Blackrock and Neuberger for sale?

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

Both, Blackrock and Neuberger, are very attractive assets held by Merrill and Lehman, respectively. But in the wake of the recent writedowns, it is thought that both firms are being pondered to be sold. Will they be sold? I would say no, but if they are, then we will know that Merrill and Lehman are seriously desperate for cash. Let's look at both money management firms:

Blackrock Inc. (NYSE: BLK) is an investment management firm that has almost $1.4 trillion in assets under management. Blackrock 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 branded 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, Blackrock acquired State Street Research, a mutual fund previously owned by MetLife, and also merged with Merrill Lynch Investment Managers (MLIM). The MLIM 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, Neuberger 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. Talk among analysts is that 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.

With respect to a sale of either of these firm, I really don't think that Merrill or Lehman wants to engage into such a transaction. Both money managers 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 writedowns. In fact, any asset sales of either of these two firms would probably be followed by a downgrade by the credit agencies which, in turn, could lead to a host of other potential problems.

If in fact they were to sell the assets, my expectation is that Merrill would sell a 10% stake in Blackrock while Lehman would sell off the entire firm. Merrill and Lehman, 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 Neuberger would be good and $8.5 billion (assuming they sell a 10% stake in BLK) should suit Merrill. Anything less could spell trouble.