State Street Global Advisors' planned purchase of Bank of Ireland Asset Management — at a bargain-basement price of $80 million for a $36 billion asset management business — is equal parts consolidation and acquisition. But some investment bankers predict bigger M&A moves to come by the Boston-based giant.
The purchase price, at a scant 0.22% of BIAM's assets under management, reflects a number of underlying factors, investment bankers said.
First, roughly $12.7 billion, or 35%, of BIAM's assets are in passive strategies already managed by SSgA on a subadvisory basis, while another 19%, or $6.8 billion, are in relatively low-margin money market funds. Further cementing SSgA's existing business ties with BIAM, parent company State Street Corp., in a joint venture with Bank of Ireland, serves as custodian bank for BIAM.
BIAM's price tag, then, mostly reflects the firm's $11.2 billion of actively managed equities, $4 billion in actively managed bonds and $1.5 billion in actively managed property and loans.
However, industry veterans say a chunk of that active business comes from clients or affiliates of Bank of Ireland that pay low fees, such as insurance company Bank of Ireland Life. BIAM spokeswoman Anne Mathews said the company doesn't break out data on how much business comes from related parties.
While BIAM had more than 500 institutional clients as of Sept. 30, the biggest could well be parent company Bank of Ireland itself. Bank officials sent a letter to employees after the deal was announced Oct. 22 noting BIAM would continue to manage the bank's $5.2 billion pension plan.
In an interview, Scott Powers, SSgA's president and CEO, said the acquisition of BIAM will give his firm, known as a leading manager of passive equity and bond strategies, a significant foothold in fundamental, actively managed equities, helping SSgA to better serve clients that are increasingly looking for “solutions” spanning the risk spectrum.
Only two years before, SSgA had announced it was dismantling an existing fundamental active equities business, with roughly $450 million in client assets, in order to focus on its core strengths in indexing, cash management and active/enhanced quantitative strategies.
Asked what had changed in the interim to prompt that reversal, Mr. Powers said while the business SSgA shut down two years ago had been subscale, BIAM's business — focused on global equity — offers the kind of scale and solid track record that can attract interest from investors around the world.
Mr. Powers said he doesn't expect clients who exclusively use SSgA's bread-and-butter passive strategies to fear a loss of focus on, or commitment to, that business by SSgA, as a result of the firm's renewed push into fundamental active management. For those clients, the BIAM purchase will be a “non-event,” he said.
The lines separating money management firms “are being blurred in a lot of ways” as clients increasingly look for “solutions providers” to help them achieve their preferred outcomes, Mr. Powers said.
“I don't think you would ever have a conversation with an investor about SSgA” where its skill as a passive manager isn't one of the “top one or two things they mention,” Mr. Powers said. But he said he'd like that to be followed, as a close second, by the firm's status as a solutions provider. That goal requires “being in a position to bring a comprehensive array of capabilities to clients,” he said.
Mr. Powers declined to say whether his goal of serving clients across the risk spectrum will make the BIAM acquisition an opening move in a broader, more aggressive mergers-and-acquisitions strategy. The CEO would say only that his team remains open to meeting client needs either by developing new capabilities internally or acquiring those capabilities.
At least one investment banker, who declined to be named, said Mr. Powers remains under pressure to make SSgA a more important piece of parent State Street Corp.
In an interview with Pensions & Investments in 2008, Mr. Powers had said the parent company's hopes were to lift SSgA's contribution to group operating income toward 25%.
In a recent interview, Mr. Powers said SSgA now contributes between 14% and 15% of operating income, “well short of where we need to be.” He conceded the relatively high basis-point fees earned on active management are attractive “as a diversifier,” together with the firm's broader interest in being in a better position to serve the complex needs of clients.
Mr. Powers declined to say whether SSgA is on the hunt for a “transformational deal,” or whether his firm might bid on bigger properties now being shopped around, such as Milan-based UniCredito's Pioneer asset management arm. He did, however, note that parent company State Street has built a “formidable, strong balance sheet,” which gives “us the ability to look at a lot of things.”