In the world of asset management, Larry Fink is something of a rock star. For starters, Fink has built his asset-management company, the New York-based BlackRock, into the third-largest bond manager in the U.S., with some $450 billion in assets. Indeed, investors in BlackRock's IPO back in October 1999 are very happy: BlackRock shares have appreciated by a factor of 10. Not bad for a kid from Long Beach, Ind., who started out selling bonds on the desk at First Boston. He quickly became First Boston's youngest partner, at the age of 28.

Fink was an instrumental figure in introducing mortgage-backed securities, now a $4 trillion market. Since launching BlackRock in 1988, he has raised a healthy crop of bond funds that perennially trump their peers, and his firm has become a household name in the institutional marketplace. He purchased State Street Research, America's second-oldest mutual fund company, in August 2004.

But Fink, like most successful businessmen, is not content to rest on past triumphs. He has recreated his investing house by swapping nearly half his company for Merrill Lynch Investment Managers, Mother Merrill's asset-management and mutual-fund group. It is a colossal deal: The combined entity, to be called BlackRock, will manage around $1 trillion when the deal closes in October. The firm will remain independent and, therefore, will allow BlackRock wide distribution in the retail marketplace and will have control of Merrill's rehabbed line of mutual funds. Merrill retains a 49.8 percent stake and gets rid of a perceived conflict of interest as a manufacturer and retailer.

Recently, Fink spoke to Registered Rep. Senior Editor Kevin Burke. He explains why he and Stan O'Neal hit it off so quickly in a BlackRock conference room in early January and were able to complete a deal in just three weeks — when Morgan Stanley and others couldn't get it done at all.

Registered Rep.: You've created one of the best bond fund shops in the world. Given that success, why fix what ain't broke? Why do such a big deal?

Larry Fink: When I'm working 12 hours a day, seven days a week, I ask that myself. I just see a whole transformation going on in the investment-management business. It started with the move to separate distribution and manufacturing. The other trend that is alarming to me is the speed in which globalization is happening. The cash and liquidity of foreigners — from the Saudis to the Japanese to the Chinese to South Americans, coupled with the strength of Western Europe in the U.S. — is growing so dramatically and so fast. So fast that, we here at BlackRock, in my mind, we were not keeping pace with the growth of the global capital markets.

RR: How is that happening in asset management?

LF: This is a really important point. If you look at the largest investors in the U.S. capital markets today, they're not U.S. players. It's these large players overseas. And importantly, the growth of the capital markets overseas in their own products is enormous. So I believe to be the best and the highest level of a fiduciary for all of our U.S. clients, we have to have a better knowledge of what is happening in China, Japan, Singapore, Korea, and what is going on in India, Kuwait, Riyadh and Eastern Europe. Understanding capital markets on a global basis, we'd, in theory, be better managers of our clients' money.

RR: So, this deal gives BlackRock a stronger global presence? And, being best known for bonds, you now have Merrill Lynch Investment Managers [MLIM] and an improved equity lineup?

LF: First and foremost, I would tell you that MLIM and BlackRock is an extraordinary fit in that there are very little redundancies. We're taking a firm that is strong and another firm that is strong, putting them together, and we're creating quite a powerhouse. You're correct in saying we're recognized in bonds. We had, before the merger, $45 billion in equity. This takes us into a whole new realm in equities. And on top of that, we're taking a company that is tremendously strong institutionally with a company that's tremendously strong in the retail channels, both in the U.S. and in Europe. It blends two distribution platforms together. Put those product platforms together, and we have a pretty unique organization with over a trillion dollars in assets.

If we are successful in implementing the merging of the firms, we will have the ability to be much further ahead in our growth plans overseas. Merrill Lynch Asset Managers had offices in Taiwan, offices in Korea, in Hong Kong and Australia, a very strong platform in Japan and offices in every major city in Europe. It really just gives us a much greater position to be a leader in the growth of global capital markets.

RR: So it's globalization with a diversified product line?

LF: Yeah, I think diversification. But there's one overwhelming trend that's going on institutionally. Our clients institutionally are saying, “We want fewer investment firms to deal with.” So they're looking for a broader sweep of products. Also, I do believe when you're going into different channels that it's easier for our wholesalers to go into the Morgan Stanley channel with a broader sweep of products than just bonds or just equities.

I would also say — and this is going to be a very important point — the MLIM platform really turned itself around at Merrill Lynch over the last two years. They started really doing quite well in the Merrill Lynch system. They were picking up market share because of their great performance.

And BlackRock has always had a very strong relationship with the Morgan's and the UBS' and the Wachovia's and the A.G. Edwards'. With the sweep of product that MLIM has and the sweep of products that BlackRock has, combining them will allow us to really go to those other organizations. So not only do we have opportunities — or great opportunities in the Merrill Lynch channel — we have great opportunities in Morgan Stanley and other similar channels.

