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BLK AT A GLANCE

P/E ► 18.2 AVG EV/EBITDA ► 13.6 AVG ROA ► 3.4% AVG ROE ► 5.3% AVG Debt to Equity ► 0.637 AVG Current Ratio ► 0   Interest Coverage Ratio ► 12.8 AVG

 

 

 

 

 

 

With $2.8 trillion USD of assets under management (AUM) (pending the completion of its Barclays Global Investors acquisition), BlackRock (NYSE:BLK), Inc. is the world's largest publicly traded investment management and financial service firm. BlackRock's main source of revenue comes from its investment advisory fees generated by managing financial asset types including fixed income, equity, real estate, and alternative investments as well as fees generated from "BlackRock Solutions".^[1] In 2008, the company earned $4.40 Billion of its $5.06 Billion in revenue from these fees.^[1] As of March 31, 2008, BlackRock ranked fourth worldwide in terms of worldwide AUM, after Barclays Global Investors, State Street Global Advisors, and Fidelity Investments. ^[2] However, on June 16 2009 Barclays (BCS) accepted a BlackRock offer of $13.5 billion to sell its Barclays Global Investors division.^[3] If accepted, BlackRock would take on the name BlackRock Global Investors, and become the worlds largest money manager with $2.8 trillion of clients' funds.^[3] BlackRock Solutions is a brand name under which the company offers risk management and enterprise investment services, which provides services for $7 trillion in assets, liabilities, and derivatives^[4].

In 2006, BlackRock merged with Merrill Lynch Investment Managers, nearly tripling its assets under management (AUM) and turning it into one of the world's largest investment management firms, with over $1 trillion in assets.^[5] Immediately after this merger, Merril Lynch owned 45% of BlackRock's voting common stock and 49% of its capital stock, decreasing PNC Financial Group's ownership before the deal from 69% to 34% after the deal.^[6] Following the acquisition of Merrill Lynch (MER) by Bank of America (BAC) in late 2008, PNC Bank (PNC) owned approximately 46.5% of total voting common stock, and Bank of America/Merrill Lynch owned 4.9% of total voting common stock^[4].

BlackRock's 2009 third quarter net earnings jumped a record 46% to $317 million despite its revenues decreasing from $1.31 billion in 2008 Q3 to $1.14 billion.^[7] The company cites a combination of reduced costs and increased risk tolerance by investors for the higher than expected earnings. BlackRock was able to reduce operating expenses by $76 million, or 9 percent, by offering lower incentive compensation, reducing headcount, and cutting marketing and other expenses.^[7]

Company Overview

Headquartered in New York, BlackRock manages assets for both large institutional clients and private individual investors internationally, although the majority of its business is conducted in North America and Europe. BlackRock offers a breadth of financial investment products, including fixed income, equities, cash management, and alternative investments. BlackRock's revenue comes primarily from advisory and administration fees for managing and advising assets for its clients.

2008 was a tumultuous year for markets, caused in part by the 2007 credit crunch and the 2008 financial crisis. Despite a $217.1 billion decline in asset values due primarily to declines in the stock market, BlackRock attracted $167.6 billion of new business in 2008.^[6] However, in these uncertain times and as demand for risk management increased sharply, BlackRock Solutions performed well, leading to 2008 BlackRock Solutions revenues of $406 million, more than double its 2007 revenue.^[1]

Business and Financial Metrics

While revenue growth has grown each of the past four years, net income dipped slightly in 2008.^[1]

BlackRock 2008 revenue broken down by segment.^[8]

In 2008, BlackRock had total revenues of $5.06 billion, operating income of $1.59 billion, and net income of $786 million.^[1] Although total revenues increased by $219 million in 2008 compared to 2007^[8] primarily due to increased demand for BlackRock Soluions services, net income declined from $995 million in 2007 to $786 million in 2008.^[1] The decline in net income stems from a $584 million charge related to declining values from investments and co-investments in real estate funds, private equitiy and hedge funds.^[9] As of December 31, 2008, Assets Under Management (AUM) were $1.307 trillion, a $49 billion decrease from its 2007 level of $1.357 trillion.^[10] This decline is attributed to a $189 billion decrease due to market declines, and a $28 billion decrease due to foreign exchange losses, partially offset by an increase of $168 billion increase in new business attracted.^[10]

Business Segments

BlackRock operates the company as a single business. However, its revenues can be broken down into its revenue sources: Investment advisory and administration fees, BlackRock Solutions, Distribution Fees, and Other Revenue.

