updated 2/15/2006 9:35:21 AM ET 2006-02-15T14:35:21

Retail brokerage giant Merrill Lynch & Co. Inc. has agreed to combine its investment-management business with money manager BlackRock Inc. in exchange for a nearly 50 percent stake in BlackRock, the two sides said Wednesday.

The transaction, which is expected to close in the third quarter, would transform BlackRock into one of the world’s top money managers, with an asset base of around $1 trillion.

The deal comes just weeks after Wall Street investment bank Morgan Stanley ended widely reported discussions for obtaining a stake in BlackRock and as more and more top-tier Wall Street firms look to smaller, more specialized competitors for alliances or acquisitions.

Under the deal, Merrill Lynch’s stake in BlackRock will be 49.8 percent, and it will have a 45 percent voting interest in the combined company. The new company will operate under the BlackRock name and be governed by a board of directors with a majority of independent members.

PNC Financial Services Group Inc., which bought BlackRock in 1995 and currently owns 70 percent of the New York investment firm, will maintain a 34 percent stake in the new company.

BlackRock Chief Executive Laurence Fink will be CEO and chairman of the combined company, and BlackRock President Ralph Schlosstein will maintain his post. Robert Doll, chief investment officer of Merrill Lynch’s asset management business, will become vice chairman and chief investment officer of global equities at BlackRock and is expected to join the company’s board.

Merrill Lynch Chairman and CEO Stan O’Neal will serve as Merrill’s designee on the new company’s board, along with Gregory Fleming, Merrill’s president of global markets and investment banking.

Merrill Lynch expects the deal to slightly lower its earnings in 2007, but to have a neutral effect beginning in 2008.

Merrill expects to realize a one-time gain from the deal of about $1.1 billion, after taxes and transaction-related costs, based on BlackRock’s closing share price of $145.96 on Tuesday. In addition, Merrill Lynch said it expects the elimination of goodwill related to its asset-management business to free up equity capital that the company can use for growth initiatives or share repurchases.

The deal still requires various regulatory approvals, client consents and approval by BlackRock shareholders.

Both BlackRock and Merrill Lynch are coming off very strong financial performances in 2005.

Since it was founded by Fink in 1988, BlackRock has grown rapidly to become one of the largest U.S. asset managers. The company generated $233.9 million in earnings last year, or $3.50 per share, up 63 percent from 2004. Assets under management rose 6 percent to $453 billion as annual revenue ballooned 64 percent to $1.19 billion.

Merrill Lynch earned a record $5.2 billion, or $5.27 per share, in 2005, up 18 percent from 2004. Annual revenue rose 18 percent to $26 billion in 2005.

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