Merrill to Sell Fund Operation to BlackRock

Merrill Lynch & Co. announced a deal Wednesday to combine its mutual fund arm with fast-growing investment firm BlackRock Inc., creating a fund colossus with almost $1 trillion in assets.

Merrill agreed to swap its fund unit to BlackRock for a 49.8% stake in the New York-based firm, valued at about $9 billion.

BlackRock, which caters to institutional investors such as pension funds, specializes in bonds and other fixed-income products.

Blending their operations has benefits for both firms. Merrill, best known as a stock brokerage, can shed its disappointing fund operation by gaining a stake in a well-regarded fund company.

BlackRock, meanwhile, can boost its profit by more than doubling its asset base and will be able to round out its investment offerings by adding a menu of Merrill stock funds.

With Merrill’s fund operation, BlackRock will have more than 4,500 employees in 18 countries.

The deal followed a similar one last year in which Citigroup Inc. sold its asset management business to Legg Mason Inc.

Morgan Stanley had earlier been in talks with BlackRock, but those negotiations reportedly broke down over price.

Small investors may benefit when brokerage operations are separated from funds owned by the same company, some analysts say.

Brokerages made a big push in the 1990s to have their brokers tout in-house funds -- even though most were burdened by weak performance.

Regulators have cracked down on the practice in recent years by fining firms that gave financial inducements to brokers who favored in-house funds.

“Now the individual investor can feel confident that there isn’t some background, inside deal that’s going on to their detriment,” said Lou Harvey, president of Dalbar Inc., a financial-services research firm.

But Roy Weitz, founder of FundAlarm.com, a mutual fund watchdog website in Tarzana, doubts that small players will benefit from the Merrill-BlackRock marriage. Merrill brokers may simply direct clients to the new BlackRock funds, he said.

“Merrill is still going to have big equity in this new venture, and theoretically Merrill still has an incentive to push its brokers to push these new funds,” Weitz said.

Merrill’s stock rose 14 cents to $75.30, while BlackRock shares added $5.29, to $151.25.