PDF Memorandum To: Tacoma Employes' Retirement System

MEMORANDUM

TO:

TACOMA EMPLOYES' RETIREMENT SYSTEM

FROM:

ANDREW JUNKIN, CFA, CIMA, CAIA

SUBJECT: BLACKROCK ACQUISITION OF BGI

DATE:

8/10/2009

The purpose of this memorandum is to address the pending BlackRock acquisition of Barclays Global Investors (BGI). On June 16, 2009, BlackRock announced that the Barclays Board of Directors accepted BlackRock's offer to acquire BGI. The proposed entity, called BlackRock Global Investors, will create one of the largest asset management organizations in the world with a combined AUM of approximately $2.7 trillion. Large organizations such as this can present both opportunities and concerns for clients.

The combined entity of BlackRock Global Investors will be a large financial services organization with a multitude of investment service offerings including but not limited to fixed income and equity indexing, active fixed income and equity strategies, alternative asset investment strategies, risk management software solutions, overlay and portable alpha strategies, securities lending, and transition management. Evaluating the pros and cons of this consolidated entity entails looking at the affect of the entire organization as well as the impact on specific investment product lines.

The acquisition raises concern that BlackRock has transformed from an organization focused on producing institutional quality investment products to an organization focused on asset gathering. The key concern is that the focus has shifted away from an investment culture that promotes the production of fresh intellectual ideas. Below is a timeline outlining key organizational changes that moved the firm from a stand-alone fixed income shop to a global investment services organization:

? Founded in 1988 by Laurence Fink, the Chairman and CEO since the firm's inception, as a fixed income manager.

? PNC Financial Services Group (PNC) acquired BlackRock in 1995 with a 62% stake in the firm.

? In 1999, the firm went public distributing the remaining 38% between BlackRock's employees and the public.

? In 2005, BlackRock acquired SSRM Holdings Inc. (holding company of State Street Research and State Street Realty) to enhance BlackRock's platform in equity, alternatives and real estate strategies.

? In 2006, BlackRock and Merrill Lynch Investment Management (MLIM) merged. Merrill Lynch became a minority stakeholder and PNC's ownership was reduced.

? In late 2007, BlackRock acquired the Fund of Funds company Quellos Group, LLC. Quellos specialized in Absolute Return and Private Equity fund of funds. The organization was integrated into BlackRock's Alternative Advisors group.

? On January 1, 2009, Bank of America Corporation acquired Merrill Lynch and as part of the transaction, Bank of America and PNC agreed to exchange portions of their voting common stock for non-voting preferred stock. Following the transaction, Bank of America and PNC held 4.9% and 46.5% of BlackRock's voting common stock and 47.4% and 31.5% of the fully-diluted capital stock, respectively.

Certain investment management operations benefit from economies of scale such as indexing, securities lending, and transition management, whereas strategies in active fixed income, equity, and alternatives will have increased concerns relating to the affect a large merger will have on corporate culture, compensation, product overlap, personnel displacement, and preserving investment processes. The consolidation should not pose any additional risk for the BGI's index and ETF business. BGI's Alpha Tilts strategies are in a period of relative underperformance. We have historically viewed the Alpha Tilt strategy as one of the premier products within the realm of structured and enhanced quantitative-based strategies. Because of the compound effect of the recent period of underperformance the potential distraction due to the consolidation, and the risk of a reduced quantitative research group, which is integral to the strategy, we are currently cautious about the Alpha Tilt products and will be diligently monitoring their progress. The future of BGI's fixed income strategies remains in serious question. BlackRock has a well-established and recognized fixed income platform. However, during the recent market turmoil the BGI fixed income group has performed relatively well versus BlackRock. We will closely monitor the consolidation process of the fixed income platform and the progress with BlackRock's performance.

The System has exposure to BGI through Alpha Tilts, one of the System's enhanced index investments. As of June 30, 2009, the value of the System's investment was $18.4 million.

At this point, the exact fashion in which the organizations will be combined is unknown. As information surfaces on the logistics of the consolidation, we will monitor the organizational effects that transpire. In the meantime, we are in frequent contact with senior executives at both firms. While we are not recommending any specific course of action at this time, the consolidation has raised our concerns for the future of the combined organization and the impact on its individual investment strategies.

2

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download