NEW YORK -- Merrill Lynch & Co., the world's biggest securities firm, will give up its fund management unit for a 49.8 percent stake in BlackRock Inc., transforming the bond specialist into the fourth-largest U.S. investment company.
The deal combines Merrill's funds, mainly in equities, with BlackRock, creating a company with $1 trillion in assets. Merrill will record a $1.1 billion gain from the sale.
BlackRock will leapfrog rivals such as Vanguard Group and rank behind State Street Corp., Fidelity Investments and Capital Group among U.S. money managers.
Merrill Lynch will end three decades of selling funds that have recently lagged behind competitors in attracting investors and whose profits are dwarfed by investment banking and trading.
"Merrill funds haven't exactly been shooting the lights out performance-wise," said Kevin Moore, who helps oversee about $800 million, including Merrill shares, at ASB Killian Capital Management in Palatine, Ill.
"They recognized the difficulty of managing funds in-house and are outsourcing to BlackRock."
Shares of BlackRock, up 82 percent in the past 12 months, rose 5 percent to $153.11 yesterday on the New York Stock Exchange, giving the company a market value of $9.8 billion. Merrill's stock rose 4 cents to $75.20. Shares of PNC Financial Services, which owns 70 percent of BlackRock, rose 3 percent to $68.99.
Under the agreement, BlackRock will issue 65 million new shares to Merrill Lynch. That stake is valued at $9.5 billion, based on yesterday's closing price. Merrill will report its share of earnings from the combination in future income statements, according to Merrill Chief Financial Officer Jeffrey N. Edwards.
The deal "opens up a whole new customer for BlackRock," said Robert Lutts, president and chief investment officer of Cabot Money Management in Salem, Mass., which holds BlackRock shares. "Retail customers haven't typically been a major focus for them, but now they will be."
Merrill's decision follows a similar move by Citigroup Inc., the biggest U.S. bank. Citigroup in December traded its asset management business to Baltimore's Legg Mason Inc. in return for stock, cash and a team of brokers in a deal valued at $3.7 billion.
BlackRock's assets grew four times faster than Merrill's last year, rising 32 percent, compared with 8.6 percent at Merrill.
BlackRock chief executive Laurence D. Fink, a pioneer of the mortgage-backed bond market, founded the firm in 1988 with capital from private-equity firm Blackstone Group LP. PNC bought the company for $240 million in 1995 and sold a stake to the public four years later.
BlackRock, which trails Legg Mason's Western Asset Management division and Pacific Investment Management Co. in the size of fixed-income assets it manages, last month reported its biggest profit since going public in 1999.
It had 1,020 employees at the end of 2004 and has offices in Boston, Chicago, and eight cities overseas. The new company will have more than 4,500 employees.
Merrill Lynch Investment Managers, whose flagship funds include the Merrill Lynch Global Allocation Fund and Large Cap Value Fund, had 2005 profit before taxes of $586 million on revenue of $1.8 billion.
Merrill's funds under management rose 8.6 percent last year. About 54 percent of total assets are in equities and 23 percent in fixed income.
The agreement underlines Merrill Lynch CEO E. Stanley O'Neal's willingness to sacrifice history in a quest for profit. Under David H. Komansky, who ran the firm from 1996 until 2002, Merrill's work force ballooned to 72,000. It was Komansky who in 1997 presided over the firm's $5.3 billion takeover of Mercury Asset Management of London.
O'Neal slashed almost 25,000 jobs and closed more than 200 offices, helping the firm post record profit in each of the past three years. Net income rose 18 percent in 2005 to $5.22 billion. Until yesterday, his biggest acquisition had been Merrill's 2004 purchase of energy trader Entergy-Koch LP for $800 million.
Fink said in an interview that he expects "large-scale consolidation" in the fund-management industry. He said he has "no reason" to cut the number of money managers at BlackRock.