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BlackRock and Merrill Combine Platforms

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NEW YORK (–Hedge funds may constitute a minuscule portion of the newly combined asset management businesses of Merrill Lynch Investment Managers and BlackRock Inc., but the two could each see those businesses grow from greater distribution.

While Merrill is known for its equity offerings and BlackRock for its fixed-income prowess, together they will be able to offer a wide variety of investment choices to institutional and retail clients.

The new company slated to operate under the BlackRock name will total US$992 billion in assets under management, of which US$38 billion will be in alternative investments such as private equity, real estate and hedge funds.

While officials didn’t peg an exact figure for hedge fund assets under management, it’s likely to total less than US$10 billion and essentially will be the culmination of a handful of acquisitions in recent years.

BlackRock is one of the most well-known firms in the fixed-income world, so it may come as no surprise that the company made its initial foray into hedge funds managing fixed-income portfolios that as of 2003 totaled US$1.5 billion.

In 2002, BlackRock purchased a US$100 million long/short equity manager called Cyllenius Capital Management LP. The following year, officials bought a majority interest in HPB Management LLC, a fund of hedge funds managed by Howard P. Berkowitz that ran US$150 million. Between 2003 and 2005, BlackRock through its acquisition of HPB launched four funds of hedge funds.

Merrill Lynch in 1997 bought Mercury Asset Management, a U.K.-based firm that offered long/short equity products. Since then, the firm has branched out to offer a variety of hedge funds and structured offerings catering mainly to institutional investors.

On the retail side, Merrill Lynch is one of three firms that reportedly are the subject of a NASD investigation into the sales practices of retail hedge fund products. Bloomberg reported that Merrill had wanted to increase sales of hedge fund products after failing to meet its targets. The investigation covers sales taking place from January 2004 through May 2005, Bloomberg reported.

The merger of Merrill Lynch and BlackRock would create one of the top 10 largest asset managers worldwide with 4,500 employees in 18 countries and offices in the key markets of the United States, United Kingdom, Asia, Australia, the Middle East and Europe, officials said.

Merrill Lynch’s retail presence in the United States is expected to complement BlackRock’s global institutional client base.

“The combined company will leverage each organization’s strong momentum and will be well positioned to expand its products and distribution capabilities,” said Robert C. Doll, president and chief investment officer of Merrill Lynch Investment Managers, in a statement. As part of the transaction, Mr. Doll will become a vice chairman and chief investment officer of global equities in addition to chairman of the combined firm’s private client operating committee.

Under the deal, Merrill takes a 50% stake in BlackRock, leaving BlackRock’s former parent, the PNC Financial Services Group, with a 34% share in the combined company. The deal is expected to close in the third quarter.

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