(Adds background, quotes from analyst and BlackRock)
By Trevor Hunnicutt
NEW YORK, Nov 3 (Reuters) - Bank of America Corp, the No. 2 U.S. bank, has agreed to sell its $87 billion money-market fund business to BlackRock Inc in one of the cash-management industry's largest deals ever.
The transaction comes as big banks have faced pressure to simplify their businesses since the global financial crisis and marks the largest in a series of deals reshuffling the cash-management industry before costly regulatory reforms take effect in 2016.
Terms of the transaction were not disclosed. The agreement is expected to lift BlackRock's global cash-management business to $372 billion from about $285 billion, according to the New York-based company.
BlackRock, a manager of mutual funds, exchange-traded funds, private equity pools and other investment products, is already the world's largest money manager with $4.5 trillion in assets.
"Combining our business together with the Bank of America assets and distribution puts us in a unique competitive position," said Tom Callahan, co-head of global cash management at BlackRock, in an interview.
"It's a challenge managing cash in a low interest-rate environment, so we have to be highly efficient."
BlackRock's heft is partly the result of similar acquisitions, including Merrill Lynch's investment management business in 2006. Merrill was later acquired by Bank of America and remains a major distributor of BlackRock products to individual investors and institutions.
"This transaction is consistent with Bank of America's ongoing efforts to simplify its business, in this instance, by outsourcing certain product manufacturing functions to an industry leader," said Bank of America spokeswoman Susan McCabe. She added that the bank will focus on distributing money market funds from BlackRock and other third-party providers.
The profitability of money-market funds, which invest in relatively low-risk corporate and government debt that can be paid back within days or weeks, has been hemmed in by U.S. interest rates hovering near zero.
Mergers and acquisitions trimmed the money funds industry from 75 providers in the United States last summer to just 67 this year, according to Crane Data, an industry research service.
Once the deal closes next year, BlackRock will leapfrog JPMorgan Chase & Co to become the second largest money fund family, behind Fidelity Investments, according to Peter Crane of the research service.
The $2.7 trillion industry has lost some $30 billion in revenue since 2009, according to trade group Investment Company Institute, after slashing fees to prevent investors from losing money in an era of rock-bottom interest rates.
The funds are expected to face increasingly stiff competition for a dwindling supply of the lowest-risk debt. A set of reforms adopted last year by the Securities and Exchange Commission requires money-market funds that serve institutional investors let their asset values stray from the typical $1 per share unless the funds invest primarily in government securities.
Some $200 billion in funds have announced plans to invest primarily in government-backed debt.
"Everybody has been talking about consolidation for years, but it really didn't happen until today," said Crane. "So many large players have resisted getting out of the business until now, but it's just a matter of the costs and uncertainty of money fund reforms proving to be overwhelming to some players."
Crane said Bank of America's decision came after an evaluation of which businesses were essential.
"At the same time asset managers are trying to get bigger, banks are trying to get smaller," he said. "This reflects regulatory pressure on both sides."
The deal is subject to regulatory and fund shareholder approvals. (Editing by Christian Plumb, Linda Stern and Jeffrey Benkoe)