Hitt og þetta 16. febrúar 2006

WSJ: CEOs Meeting Lead To Merrill-BlackRock Deal

New York -- MONEY MANAGER BlackRock Inc. was in the midst of deal discussions with Morgan Stanley on Jan. 17, when the heads of BlackRock and Merrill Lynch & Co. met at the Three Guys coffee shop near their homes on Manhattan's Upper East Side.

Merrill had caught wind of the BlackRock-Morgan talks. And days before, a meeting was discreetly set up between Merrill Chief Executive Stan O'Neal and BlackRock Chief Executive Laurence Fink. Over canned grapefruit juice and a bowl of Raisin Bran, Mr. O'Neal explained his point of view.

Unlike Morgan Stanley Chief Executive John Mack, Mr. O'Neal said he would be willing to combine the two companies' money-management operations in a way that would leave BlackRock with control of the new firm.

As long as Merrill still had a meaningful partnership role, Mr. O'Neal was willing to swap a business that produced 60% of the combine company's profits for just a 49% ownership stake. Now, with the Morgan Stanley talks stalling over control and price, Mr. Fink's plans began to change.

That meeting kicked off what became known as "Project Trident," a $9.8 billion exchange that would transform BlackRock into one of the world's biggest money managers. It will also reshape how Merrill, which has the largest army of 15,160 brokers, sells the mutual funds that are the staples of household finances across the country.

For the deal-averse Mr. O'Neal, it represents the largest transaction in his four-year tenure, and the best chance to squeeze more growth from his $525 billion money-management unit, which offered its first mutual fund back in 1969.

Under terms unveiled yesterday, Merrill will exchange its Merrill Lynch Investment Managers business for 65 million shares of BlackRock, valued at $9.8 billion. The newly formed BlackRock will control some $1 trillion in investments.

The market reception has, so far, validated Mr. O'Neal's approach. Since the talks were reported on Monday, BlackRock stock has surged 15%. And Merrill's stock has risen all three days as well, up yesterday 14 cents to $75.30 a share in 4 p.m. trading on the New York Stock Exchange.

Wall Street runs on personal alliances and enmities, and the wooing of BlackRock featured a three-way dance between Mr. O'Neal, Mr. Fink, and Mr. Mack. As longtime friends, Mr. Fink recommended Mr. Mack to headhunters who were filling the top job at Morgan Stanley last year. And during the course of the negotiations that kicked off in early November, it became apparent that Mr. Fink could eventually be his heir apparent if a deal were reached.

Mr. Mack, meanwhile, wouldn't budge on his demand to keep control of a reformed BlackRock. If Morgan Stanley was contributing a majority of earnings, why should it accept less than a 60% stake in the new company, he asked. As the two sides parried, it became clear that there were two potential buyers, and no seller, say people familiar with the discussions.

That left an opening for the 54-year-old Mr. O'Neal. He proved eager to sew up a deal, agreeing in substance to many key points soon after the Jan. 17 breakfast. In the talks, Merrill Lynch was given the code name "Miami" and BlackRock was dubbed "Boise."

But even though both had served on the board of the New York Stock Exchange, Messrs. Fink and O'Neal didn't know each other well. As a kind of executive speed-dating, they headed out for a series of meals, hitting two of Manhattan's swankiest restaurants, Picholine and Sistina.

This wasn't the only deal Mr. Fink had considered. He had also held talks with Mellon Financial Corp. about a merger that would give Mr. Fink the chief executive role. But those talks petered out, and Mellon chose a new chief executive.

Developments grew rockier for Morgan Stanley by late January. On Jan. 20, CNBC-TV reported the talks between BlackRock and Morgan Stanley. The leak caught Mr. Mack halfway around the globe, on vacation in Tahiti.

The ensuing public drama was draining for Mr. Fink, given the longtime Mack-Fink friendship. Merrill didn't want a contested negotiation, and Mr. Fink didn't want to use Mr. Mack as a stalking horse. So upon his return, Mr. Mack ended the merger talks.

On Jan. 24, Mr. O'Neal informed Bob Doll, head of Merrill's money-management group, that Merrill was actually in talks with BlackRock -- a possible partner Mr. Doll had ranked highly in company strategy sessions.

By Jan. 29, over French wine in Mr. Fink's apartment on the Upper East Side, Messrs. Fink and O'Neal agreed to move forward. Two days later, word went out that the Morgan Stanley-BlackRock talks had "hit a snag."

Discussing the deal on a conference call with analysts yesterday, Mr. O'Neal said he wanted to "accelerate growth" at MLIM and "diversify" the stock-heavy business across asset classes. He sought a partner with a publicly traded stock as a currency for new acquisitions, and a recognized brand with strong distribution channels.

His requirements in the BlackRock talks, his colleagues say, were to receive "value for value," or a stake in the new entity commensurate with MLIM's existing value, and a true partnership. "When I spoke to Larry at first," Mr. O'Neal said, "it was clear we had a meeting of the minds on this concept." From there, he said, it was "a relatively easy decision."

Initially, Merrill's influence over the merged company will be curtailed in several ways. In exchange for MLIM, Merrill will receive 12.6 million shares of BlackRock nonvoting participating preferred stock, as well as 52.4 million class A common stock, which carry a 45% voting stake.

Moreover, Merrill executives will initially have only two seats on the 17-member board, in addition to Mr. Doll, who will become vice chairman of BlackRock and head of its stock investments. The Merrill board seats will be filled by Mr. O'Neal and Gregory Fleming, co-head of markets and investment banking.

Merrill also agreed to restrictions on voting its shares, according to a presentation prepared for BlackRock investors. Among them, BlackRock said, are that "certain significant matters" require a vote of 70% of all directors and 100% of the nine independent directors.

Merrill, along with another minority owner, PNC Financial Services Group Inc., must also vote its shares as recommended by the board.

Merrill agreed to the governance limits even though MLIM has more money under management, at $544 billion, compared with $452.7 billion for BlackRock, because BlackRock has been growing faster. BlackRock's net earnings for 2005 rose 63% to $233.9 million, while MLIM's pretax earnings rose 27% to $586 million.

In an interview, Merrill's Mr. O'Neal illustrated the appeal of gaining a new brand name for Merrill mutual funds by noting that Merrill brokers will sell Van Kampen funds, but not Morgan Stanley funds -- even though Van Kampen is a Morgan Stanley brand.

Merrill Lynch was advised by its own investment bank and attorneys at Sullivan & Cromwell. BlackRock was advised by Citigroup Inc. and Skadden, Arps, Slate, Meagher & Flom. PNC was advised by Credit Suisse Group and Wachtell, Lipton, Rosen & Katz.