State Street Corp. is acquiring Investors Financial Services Corp. in a $4.5 billion stock transaction. The deal will make State Street the world's second-largest asset service provider, with $14 trillion in assets under custody. The largest will be Bank of New York, whose merger with Mellon Financial will result in a combined $16.6 trillion in assets under custody. State Street shares were down 6% in afternoon trading, following the merger news as analysts deemed the price tag high for an acquisition that will not add to earnings until 2009.
But Ronald Logue, State Street chairman and CEO, said in a media conference call, "This is about acquiring the last pure-play custodian in the world." He also noted the two firms "share a similar focus, service model and customer type, which makes for a seamless and swift consolidation."
Investors Financial will bring $2.2 trillion in custody assets to State Street, including a major presence in offshore and hedge fund servicing. Once the deal closes, State Street will service $298 billion of the $2.7 trillion offshore fund sector, and $340 billion of the $1.4 trillion hedge fund sector. State Street will also gain entry to the private equity servicing business.
Fitch Ratings analysts cited customer retention as a challenge for the merged entity. It noted that Barclays Global Investors, which represents 18% of Investors Financial's revenue, "competes directly against State Street Global Advisors in exchange-traded funds and indexed funds."
Mr. Logue expressed confidence that BGI and a dozen Investors Financial customers that account for 70% to 80% of revenue will stay after the merger. But he confirmed that BGI's contract allows the firm to leave in the event of a merger. Tom Taggart, head of global corporate communications at BGI, said: "BGI's senior management has been reassured by IFS that BGI's expectation of service excellence will continue, and we should anticipate minimal, if any, impact to our clients. As is our current practice, BGI will continuously monitor to ensure that the services received are in the best interests of our clients."
State Street spokeswoman Hannah Grove said she did not expect defections from major clients such as BGI because "we have a global scale and they are global names."