Two ratings agenies have affirmed ratings for Merrill Lynch & Co. Inc. in the wake of its deal with BlackRock Inc. BlackRock will acquire Merrill’s investment management business in exchange for newly issued BlackRock common and preferred stock.

The deal will give Merrill Lynch 49.8% ownership in the new and expanded BlackRock, which will have just under US$1 trillion in assets under management.

Moody’s Investors Service says that the combination of Merrill Lynch’s asset management franchise and BlackRock is strategically attractive for Merrill. The new BlackRock will have greater scale, a better balance of AUM by asset class, and will have expense savings opportunities.

“The transaction means that Merrill Lynch loses direct management control of its asset management complex and the related profits and cash flows,” it notes. “Nonetheless BlackRock has demonstrated its ability to build and control an asset management operation and Merrill Lynch will retain access to a dividend stream of cash flows from a business that is less capital intensive than its institutional brokerage activities.”

Moody’s noted that the transaction is expensive to Merrill Lynch, based on BlackRock’s current high market valuation. A possible implication of the transaction is that Merrill may take a more aggressive stance to repurchasing shares in the future. Moody’s would evaluate such action in the context of Merrill Lynch’s current capital position and its future capital generation capacity.

The transaction also presents execution challenges, principally the ability to integrate management teams while maintaining strong investment performance at BlackRock, Moody’s adds.

Fitch Ratings says that the combined assets of Merrill and BlackRock create a formidable asset management franchise. “The combination immediately creates greater market share, product breadth and distribution capacity,” it adds.

It adds, “Fitch believes this acquisition has other positive results for Merrill as well. Spinning off the asset management segment reduces the perceived and/or real conflicts of interest that may occur when advisers sell products that are sponsored by their own firm. Also, some third party vendors may be more inclined to recommend funds that are branded by ‘independent’ fund sponsors. There are also synergies and economies of scale that may be exploited. The transaction also eliminates over $4 billion of goodwill on Merrill’s consolidated balance sheet.”

While Merrill does not have a controlling interest in BlackRock, it will have a 45% voting interest, and will be the largest single investor, it notes. It is expected, however, that the current president and CIO of Merrill’s asset management division Robert Doll would become vice chairman of the combined entity, and CIO for the equity business. Merrill will also have representation on the board comprised of a majority of independent members.

“In the event that the potential of this acquisition is not realized, the essence of Merrill’s franchise remains intact. MLIM is the smallest – in terms of both revenues and earnings – of Merrill’s three core businesses,” Fitch notes.