Merrill Lynch & Co., the world’s biggest securities firm, will give up its fund management unit for a 49.8% stake in BlackRock Inc., transforming the bond specialist into the fourth largest American investment company.

The deal combines New York-based Merrill’s funds, mainly in equities, with BlackRock, creating a company with $1 trillion in assets. Merrill will record a $1.1 billion gain from the sale.

BlackRock Chief Executive Officer Laurence Fink, 53, will leapfrog rivals such as Vanguard Group with the purchase, and rank behind State Street Corp., Fidelity Investments and Capital Group among U.S. money managers. Merrill CEO E. Stanley O’Neal, 54, will end three decades of selling funds that have recently lagged behind competitors in attracting investors and whose profits are dwarfed by investment banking and trading.

“Merrill funds haven’t exactly been shooting the lights out performance wise,” said Kevin Moore, who helps oversee about $800 million, including Merrill shares, at ASB Killian Capital Management. “They recognized the difficulty of managing funds in-house and are outsourcing to BlackRock.”

Shares of BlackRock, up 82% in the past 12 months, rose 5% to $153.11 in New York Stock Exchange composite trading, giving the company a market value of $9.8 billion. Merrill stock rose 4 cents to $75.20. Shares of Pittsburgh based PNC Financial Services, which owns 70% of BlackRock, rose 3%.

Under the agreement, BlackRock will issue 65 million new shares to Merrill Lynch. That stake is valued at $9.5 billion, based on yesterday’s closing price. Merrill will report its share of earnings from the combination in future income statements, according to Merrill CFO Jeffrey Edwards.

The deal “opens up a whole new customer for BlackRock,” said Robert Lutts, president and chief investment officer of Cabot Money Management, which holds BlackRock shares. “Retail customers haven’t typically been a major focus for them, but now they will be.”