Institutional money management firms have always been a good business. Maybe not as sexy as prinicpal trading but always a dependable revenue stream. They offer a highly predictable cash flow without the cost of extensive capital requirements that might go into other business models that sit as these same revenue levels.

Both, Blackrock and Neuberger, are very attractive assets. But should they be sold? I would say no, but if they are, then we will know that MER and LEH are seriously desperate for cash. Let’s look at both firms:

Blackrock Inc. (NYSE: BLK) is a investment management firm that has almost $1.4 trillion in assets under management. BLK was founded as the Financial Management Group in 1988 within the private equity firm Blackstone Group. After a number of acquisitions, the firm was spunoff from the Blackstone Group under the name Blackrock and was aggressively re-invented as an independent money management firm. Then in 1995, PNC Financial purchased BLK where assets under management would grow to $165 billion over the next few years. Shortly thereafter, the firm decided to go public.

Since then, BLK acquired State Street Research, a mutual fund previously owned by MetLife, and also merged with Merrill Lynch Investment Managers (MLIM). This deal, which was completed in 2006, halved PNC’s ownership and gave Merrill Lynch a 49% stake in the company.

Neugerger Berman Inc. is an investment advisory firm founded in 1939 by Roy Neuberger to mange funds for high net worth individuals. In 1950, NB became one of the first firms to offer a no-load mutual fund to individual investors and, in 1971, launched a portfolio for institutions which pushed the firm into the foray of institutional based money management.

In 2003, Lehman Brothers bought NB for $2.6 billion in cash and stock which at the time represented about 4% of NB’s assets under management. Analysts at the time commented that price was “reasonable” considering the stature of the NB brand. Street talk among analysts is that if Lehman could possibly fetch $8 billion if it were to sell off NB on the basis of their firm’s $130 billion in assets under management.

I really don’t think that MER or LEH really wanted to consider doing such a thing – selling their prized money managers. Both firms are cash flow machines and provide a nice anchor in earnings to an otherwise volatile earnings environment. But it appears that they might need to do so as to increase their firms’ liquidity after their massive CDO writedowns. And to make matters, they will need to make these sales from a “must sell” position which could comprise the valuation of these firms.

My expectation is that MER sells a 10% stake in Blackrock while LEH sells off the entire firm. MER and LEH, at a minimum, must demand a sale price of more than 5% of the assets under management and possibly even more. Therefore, $8 billion for NB would be good and $8.5 billion (assuming they sell a 10% stake in BLK) would be good for MER. Anything less could spell trouble.

Last 5 posts by Agustin Gonzalez

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