Posted by: Ben Steverman on May 15, 2009
The pursuit of Barclay’s prized iShares unit, the No. 1 ETF firm, continues to heat up. Here is a guest Investing Insights posting by BusinessWeek’s David Bogoslaw on the latest developments:
Could ETFs emerge as a more widely sought financial product in the future? It certainly looks that way from the interest Barclays is seeing not only in its iShares business but now its entire asset management unit, BGI. The British bank confirmed on May 15 that it’s considering selling BGI for up to $12 billion, with BlackRock and Bank of New York Mellon reportedly heading the list of suitors.
Under the terms of a sale agreement to it signed in April, Barclays has until June 18 to look for an offer that would top the roughly $4.4 billion price that private equity firm CVC Capital Partners is willing to pay for iShares. A number of firms are said to have shown interest in iShares and BGI, including Vanguard, another of the three biggest ETF providers.
The thought that BlackRock is open to such a big acquisition tells the world that BlackRock, and possibly other strategic acquirers, see this product as having a very hopeful future, says David Elan, a principal at Boston-based Windward Investment Management, 95% of whose holdings are in ETFs. That BlackRock would be willing to find the money for such a deal in these capital-constrained times is even more impressive.
Reportedly, all the deals that Barclays is considering would allow it to keep a stake in BGI, which manages $1.5 trillion in indexed assets. Its agreement with CVC excluded the lucrative share lending part of iShares, which earns big fees by lending shares in its funds to short sellers. Even though iShares, with about $300 billion in assets, is a small portion of BGI, Matt Hougan, editor of IndexUniverse.com, estimates that ETFs would account for half the price tag of $10 billion or more for BGI.
ETF investors should hope that whoever ends up buying BGI or one of its parts doesn’t take on too much debt to do so, and consequently have to raise management fees and take other steps to increase margins, says Hougan.
You don’t want an acquirer to “mess with the formula for success — low fees and a big investment in education. That’s what got BGI to the position it’s in,” he says.
If Vanguard buys iShares, the reduced competition could allow it bring fees on its own funds up to the higher level that iShares has been charging, says Elan at Windward. There’s also a chance that a larger diversified owner could be less aggressive on education or on monitoring spreads and working with specialists than iShares has been, though presumably the price alone reduces the odds of neglect.
A new owner might decide to close some of the less used funds or condense split sectors back into broader sectors to boost profit margins, says Dennis Guenther, co-manager of the $500 million Amerigo Fund at CLS Investments in Omaha, Neb. He hopes the new owner is committed to the ETFs that provide international exposure, which is much harder for individual investors and fund managers to get.