Updated from 9:36 a.m. EST
reportedly is in advanced talks to acquire a minority stake in
, the bond fund giant with more than $450 billion under management.
Merrill could swap its asset-management division for 49% of BlackRock, the asset manager that is 70%-owned by
, according to
The Wall Street Journal
and other outlets. PNC's stake would fall to about 35%.
BlackRock shares rose $14.13, or 10.7%, to $145.64 Monday. PNC gained $1.70, or 2.6%, to $66.28. Shares of Merrill rose 80 cents, or 1.1%, to $73.59.
Merrill Lynch's move to acquire one of the hottest money managers on Wall Street comes just two weeks after
reportedly ended talks for a stake. Acquisition talks with Morgan Stanley broke down because of BlackRock's high price, according to reports on
BlackRock's stock is up 22% since Morgan Stanley's interest was first reported on Jan. 20. Merrill Lynch's shares have been on a tear of their own, running up over 7% since the beginning of the year.
By acquiring a minority stake, Merrill Lynch might be able to avoid the dilution issues that Morgan Stanley faced, and could make a deal work even given BlackRock's share increase, says one arbitrage investor who closely tracks stocks involved in acquisitions.
"A controlling position as opposed to buying shares in their entirety is somewhat easier," he says. "A run-up in price is less likely to interfere with this type of deal than in a buyout."
Still, this particular investor was surprised at how shares in the BlackRock reacted Monday morning.
"Everyone knew that there was a strong possibility of something like this happening
with BlackRock," he says, "We thought that most of the anticipation was already priced in."
Indeed BlackRock's CEO Larry Fink mentioned in a meeting last September that there was a "very good chance of a very good deal for BlackRock in the next 12-18 months," according to a report from Morgan Stanley equity research analyst Chris Meyer.
Meanwhile, Merrill Lynch's reasons for partnering with BlackRock are clear, says Denise Valentine, a senior analyst at Boston-based financial research and consulting firm Celent. Because margins are rather low, a partnership can bring significant economies of scale, and the combined operations could offer better deals financially for its clients.
"Strength and scale in this fiercely competitive market is enormously profitable," says Valentine. "Merrill Lynch is a marketing and distribution machine whose retail client base will feel they are getting the money manager of the kings -- and they are."
While the synergies were "rather identical" with Morgan Stanley, she says, a deal with Merrill Lynch would allow BlackRock's management to maintain its independence, a dynamic that was said to be contentious in discussions with Morgan Stanley.
"BlackRocks' institutional clients will not likely feel hindered by a Merrill association, and will be pleased -- as no doubt BlackRock senior management is -- to keep the firm independent from the monolith."
Financially, the deal makes sense for both companies, says Morgan Stanley's Meyer. According to his analysis, the combination would gain $150 million in cost savings, significantly more than were created in the
asset swap last year.
Still Meyer cautions that a deal is not a sure-thing.
"BlackRock is likely a significant fixed-income client to Merrill's global markets and investment banking business," he says. "The conflict of interest that a large ownership stake...may introduce could limit the amount of business that Merrill can do with BlackRock, something that would need to be factored into the deal."
PNC is another question mark. "PNC's desire to dilute their approximate 70% stake in BlackRock down to the 30% range is another wildcard," he says, adding but "we believe Fink may have the upper hand in this negotiation, however."
A combination of Merrill Lynch's investment management group and BlackRock's $452.7 billion of assets under management would make a $1 trillion asset-management powerhouse.