USD 50.2 billion of net new business, with favorable flows in all asset classes and from all client channels.

Net inflows were balanced geographically, with USD 27.1 billion of net new business from US clients and USD 23.1 billion from non-U.S. investors. In addition, it added 32 net new assignments in BlackRock Solutions and related products during the year, including 10 net new assignments in the fourth quarter, which contributed to a 38.5% increase in revenues from 2004.

What is BlackRock’s client/service profile?

Since its inception in 1988, BlackRock has been independently managed by its Management Committee, whose members represent all operating areas of the firm. BlackRock has focused on a cross-disciplinary team approach where clients benefit from the pooled expertise of the firm’s resources: its investment and risk management professionals and proprietarily-developed analytical tools.

BlackRock’s client base includes corporate, public, and Taft-Hartley pension plans, insurance companies, mutual funds, endowments, foundations, nuclear decommissioning trusts, corporations, banks, and individuals worldwide.

On January 31, 2005, BlackRock acquired SSRM Holdings Inc., the holding company of State Street Research and Management and State Street Realty. The transaction enhances BlackRock’s investment management platform with additional US equity, alternative investment, and real estate equity management capabilities, expanding the scale and scope of BlackRock’s open-end mutual funds and distribution capabilities.

Would Morgan Stanley pay a premium to acquire a majority stake in BlackRock?

Morgan Stanley Chairman and Chief Executive John Mack, who took over at the bank last June, has made it clear he is interested in making acquisitions in a number of businesses, notably money managers and hedge funds, to boost earnings and revenue growth.

Wall Street firms are keen on expanding fund management businesses, which generate high returns and dependable revenue that can offset more-volatile investment banking income.

A deal with BlackRock would give Morgan Stanley a stake in one of the fastest-growing US money managers and accelerate the revival of its laggard money management division.

In recent years, regulators have scrutinized potential conflicts of interests at brokers affiliated with money management businesses, worried they would steer retail clients toward in-house funds even if they are not strong performers.

Citigroup solved the problem by selling its asset management arm to Legg Mason. Morgan Stanley, by adding BlackRock and its focus on institutional clients would reduce the proportion of assets coming from retail investors and therefore help mitigate regulatory concerns.

Still, to gain a controlling stake, Morgan Stanley will have to go through Pittsburgh-based PNC Financial Services Group, which owns 62 per cent of BlackRock.

How much is BlackRock worth?

With last Friday’s (20 February) stock rise, the market now values BlackRock at around USD 8.4 billion. Goldman Sachs analyst James Fotheringham noted PNC, given the opportunity to reap USD 8 billion to USD 10 billion for its stake, may be tempted to cash out. The company, whose own shares rose 4 percent to USD 66.30, declined to comment on the reports of a sa.

So can Morgan Stanley afford BlackRock?

The final word comes from Morgan Stanley analyst Chris Meyer, who said in a note last week: "While BlackRock continues to post strong flows, solid earnings growth and a healthy pipeline, we remain cautious on valuation.’ Excluding performance fees, BlackRock trades for 26 times 2006 earnings, "too rich for our blood, despite their good growth." That said, Meyer raised his share-price target to USD 105 and maintained his "equal-weight" rating.

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