Inside the Big Deal Between BlackRock and Barclays

Maria Bartiromo talks to Barclays President Bob Diamond and BlackRock Chairman and CEO Larry Fink

BlackRock's Larry Fink and Barclays' Bob Diamond Illustrations by Sean Mccabe based on photographs by Andrew Harrer/Bloomberg News

By Maria Bartiromo

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Even in boom times, BlackRock's (BLK) $13.5 billion acquisition of Barclays' (BCS) investment unit, Barclays Global Investors (BGI), would qualify as a megadeal. In these trying days, it's a certified blockbuster. On June 16, Barclays accepted BlackRock's bid and will be paid $6.6 billion in cash and the rest in stock. That makes BlackRock the world's biggest money manager, overseeing $2.7 trillion in assets—more than the Federal Reserve. Four days before the deal was sealed, I talked with Barclays President Bob Diamond and BlackRock Chairman and CEO Larry Fink, who started his firm in a one-room office 21 years ago.

MARIA BARTIROMO

Thirteen and a half billion dollars is a lot of money. What's attractive about BGI, and why buy it now?

LARRY FINK

There are only a few firms we truly thought were innovative and only a few firms we thought we could put together with BlackRock, and BGI was one of them. We had conversations in 2002 to see if there was anything to do in a combination, and we both realized we were not ready but maybe there would be a time in the future. The complements of products are unique, providing BlackRock with a great position in the passive management [or index tracking] side, the scientific equity positions, and, of course, the ETF business in iShares.

But you're really paying a big premium, a lot more than analysts thought you would. Did you overpay?
The market will do that test. But the market believed there was something going on between BlackRock and Barclays for weeks, and our stock has appreciated by more than 30%.

Bob, certainly it's a very nice price for you. What are you going to do with this money? Did you need new capital?

BOB DIAMOND

No...but I must say it puts us in a very good position for capital. What we have done is we've invested in the new BlackRock Global Investors, and both [Barclays CEO] John Varley and I will be on the board and do everything we can to support the strategy and Larry and his team in terms of how they manage the combined business.

Larry, you have a lot of relationships in the Mideast. Do you think that they are less risk-averse right now? Are you seeing sovereign funds and large Middle Eastern investors once again putting money to work in the markets? They did that before and got burned.

LARRY FINK

Not only sovereign wealth fund clients got burned in the market. I think anyone who invested in 2007 and early 2008 got burned. But in terms of what we are seeing from clients worldwide—from our sovereign wealth fund clients to our retail and institutional clients—I think they're saying Armageddon is behind us. They're now starting to ask questions: "What can we do to earn more than zero percent?" There is over $4 trillion sitting in money market funds. We have trillions of dollars sitting in short-term Treasuries. And we are seeing evidence now that clients are looking to take on more risk to earn a higher return. We've had a tremendous rally in credit, indicating people are looking to make a higher return, which means they are taking more risk. And in terms of our international clients, most certainly they are now engaging us with more questions as to how should they navigate their large pools of cash.

You've got $2.7 trillion under management now, and you've got a lot of cultures going on here. You've got the BlackRock culture, the Merrill Lynch (BAC) culture, now you've got the BGI culture. Some people say if it gets too big, you start worrying about the Citigroup (C) problem. When does it get too big to manage?
This is so different from Citigroup. First of all, we don't have a Merrill Lynch culture.

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