BlackRock’s Acquisition of Cachematrix Should Strengthen Its Cash Management Unit

BlackRock (NYSE:BLK) recently entered into a definitive agreement to acquire fintech firm Cachematrix – a move that will allow the asset management giant’s cash management unit to leverage the latter’s simpler technology platform to better target banks and their corporate clients. Notably, the deal is well-aligned with the improving interest rate environment, as the Fed’s rate ongoing rate hike process is helping profits across money market funds recover from the lows seen over most of 2011-2015.

BlackRock reported $388 billion in total assets under management (AUM) across its money market funds at the end of Q1 – making it the second largest player in the segment after Fidelity, which managed $477 billion in these assets at the end of Q1. BlackRock has been keen on growing its cash management business over the years, as was evident by its acquisition of Bank of America’s cash management operations in late 2015. The Bank of America deal, which was finalized in April 2017, added $80 billion in new assets to BlackRock’s cash management unit.

We are currently in the process of updating our $400 price estimate for BlackRock’s shares to factor in the impact of the new acquisition.

See our full analysis for BlackRock

Over the years, money market funds have been the preferred investment vehicle for investors looking for solid returns over a timeframe of just a few months. However, weekly data compiled by ICI shows that money market funds in the U.S. currently manage more than $2.6 trillion worth of assets. This represents a steep reduction from the peak figure of $3.8 trillion in late 2008. While the primary factor behind this decline was the low interest rate environment, another reason that contributed to this was stricter regulations implemented by the SEC governing these funds. In response to the falling asset base, cash management firms slashed fees considerably over 2009-2014, as seen in the chart below for BlackRock.

But things have been upbeat for the money market industry as a whole over recent quarters as higher interest rates translate to more inflows, and also positively impact fees. Fidelity, BlackRock and JPMorgan are currently the three largest players in the cash management segment, and all three have been working on consolidating their presence in the space to benefit from improved economies of scale. This is where BlackRock’s recently announced acquisition of Cachematrix comes in.

Cachematrix’s proprietary cash management platform currently manages around $200 billion in money market investments for banks and asset managers. As the platform allows corporate clients to directly allocate cash to various money market funds, BlackRock will benefit from using it as a distribution channel for its relevant products. This should have a sizable positive impact on value in the long run by boosting the size of assets under management for BlackRock’s money market funds. You can see how a faster or slower growth in these assets impacts BlackRock’s share price by making changes to the chart below.

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