Investment advisory and administration fees (87.1% of 2008 Revenues)^[8]

Investment advisory and administration earns fees under four sub categories: i) Fixed Income, ii) Equities, iii) Cash Management, and iv) Alternative Investments. These fees make up the vast majority of BlackRock's revenues, earning it $44.1 billion in 2008, a $49 million increase from 2007.^[8] In 2008, fixed income revenues fell $9 million to $892 million and equities revenues decreased $117 million to $2.10 billion, while cash management revenues increased $188 million to $708 million and alternative investments increased $160 million to $531 million.^[8] Performance based revenues declined 49% in 2008, falling from $350 million in 2007 to $177 million in 2008, due to BlackRock's inability to earn perfornace based bonuses due to declining markets.^[13]

BlackRock Solutions (8.0% of 2008 Revenues)^[8]

Under the BlackRock Solutions name, the company has developed an operating platform called Alladin to support its investment and risk management operatins. BlackRock offers Alladin, along with other services, to 135 institutional investors during 2008.^[14] In 2008, due to increased demand, revenue earned from BlackRock Solutions increased 105% from $198 million in 2007 to $406 million in 2008.^[8]

Distribution Fees (2.7% of 2008 Revenues)^[8]

Distribution fees rose by $16 million in 2008 to $139 million, primarily due to an acquisition of distribution financing arrangements from PNC as well as an increase in contingent deferred sales commissions.^[13]

Other Revenue (2.2% of 2008 Revenues)^[8]

Other revenue include property management fees, net interest earned on loans, sales commission, and fund accounting services. Other revenue decreased $54 million in 2008 to $110 million, compared to $164 million earned in 2007.^[13]

Trends and Forces

BlackRock has begun to develop its own global trading platform

BlackRock announced on September 11, 2009 that is has begun to develop a global trading platform which will allow it to significantly reduce trading costs.^[15] The overall idea behind the platform is to cross trades among its various clients internally, thereby cutting costs related to trading. A quick example would help illustrate the general strategy. Suppose Blackrock has two clients, one who wishes to buy 100 shares of Company A at $100 per share, and another who wishes to sell 100 shares of Company A at $100 per share. Rather than actually making both trades, and thus incurring two sets of trading costs (one for the sale, another for the purchase), BlackRock hopes to internally make the transfer of shares within BlackRock itself, thereby avoiding both sets of trading costs. Being able to reduce its trading costs will alllow BlackRock to charge its clients less per transaction, helping it attract business.

BlackRock has applied to the public-private Treasury Fund

The public-private fund is a $1 trillion program set up by the government in which private investors and the U.S. Treasury contribute equal amounts of money, backed by a loan from the Federal Deposit Insurance Corporation (FDIC) to buy toxic assets such as troubled loans and mortgage backed securities (MBS) from large banks via auction.^[16] The program is designed to remove difficult to value assets from the balance sheet of banks in order to help banks begin lending again.^[17] On July 9, 2009 BlackRock was one of nine fund managers picked by the U.S. Treasury department. ^[18] BlackRock has since announced it plans to raise up to $5 billion for toxic assets.^[19] Whether BlackRock is able to profit from this depends not only on their ability to accurately value toxic assets, but also its ability to win bids against competing firms.

51.4% of BlackRock's voting common stock is owned by Bank of America (BAC) and PNC Bank (PNC)

As of February 27, 2009, Bank of America (BAC) and PNC Bank (PNC) owned approximately 4.9% and 46.5% of BlackRock's voting common stock respectively.^[20] Both Bank of America (BAC) and PNC Bank (PNC) have agreed to vote all of their shares in accordance with the board of directors recommendation. This means stockholders of BlackRock have no power to influence actions by the company, and any matters that go to a vote are effectively decided by the board. In other words, management control of the company lies directly and exclusively within the board of directors.

Breakdown of BlackRock's 2008 investment advisory and administration fee breakdown, by asset class.^[8]

70.2% of its Assets Under Management (AUM)^[21] and 67.9% of its revenues^[22] come from the United States

As of December 31, 2008, $917.98 billion of BlackRock's $1.307 trillion assets under management (AUM) came from the United States, representing 70.2%of its total.^[21] This is a 5.9% increase compared to 2007, when only 64.4% of BlackRock's $1.356 trillion of AUM came from the U.S.^[21] BlackRock's 2008 revenues from the U.S. was $3.44 billion, or 67.9% of its $5.06 total.^[22] This is a 4.5% increase compared to 2007, when only 63% of its $4.85 billion revenue came from the U.S.^[22] This makes BlackRock's earnings more exposed to economic downturns in the U.S., since fee revenues are loosely tied to a percentage of total AUM. As such, large declines in markets (such as the S&P 500 (.SPX-E)) result in lower levels of AUM. Furthermore, falling markets make it less likely that BlackRock is able to earn performance based fees, thereby reducing revenues even further.

