Morgan and BlackRock: Another Asset Swap?
Rumors swirled late Friday and Monday that Morgan Stanley, the struggling Wall Street powerbroker, was looking to takeover BlackRock, the successful institutional money manager. But a more likely scenario, say analysts, is that Morgan Stanley will sell its asset-management business to BlackRock and take a stake in the combined entity, much like Citigroup did with Legg Mason last year.
One driving force behind such a deal could be the firm’s interest in eliminating perceived conflicts of interest connected to housing product manufacturing and distribution under the same roof. Greater regulatory scrutiny over proprietary-product sales has made some investors wary of buying products that are sold by the same firm from which they get brokerage or financial-planning services.
Indeed, Morgan Stanley, which sells some proprietary funds under the Van Kampen name, has been fined millions of dollars by regulators over the past two years for pushing its own products through broker incentives that weren’t disclosed to investors.
The firm says it has since done away with the incentive programs, and executives recently told The Wall Street Journal that Morgan Stanley is considering changing the name of its Morgan Stanley funds, as Merrill Lynch recently announced it would do, to avoid the perception of conflict.
The combined Morgan Stanley and BlackRock asset-management business would add more value to each enterprise, while taking an ownership stake would allow Morgan to continue to benefit from the high-profit margins that the asset-management business enjoys, says Ruchi Madan, an analyst with Citigroup. Such a deal could drive Morgan’s stock price up some 15 percent, according to Madan’s calculations, while solving “some of [John] Mack’s issues in trying to ‘fix’ this business.”
Last year, overall assets in Morgan’s asset-management business grew less than 2 percent to $431 billion. Still, the asset-management unit remains its most profitable business, with a 43 percent pretax margin in the fourth quarter of last year.
“Lackluster growth has in part been the result of customer outflows,” writes Keefe Bruyette & Woods analyst Lauren Smith, in a report Monday. “For the year total outflows were $14.5 billion, with $5.1 billion from retail and $9.4 billion from institutional.”
For BlackRock, 70 percent of which is currently owned by PNC Financial Services Group, the benefits are, perhaps, less clear—though Madan suggests a couple. “This would increase value to BlackRock because of synergies created in the deal,” writes Madan. “And even though PNC’s ownership would be meaningfully diluted, this structure could also add value to PNC.” According to Madan’s calculations, the deal could add a 13 percent premium to PNC’s stock price.
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