PDF 2006 2 23 BlackRock Merger - County of Fresno

WURTS

ASSOCIATES

MEMORANDUM

To: Fresno County Employees' Retirement Association From: Wurts & Associates CC: Jeffrey MacLean, Chief Executive Officer Date: February 23, 2006 Re: BlackRock Merger with Merrill Lynch

BlackRock, Inc. and Merrill Lynch recently announced an agreement to merge Merrill Lynch's investment management business, Merrill Lynch Investment Managers (MLIM), into BlackRock. In conjunction, Merrill Lynch will take a 49.8% ownership position in BlackRock which includes a 45% voting interest in the company. Essentially, Merrill is swapping 100% ownership in MLIM for a 49.8% interest in BlackRock. PNC Financial, which acquired BlackRock in 1995, currently owns 70% of the firm with the remainder owned by employees and the public. Following the transaction, ownership in BlackRock is expected to be split 49.8% Merrill Lynch, 34% PNC and 17% public and employees. The deal has been approved by the boards of both companies and is expected to close by September 30, 2006. The combined company will operate under the BlackRock name and all U.S. product offerings will be distributed with the BlackRock brand. The company is expected to be governed by a 17 member board of directors which include four management1 members as well as two from Merrill Lynch, two from PNC Financial and nine independent directors2. Following the integration of MLIM, BlackRock will become the largest publicly traded asset management company as well as one of the top ten manager's globally with $1 trillion in combined assets. As a result, the firm will be the largest active fixed income manager and the 13th largest equity manager globally. The BlackRock fund family itself will be the fourth largest broker-distributed fund family.

Rationale for BlackRock: For BlackRock, the deal allows them to continue to diversify their fixed income business into equity and other asset classes as well as broaden their international reach. Roughly 85% of the firm's assets are fixed income/cash management oriented and over 77% of their client base is U.S. domiciled. In Europe alone, Merrill Lynch has over 10,000 selling agreements in place. By adding the BlackRock brand and products to this platform, management sees significant growth potential in European as well as other non-U.S. markets. The deal also allows them to expand their client base, which is largely institutional, into retail markets and provides a built-in distribution channel through Merrill Lynch's 15,000 broker network. In addition, BlackRock acquires $540 billion in fee-paying assets as well as increased scale and operational efficiency without giving up a controlling stake in the firm.

Rationale for Merrill Lynch:

1 Management members include three original BlackRock members (Larry Fink, Ralph Schlosstein, and Robert Kapito) and one former MLIM member (Bob Doll). 2 David Komansky, former Chairman and CEO of Merrill Lynch is a member of the "independent" board of directors. He has been on BlackRock's board since his retirement from Merrill in 2003.

Institutional Investment Consultants Seattle and Los Angeles

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ASSOCIATES

For Merrill Lynch, the deal allows them to divide their potentially conflict-creating asset management unit and brokerage operations and divest MLIM which was a small revenue driver for the firm (8% of pre-tax profits in 2005). More importantly for them, Merrill Lynch funds will be rebranded to the BlackRock name in the United States. Merrill plans to leverage the BlackRock brand in order to sell to third-party distribution networks. In addition, given increased regulatory scrutiny, it is increasingly difficult for brokerages to aggressively sell in-house funds due to potential conflicts-of-interest and other issues. This has slowed existing growth in sales and distribution for Merrill. By combining MLIM into BlackRock, they believe that the appearance of conflicts and regulatory scrutiny may be reduced and sales growth may accelerate. Other benefits include access to BlackRock's fixed income capabilities and technology platform. Management plans to leverage BlackRock's technology capabilities, BlackRock Solutions, across the entire firm and allow for an easier integration. The deal also allows MLIM to diversify its equity-oriented investment lineup and gain increased exposure to potential growth in new areas such as liability-led mandates.

MLIM has a total of $539 billion under management of which roughly 40% or $211 billion is fixed income. Over half of the $211 billion is liquidity and cash equivalents. Merrill has one Core Bond strategy with $4.9 billion in assets. Following the combination, BlackRock's fixed income assets will rise from $386 billion to $635 billion. Despite this increase in total fixed income assets, we believe the impact to BlackRock's Core and Core Plus products will be negligible from an asset flow standpoint. While little is known about the integration of personnel, we believe the impact to BlackRock's fixed income team will be minimal based on the information we have available. Rob Kapito will remain as Head of Portfolio Management at BlackRock and Keith Anderson will continue as Global Fixed Income CIO. One known change is that MLIM's CIO, Bob Doll will become Global Equity CIO and Chairman of the Private Client Operating Committee following completion of the transaction.

Following discussions with both BlackRock and Merrill Lynch, there appears to be little additional details regarding the combination given how fast the deal was put together. There is an Integration Steering Committee which is co-chaired by BlackRock's President, Ralph Schlosstein and MLIM's CIO Bob Doll, that is charged with coordinating and ensuring a seamless transition. The Committee's first meeting was February 22nd and we expect to continually receive more information on the integration up to the expected close of the deal in the third quarter of this year. In the meantime, there are several specific areas that we feel are worth noting:

? Integration: We believe the initial success of this transaction will be predicated on the successful and timely integration of the MLIM unit into BlackRock. We do not expect any major personnel changes on the BlackRock side. However, it is unclear how MLIM's 2,600 employees and over 550 investment professionals operating in over 17 countries will be integrated into the BlackRock organization.

? Controlling Interest: There is a standstill agreement in place that prevents Merrill from increasing ownership over and above 49.8% on a fully diluted basis for five years following the close of the deal. Merrill is also required to hold its stake for a minimum of three years. In addition, upon change of control of Merrill Lynch within the first five years, the firm is required to sell down their ownership stake to 24.9% or convert to all non-voting shares. So, over the near term we do not believe a risk of assigning a controlling interest is significant.

? Culture Clash: We are concerned about the risk of "culture clash". In integrating any two organizations, maintaining the integrity of the firm culture is very important to the success of operations and stability of personnel in the future. While this is difficult to quantify, it is still a concern and we believe will have a significant influence in the success of this deal. BlackRock

Institutional Investment Consultants Seattle and Los Angeles

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ASSOCIATES

CEO, Larry Fink expressed that maintaining the integrity of BlackRock's culture is a top priority for management. ? Business Development & Growth Objectives: As a part of the growth objective of the deal, BlackRock's brand will have to be built in the retail market. We believe that BlackRock will be largely dependent on Merrill Lynch and third party broker networks for this. As the strategy for distribution unfolds, we feel that Merrill may exert increasing influence as a significant amount of assets will be among their distribution network. We will be looking for any signs that Merrill's business development goals may not be in the interest of our clients over time. As a combined firm, both entities growth objectives must be aligned as they are now dependent on one another to achieve them. It is unclear at this point as to what exactly their growth objectives are. ? Compensation and Employment Agreements: We will look for any signs of changes in how investment professionals are compensated and/or retained leading to and following the integration. In addition, any major changes in personnel at BlackRock would be a major concern for us.

We are expecting that more information on the specifics of the integration as well as more clarification on the aforementioned risks will become available as the third quarter transaction date approaches. Based on the information available, we do not expect any major adverse operational and/or personnel changes to BlackRock's existing Core and Core Plus strategies at this time. However, as in any major organizational change such as this, uncertainty regarding the future prospects of the business and organizational stability is created. Therefore, we feel that plan sponsors may want to carefully consider this information as we wait for more clarification on the impact of this transaction. Wurts & Associates will monitor this situation closely and keep you apprised as new information becomes available.

Institutional Investment Consultants Seattle and Los Angeles

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