BlackRock's source of revenues have slowly shifted away from fixed income assets toward equities

In 2008, 49.8% of BlackRock's investment advisory fees were due to equities, and only 20.3% came from fixed income.^[8] However, in 2006 only 33.6% of investment advisory fees came from equities, and in 2005 income advisory fees stood at only 17.3%.^[23] Conversely, fees generated from fixed income has steadily declined from 42.4% in 2005 to 30.7% in 2006.^[23] Since 2005, assets allocated to equities as a percentage of total AUM has consistently been less than fixed income, suggesting a higher margin for equities.

Competition

BlackRock faces competition from other companies that offer investment management services to both retail and institutional clients, including Barclays Global Investors, State Street (STT), and Fidelity Investments (privately held). BlackRock is ranked fourth worldwide in terms of global AUM, behind Barclays Global Investors, State Street, and Fidelity Investments.^[2]

• Barclays Global Investors has $1.495 trillion in total AUM, and is the world's largest investment advisory firm based on AUM.^[2] While its AUM remained relatively stable in terms of British Pounds (GBP), the dollar value of it declined 28% in 2008 due to unfavorable exchange rates.^[24]On June 16, 2009 Barclays (BCS) accepted a BlackRock offer of $13.5 billion to sell its Barclays Global Investors division,^[3] which if accepted would make BlackRock the worlds largest money manager with $2.8 trillion of clients' funds.^[3]
• State Street (STT), with $1.44 trillion in AUM, is an investment advisory firm based in Boston, Massachusetts.^[25] In 2008, it had total revenues of $10.70 billion, and net income of $1.81 billion.^[26]
• Fidelity Investments, with $1.25 trillion in AUM is the largest mutual fund company in the United States.^[27] In 2008, it had total revenue of $12.94 billion, and $2.36 billion in operating income.^[27]

Note: Financials for Barclays (BCS) are reported in British Pounds (£). For comparative purposes, Barclays (BCS) data in the above table was translated to USD using the GBP/USD exchange rate of 1.47605 on 29 April 2009.^[28]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6} BLK 10-K 2008 Item 6 Pg. 30
2. ↑ ^{2.0 2.1 2.2} Pensions & Investments Online. Top 150 managers of international/global assets.
3. ↑ ^{3.0 3.1 3.2 3.3} Barclays accepts BlackRock's $13.5 billion offer for BGI. Reuters.
4. ↑ ^{4.0 4.1} BLK 10-K Item 1 Pg. 1
5. ↑ BlackRock Merrill fund unit complete merger. John Spence. MarketWatch.
6. ↑ ^{6.0 6.1} BLK 10-K 2008 Item 7 Pg. 33
7. ↑ ^{7.0 7.1} Ross Kerber, John Wallace. BlackRock net jumps; cites client appetite for risk. Reuters.
8. ↑ ^{8.00 8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 8.10} BLK 10-K 2008 Item 7 Pg. 44
9. ↑ BLK 10-K 2008 Item 7 Pg. 50
10. ↑ ^{10.0 10.1} BLK 10-K 2008 Item 7 Pg. 40
11. ↑ ^{11.0 11.1 11.2} BLK 10-K 2008 Item 6 Pg. 26
12. ↑ BLK 10-Q 2009 Item 1 Pg. 3
13. ↑ ^{13.0 13.1 13.2} BLK 10-K 2008 Item 7 Pg. 45
14. ↑ BLK 10-K 2008 Item 1 Pg. 2
15. ↑ BlackRock develops global trading platform. Svea Herbst-Bayliss. Reuters.
16. ↑ $1 trillion public-private fund evolving, with delays. Ronald D. Orol. MarketWatch.
17. ↑ BlackRock applies to public-private Treasury fund. Ronald D. Orol. MarketWatch.
18. ↑ U.S. picks fund managers for toxic securities plan. Reuters.
19. ↑ BlackRock to raise up to $5 billion for toxic assets. Reuters.
20. ↑ BLK 10-K 2008 Item 1A Pg. 24
21. ↑ ^{21.0 21.1 21.2} BLK 10-K 2008 Item 1 Pg. 11
22. ↑ ^{22.0 22.1 22.2} BLK 10-K 2008 Item 1 Pg. 14
23. ↑ ^{23.0 23.1} BLK 10-K 2006 Item 7 Pg. 32
24. ↑ Barclays Global Investors 2008 Annual Report
25. ↑ STT 10-K 2008 Item 1 Pg. 1
26. ↑ STT 10-K 2008 Item 6 Pg. 31
27. ↑ ^{27.0 27.1} Fidelity Investments' 2008 profit falls 18 percent. Mark Jewell. YahooFinance.
28. ↑ GBP/USD Exchange Rate, X-Rates.com