The combined company, to be called BlackRock Global Investors, will have roughly $2.8 trillion of assets under management, more than double BlackRock's current size.
BlackRock, founded 20 years ago as a bond investment firm, has managed to sidestep the toxic assets and vehicles that have laid low many competitors, giving Chief Executive Laurence Fink a reputation as one of the shrewdest asset managers on Wall Street. The U.S. government selected BlackRock to manage troubled assets from Bear Stearns and American International Group Inc
The deal gives BlackRock exposure to exchange-traded funds, a product that has grown fast because it allows investors to buy assets easily that otherwise might be difficult to acquire, such as precious metals or foreign stocks. Exchange traded funds also typically have low management fees, which many investors have taken more seriously after a brutal decline in asset values in 2008.
Exchange-traded funds have been a growth area in an industry that's struggling for growth opportunities, said Ralph Cole, who helps manage $2.2 billion at Ferguson Wellman Capital Management in Portland, Oregon.
New York-based BlackRock grew from a one-room investment firm to the largest publicly traded asset manager in the United States, and now the world, through a series of acquisitions. In 2006, it bought Merrill Lynch & Co's asset management business for around $8.6 billion.
BlackRock is paying $6.6 billion in cash and the rest in stock. It is raising $2.8 billion from the sale of 19.9 million shares to a group of institutional investors. BlackRock did not identify them, but people familiar with the matter expected Middle East sovereign wealth funds to be among them.
The new share issuance helped push BlackRock's existing shares down $6.04, or 3.3 percent, to end trade on the New York Stock Exchange at $176.56 on Friday.
CAPITAL FOR BARCLAYS
Barclays shares fell 4.1 percent to close at 292 pence, on concerns that the deal will leave the company more reliant on investment banking, which generates less-stable earnings.
But the deal also helps Barclays by shoring up its capital base. The bank said that it was recording a net gain of $8.8 billion on the assets, which should lift its core Tier 1 capital adequacy ratio by 1.5 percentage points to around 8 percent.
Barclays refused aid from the British government last year as the financial crisis engulfed the industry, and sold shares to Abu Dhabi and Qatar instead.
Banks are under increasing pressure from regulators to keep asset management and investment banking businesses separate, while clients are keen to work with independent fund managers. That means other banks are likely to split off their fund arms, and the asset management industry should consolidate.
The BlackRock deal scuppers the planned $4.4 billion sale of iShares, the exchange traded funds arm of BGI, to buyout firm CVC. CVC has until June 18 to improve its offer, but it is unlikely to counterbid as it wanted iShares rather than all of BGI, a person familiar with the situation told Reuters. It will receive a $175 million break-up fee.
Barclays, which bought the U.S. investment banking business of Lehman Brothers in September, said its trading performance up to the end of May had been generally consistent with trends it reported on May 7. The companies expect to close the deal sometime in the latter part of the fourth quarter.
DILUTION FOR B OF A, PNC
San Francisco-based BGI's $1.5 trillion in assets will give BlackRock $2.8 trillion in assets under management, catapulting it to a dominant position with twice the assets of nearest rival State Street
BlackRock was able to pay for the deal in part because its shares have performed relatively well recently. The company's shares are up 36 percent so far this year through Thursday's close, roughly double the increase for the overall sector as measured by the Dow Jones U.S. Asset Managers Index. <.DJUSAG>
Other new investors would get a stake of about 10.5 percent in BlackRock and the deal will dilute the stakes of Bank of America
BlackRock, which pays a $3.12 annual dividend, will review its dividend policy once it closes on the deal and has paid off short-term credit facilities, CEO Fink said on a call.
Barclays has agreed not to sell any of its BlackRock shares in the first year without the asset manager's consent, and no more than half its holding in the second year.
Barclays Chief Executive John Varley and Barclays President Bob Diamond will each get a seat on BlackRock's board.
Diamond will receive a net consideration of $36 million before any deductions from shares he holds in BGI. He will have paid $10 million to acquire the shares since 2003, Barclays said.
Other BGI staff are in line for a windfall from a lucrative employee share ownership plan. If they exercise options, staff will own 9 percent of BGI.
Barclays was advised by its investment banking unit, Barclays Capital, and Lazard. JPMorgan Cazenove served as Broker and sponsor to Barclays. Citigroup and Credit Suisse were lead advisors to BlackRock.
(Additional reporting by Dan Wilchins in New York and Paul Hoskins and Simon Meads in London; Editing by Greg Mahlich and Matthew Lewis)