For BlackRock, a 21-year old company which relied heavily on acquisitions to grow from a one-room bond investment firm into the largest publicly traded U.S. money manager, the deal will more than double assets to roughly $2.7 trillion.
It will also give New York-based BlackRock, well-known for working with governments and institutional clients, access to retail investors and the hugely popular exchange traded funds San Francisco-based Barclays Global Investors offers.
BGI, which has operations in 15 countries and ranks as Europe's largest hedge fund manager, will help expand BlackRock's reach around the world and into new products spanning actively and passively managed portfolios.
This gives BlackRock a global footprint which is a substantial thing to have in these markets, said Geoff Bobroff, who advises mutual fund companies as president of Bobroff Consulting Inc.
For Barclays the deal will strengthen its balance sheet after the bank refused aid from the British government that some of its rivals accepted as the global financial crisis engulfed the industry.
BlackRock will pay $6.6 billion in cash and the rest in stock to acquire BGI and Barclays' iShares unit, which had been promised to private equity firm CVC Capital Partners for $4.4 billion in April.
Barclays was allowed to keep shopping for a better deal until the middle of June and will owe CVC a $175 million break-up fee if it sells iShares to another bidder. CVC has until next week to come up with a counter offer.
This is a transformational transaction for the investment management industry Laurence Fink, BlackRock's chief executive officer, said on a hastily arranged conference call late on Thursday.
Fink said BlackRock has received commitments from a global network of institutional investors and clients to purchase 19.9 million shares at the closing of the transaction for a total of $2.8 billion. He would not disclose the investors.
The combined companies' market capitalization will be roughly $34 billion, Fink said.
BlackRock's share price, which has climbed 36 percent since January, shot up 11.5 percent this week to close at $182.60 on Thursday as speculation about a possible deal heated up. Bank of New York Mellon
Together BlackRock and BGI -- or BlackRock Global Investors as the new company will be called -- will be the industry's single biggest player, zooming past rivals State Street Corp
The deal also further shakes up an already battered money management industry where firms lost billions in assets and thousands of jobs during the financial crisis by eliminating a possible bidder for other firms that are up for sale.
BlackRock had expressed interest in Columbia Management, the investment management arm at Bank of America
Barclays will own a roughly 20 percent stake in BlackRock and expects a net gain on sale of $8.8 billion, which it will use to shore up its capital.
To outsiders, this mega-deal carries the signature of Fink, who co-founded BlackRock and has grown the company through a series of acquisitions including an $8.6 billion deal to buy Merrill Lynch's asset management operations in 2006.
Known for sticking to routines like arriving at the office by 6 a.m. and having lunch at a local Italian restaurant, Fink had interviewed to head Merrill Lynch in 2007. Instead he stayed put and his company survived the financial crisis largely unscathed while others suffered.
Now he will have to marry the two distinctly different cultures of BlackRock and BGI. You'll have bookends on the east and the west coasts, Bobroff said, adding It has been Fink's style to put everything under one roof but that won't make sense anymore.
Barclays president Robert Diamond will receive a about $36 million for his shares and options in BGI and will sit on the new company's board of directors.
Barclays Capital and Lazard were the British lender's financial advisers, while JPMorgan Cazenove acted as broker and sponsor. Clifford Chance LLP and Sullivan & Cromwell LLP provided legal advise.
BlackRock was advised by Citigroup and Credit Suisse, while Bank of America Merrill Lynch, Morgan Stanley and Perella Weinberg Partners provided additional financial advisory support. Skadden, Arps, Slate, Meagher & Flom served as legal counsel.
(Additional reporting by Paritosh Bansal and Robert MacMillan in New York; Editing by Lincoln Feast)