Handicapping Potential iShares Buyers

by on June 8, 2009 | Updated June 9, 2009 | ETFs Mentioned:

In April of this year, Barclays announced that it had agreed to sell its iShares line of ETFs to private equity firm CVC Capital Partners for $4.4 billion. So why all the speculation lately that BlackRock and other banks are in the running to acquire the fund family? As part of its deal with CVC, Barclays inserted a “go shop” clause, which allows it to seek out potential acquirers until June 18. With that deadline less than two weeks away, BlackRock and Bank of New York Mellon have emerged as frontrunners, but the fate of iShares is still murky. Here’s a look at several companies rumored to be interested in making an acquisition:

BlackRock (BLK)

Why a deal might happen: Several news reports this week have indicated that Barclays may be close to reaching a deal to sell Barclays Global Investors (BGI) and iShares to BlackRock for approximately $12 billion (note that the CVC deal only included iShares, so these price tags cannot be directly compared). With more than $1.2 trillion in assets under management, BlackRock is one of the world’s leading asset managers. Most of these assets, however, are in traditional mutual funds, fixed income, and alternative investment and real estate strategies. BlackRock would no doubt love to enter the rapidly-expanding ETF market, and the acquisition of iShares would certainly make competitors take notice.

Why a deal might not happen: BlackRock would likely need to raise capital to complete a takeover of BGI and iShares, with an injection likely coming from a consortium of Middle East partners. Kuwait’s KIO, the Qatar Investment Authority, and Adia, the government investment arm of Abu Dhabi, are rumored to be close to paying $3 billion for a 12% stake in BlackRock. The proceeds would presumably be used to partially fund an iShares acquisition. Existing BlackRock shareholders, including Bank of America (49%) and PNC Financial Services (33%) may be hesitant to dilute their investments by seeking additional investors.

Odds of acquiring iShares: 2-1

Bank of New York Mellon (BK)

Why a deal might happen: Numerous news outlets were also reporting Monday that BNY Mellon is also in the running to acquire BGI (including iShares). Late last week, CEO Robert Kelly indicated the company is actively looking to grow through acquisitions, saying “what we’re interested in is products that we don’t have today. We’re very big in the active space.” Kelly’s comments imply that his firm is looking to expand its presence in the passively-managed investment arena, which is dominated by ETFs. BGI oversees more than $1.5 trillion in assets, most of which are invested in funds whose holdings are passively determined by well-known indexes.

 Why a deal might not happen: BNY Mellon was among the nine largest financial institutions that received government money in October 2008 as part of the Troubled Asset Relief Program. The company, which received $3 billion from the government, has raised $2.7 billion through stock and bond sales to help repay the borrowings. Although BNY Mellon’s financial health has improved since October (in May it passed the government’s “stress tests“), funding of a $12 billion acquisition may not be a prudent move at this time.

Odds of acquiring iShares: 4-1 

Fidelity

Why a deal might happen: Fidelity has a relatively strong balance sheet, and finds itself in the unique position of having cash on hand without an obligation to the federal government. Although a leader in the mutual fund industry, Fidelity has been slow to enter the ETF arena, as its ONEQ fund has a market capitalization of less than $100 million. Similar to a few other potential acquirers, an iShares purchase would allow Fidelity to gain a huge market share overnight.

Why a deal might not happen: With any acquisition this big come significant risks. Although iShares is a tempting prize, Fidelity may be better suited to enter the ETF arena more gradually. Going from one fund to nearly 200 is a huge jump, and Fidelity may have some serious growing pains along the way. Given its established brand name and experience in the active management industry, Fidelity may prefer to build upon its existing fund line to gain market share. It’s also not clear if Fidelity would be willing to take on all of BGI (as opposed to just the iShares ETF line) in a potential deal.

Odds of acquiring iShares: 7-1.

Vanguard

Why a deal might happen: Vanguard has been the one traditional mutual fund company to truly embrace ETFs and get into the game early, allowing it to become one of the dominant players in the industry. Currently the #3 ETF sponsor behind iShares and State Street, Vanguard could firmly establish itself as the leading force in the ETF industry with the acquisition of the iShares fund family. 

Why a deal might not happen: Vanguard would likely have to borrow a significant amount of money to complete a deal, a task that remains difficult and costly in the current environment. In addition, there could be difficulties in integrating iShares ETFs with Vanguard’s current product offerings. Since a number of Vanguard finds compete directly with iShares (VBK and JKK are just one example), Vanguard would be left with significant overlap and risk cannibalizing its existing business. Since Vanguard has proven itself to be a highly popular and talented ETF sponsor, organic growth may be a preferred alternative over paying a premium to acquire an existing business line.

Odds of acquiring iShares: 7-1.

CVC Capital Partners

Why a deal might happen: CVC is the leader in the clubhouse, having agreed to acquire iShares for $4.4 billion back in April. Given the difficult, albeit improving, credit markets, other strategic buyers may have troubles raising the required capital to complete a deal. In addition, CVC would be owed a breakup fee of $175 million if Barclays selects another buyer.

Why a deal might not happen: There are simply too many asset management companies that have missed out on an entrance into the ETF industry and are now willing to pay a premium to play catch-up. Moreover, the fact that many deals rumored to be on the table now include all of BGI (as opposed to just iShares) diminishes the prospects for Barclays following through on the CVC deal. Although CVC has the right to make a counteroffer, it’s looking less and less likely that the firm will be interested in doing so.

Odds of acquiring iShares: 12-1.

The Field

There are a number of other long shots, including:

  • Northern Trust: A huge financial institution that tried and failed to launch its own line of ETFs.
  • Charles Schwab: The asset management firm has expressed its interest in entering the ETF industry, and could bring a well-known and respected brand name to the table.
  • Deutsche Bank: Another potential acquirer that has not taken any government money and is on relatively strong financial footing.

Odds of acquiring iShares: 30-1.