RR: Does this deal suggest that a brokerage firm can no longer own an asset manager outright?

LF: It has always been my belief that there's a need for greater fiduciary standards. I believe it is more difficult to have distribution and manufacturing side by side.

RR: I realize there are some great synergies here with Merrill and BlackRock, but I was wondering what was so compelling about the deal that you sat down with Stan O'Neal and, bang, the deal came together very quickly. What made that happen so fast?

LF: We had conversations with over five large organizations. It was public that we had conversations with Citi. It was public that we had conversations with Morgan Stanley. It was public we had conversations with MLIM. It was not public about two other organizations, so I'm not going to even talk about those. The only three names that I can confirm to you are those three names.

So there were five organizations where we had, to various degrees, intense conversations about combinations. And those conversations allowed us to really understand what is good, what is bad, what will be necessary for BlackRock. Having those other conversations forced me to test, what do we need at BlackRock? How much can we handle?

So we had formulated quite a bit of a strong opinion, what works, what doesn't work. I think it was also very public that Merrill Lynch had one or two conversations, and I think they came a long way in formulating where they wanted to take their platform. I certainly don't want to speak for Stan, but I believe that's probably the case. And so when Stan visited me here in my conference room early January of this year, within 20 minutes we had similar themes. And we knew right away that there is ample reason to start aggressively having a dialogue. And those themes were as follows. I did not want to buy an investment firm that was imbedded in investment banking or broker/dealer firm without that firm having major equity interest in BlackRock. I do believe some linkage is important.

Stan did not want to sell; he wanted to transfer his equity in MLIM to equity in Black Rock. So right then and there, one of the major structural issues we already agreed on in five minutes. Two, Stan did not want to have any day-to-day control, he would have a minority interest, and minority interest on the board. We agreed on that right away. We agreed on the same themes about where the world was going in investment management. We had a belief that the combination of institutional and retail is a powerful combination. The ability to have over a trillion dollars of assets is going to have the power and the resources to compete in the global markets.

So we had a number of very transformational themes that we both agreed upon within our first 20 minutes of conversation. What it takes to make a good investment firm, and what we would be interested in and what he would be interested in. So, you're right, it came together very rapidly. But it came together because probably in both cases, we had already spent pretty close to seven or eight months of having conversations with other people. The fact that we had five serious conversations before Merrill just tells you that on many people's minds — because these were all large-scale assets with way north of $100 billion each — that large-scale organizations were really trying to figure out what should they do. And I believe BlackRock offered to those organizations a unique platform to be transformational with.

RR: Merrill has a pretty big stake at 49.8 percent. What measures are in place to ensure that Merrill doesn't wield too much influence or gain control?

LF: Well, we have an independent board of nine individuals, and Merrill Lynch has two seats as insiders. We've been working with PNC, which owned 70 percent of BlackRock, for a long time. Now they're down to 34 percent. And the SEC requires us to treat every equity owner equally.

RR: So it's less product or client oriented; it's more process?

LF: It's all process. To me, investment management is process, it is not merchandising. I think in the past too many investment firms forgot what their job was and they became merchandisers. The number one job is to be a manufacturer of alpha, and to have a process of excellence. That process has to be scrutinized and managed every day. I still sit on the trading floor. We don't have an executive suite here. I believe the number one job is making sure we have a competitive, scrutinized process of investing, and that process of investing is one that works for stocks, bonds, liquidity, whatever.

RR: You stated publicly that a lot of mergers, particularly in the investment-management world, don't work.

LF: I'll still say that today!

RR: And one of the potential pitfalls is a culture clash between the firms or a loss of talent. So what steps will you take to retain talent and enable the cultures to mesh?

LF: That's a great question. First and foremost, as I said, we looked at five firms. We saw the cultures of MLIM and BlackRock to be very similar. In the first six weeks since we announced the transaction, we signed up every portfolio manager we wanted to keep. They're all signed up. Every portfolio manager who is part of the new BlackRock has signed up. We also said from the very beginning — that on Oct. 2, the first official day of the new firm — there is only one firm, and it is BlackRock. So there's only one culture, one organization. This is a marriage; this is not a merger. We didn't look at this as an idea that we're going to fire 2,000 employees and just do a very creative deal. We're going to organize and merge into one platform.

RR: Obviously our readers are retail financial advisors. What does this merger mean, or what should it mean for these folks?

LF: Principally, it means we can offer them the excellence of what BlackRock offers; the excellence of MLIM's products without the Merrill Lynch name. It's going to be under BlackRock. It's going to be one unified organization with a tremendous sweep of products.