Sunday, May 17, 2009

BGI's Other Appeal: Share Lending

By SHEFALI ANAND and SARA SCHAEFER MUñOZ The renewed bidding war surrounding Barclays PLC's money-management unit, Barclays Global Investors, is partly an attempt to grab the firm's attractive securities-lending business. In recent days, at least one firm, New York money manager BlackRock Inc., has been in talks to buy BGI, which manages $1.5 trillion in assets, according to people familiar with the matter. Barclays is asking for $12 billion. This includes the fast-growing exchange-traded funds unit, iShares, which Barclays agreed to sell for $4.4 billion to private-equity firm CVC Capital Partners, two months ago. That earlier deal would be undone if Barclays instead decides to sell its entire asset-management unit. The most recent discussions are valuing both iShares and the remaining business at a much higher price than just two months ago. When Barclays was shopping around the iShares unit earlier this year, analysts estimated that all of BGI could be sold for around $7 billion to $8 billion. Brighter Outlook Now, with the economy seen as poised for a rebound and stock prices rising, the outlook has improved for the asset-management business. The Standard & Poor's 500-stock index has shot up 17% from its March 16 close, just before Barclays said it is in talks to sell its iShares business. View Full Image Bloomberg News U.K. lender Barclays may get a better bid for its asset-management unit. The contract included a "go shop" clause, which allowed Barclays to solicit offers until mid-June. Barclays will pay roughly $180 million in a breakup fee if it dumps CVC for another bidder. Along with iShares, potential buyers of BGI are looking to partake in the securities-lending business, in which BGI is a leader. In securities lending, a fund lends out some of the stocks or bonds it holds in exchange for collateral. That money is reinvested in a low-risk investment to provide additional returns. For BGI, lending out securities held in the huge portfolios it manages has been quite lucrative. BGI had a pretax profit of £595 million ($906 million) in 2008. While Barclays doesn't break out profits from the various BGI units, a person familiar with the matter said as much as a third each came from the iShares and securities-lending business. BGI manages nearly $1 trillion in index and other passive funds for large pension plans, like the Federal Employees Retirement System. But BGI charges minuscule fees of 0.03% to 0.04% on this institutional business. "Most of the money that BGI makes comes from securities lending," said Matt Hougan, editor of Earlier Interest Seen for BGI Unit of Barclays Another $250 billion of BGI's assets are managed "actively" based on quantitative computer models. Quantitative trading fared poorly in the bear market. Sandy Chen, an analyst at Panmure Gordon in London, said that the value of BGI has risen along with the strength in markets in recent months and that a possible bid of more than $12 billion from a fellow money-management firm wouldn't be surprising. Justifying a Deal "The cost synergies with an acqusition of BGI for a fund-manger like BlackRock could justify a higher valuation," he said. He said the talks over BGI raises some questions about the health of its parent, Barclays. "Why would Barclays be doing this if they say they have no plans to raise additional capital and they say are doing very well?" he asked. Unlike some of its rivals, Barclays hasn't turned to the U.K. government for capital during the financial crisis. It recently passed a test of financial resilience by U.K. regulators and said it had no plans to raise additional capital. The bank's shares have quadrupled in value since early March. Write to Shefali Anand at and Sara Schaefer Muñoz at

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