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BlackRock Acquisition of BGI Presents Integration Challenges

BlackRock's deal for BGI will create the world's largest money manager. But integrating BGI's automated electronic trading and transaction cost analysis technology with BlackRock's Aladdin system will require a world-class effort.

When BlackRock completes its acquisition of Barclays Global Investors, it will become the world's largest money manager, overseeing $2.7 trillion in assets -- reportedly larger than the Federal Reserve Bank and twice as large as its two nearest competitors, State Street Global Advisors and Fidelity Investments. As a result of the $13.5 billion acquisition, which was announced June 11, BlackRock, the asset management giant known for its active stock and bond funds, will gain a powerhouse in index-fund management and exchange-traded funds as well as a highly automated electronic trading and transaction cost analysis infrastructure.

The deal, which is subject to shareholder and regulatory approvals and is expected to close in the fourth quarter of this year, will give the combined firm a foothold in active and passive fund management for retail and institutional investors. Barclays Bank will maintain a 19.9 percent stake in the new entity, which will be known as BlackRock Global Investors.

But how will BlackRock integrate BGI's technology, including the market-leading iShares platform for ETFs, with its own trading operations? Will BlackRock migrate BGI's trading desks and its vast transaction-processing infrastructure onto Aladdin, the enterprise investment platform that BlackRock uses for portfolio management, operations and risk management?

According to Laurie Berke, principal at financial market advisory and research firm TABB Group, the firms' complementary cultures should help smooth the integration process. She points out that both firms are oriented toward quantitative trading and technological efficiencies. "BlackRock is highly quantitative on the fixed-income side, while BGI is quantitative on the indexing and ETF side as well as in hedge funds," Berke comments. BGI also has a quantitative research group specializing in transaction cost analysis.

The Power of One System

To pull off the integration, there is speculation that BlackRock will draw on the skills of BlackRock Solutions, the firm's technology unit, which operates Aladdin, its enterprise risk management, analytics and investment systems platform. Aladdin is used by BlackRock internally and offered as a managed service to external investment managers.

Analysts expect BlackRock to integrate BGI's front-office trading systems into Aladdin. "The intent would be to fully integrate as they did with MLIM," says Berke, referring to Merrill Lynch Investment Management, which BlackRock acquired in 2006.

In an exclusive interview with Advanced Trading before the BGI merger was officially announced, BlackRock CIO Thomas Fortin talked about BlackRock's philosophy of running the firm on one technology platform. While he declined to comment then on the BGI acquisition, he said that throughout its history BlackRock has espoused the benefits of one system, one database and one process. He added that one of the keys to BlackRock's success has been its ability to run the entire firm on one front-, middle- and back-office system.

The beginnings of Aladdin -- which stands for "Asset Liability and Debt and Derivatives Investment Network" -- can be traced back 21 years ago to a department within BlackRock that developed the system for risk management and analytics, explains Fortin. Aladdin first was utilized in the mortgage-backed securities space before its use was expanded to other areas, he notes.

While integrating BGI's technology with its own will be a challenge, BlackRock already has integrated three other firms onto Aladdin successfully, beginning with State Street Research and Management in 2005 and then the MLIM merger in 2006. Most recently BlackRock acquired Quellos, a Seattle-based fund-of-funds manager, in 2007. "We're in the process of converting their business onto Aladdin now," relates Fortin.

Explaining that a main tenet of the firm's service strategy is, "One BlackRock," Fortin explains that "Whether the client has a portfolio manager in London, Tokyo or Hong Kong, they should feel they have the same approach." Technology, he says, "carries" this culture.

"It's a very powerful tool in that it not only makes people more efficient, but it also brings everyone together by having everyone speak the same language," Fortin says. One of the advantages of running on one system is that it "breaks down all information barriers between regions and departments," Fortin continues, noting that there is a strict and robust permission system that prevents portfolio managers in different regions from seeing each other's data.

Today the vast majority of BlackRock's equity portfolio management and operations as well as its fixed-income trading are on Aladdin, according to Fortin. "When it comes to trading, Aladdin is what our fixed-income traders use," the CIO explains.

Fortin adds that one of BlackRock's major equity investments this year will be the build-out of Aladdin's equity trading capabilities. While Aladdin currently is used in certain equity pockets today, he reports, major rollouts of equity trading on Aladdin are slated for the second half of this year and the second half of 2010.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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