State Street's BBH acquisition puts it at top

In the biggest consolidation deal for the global custody/asset-servicing business in more than a decade, State Street Corp. will acquire BBH Investor Services for $3.5 billion in cash from Brown Brothers Harriman & Co.

The acquisition of BBH Investor Services, when completed, will propel the Boston-based bank to No. 1 among global custodians from third, displacing New York-based Bank of New York Mellon Corp. and J.P. Morgan Chase & Co., respectively.

As of June 30, State Street had $31.9 trillion in assets under custody while BBH, New York, had $5.4 trillion. State Street's assets under administration totaled $10.7 trillion as of the same date.

The deal, targeted to close by the end of the year, will provide State Street with accretive technology; broader global coverage; long-tenured, talented employees; and high-functioning, global client service, said Louis D. Maiuri, State Street's executive vice president and chief operating officer, in an interview.

"The acquisition is expected to advance State Street's strategy as an enterprise outsource solutions provider by creating the No. 1 asset servicer globally," the company said in a Sept. 7 news release. But Mr. Maiuri stressed that the company's goal isn't "to be the largest provider in the business. The goal is more about being very good at asset servicing and custody and expand State Street's capabilities."

As for BBH Investor Services, "this deal makes compelling sense to our employees, clients and regulators. It will create opportunities for a convincing future for the company," said Sean Pairceir, the Dublin-based head of BBH Investor Services and a partner at Brown Brothers Harriman & Co., in the interview with Mr. Maiuri.

All nine partners will stay with BBH Investor Services when it is integrated into State Street, Mr. Pairceir said, adding that the firm has received a "very positive response" to the news of the acquisition from its client base of asset owners and money managers.

Like most custodial banks, State Street has an asset-servicing business that provides money managers and asset owners with fund administration and other services. As of June 30, State Street's asset-servicing revenue accounted for 46% of the bank's total $3 billion of revenue for the year ended June 30, said a report on the firm's website.

The last large acquisition in the global custody/asset-servicing segment was the purchase of Mellon Financial Corp. by then-named Bank of New York Co. Inc. on July 1, 2007, for $16.5 billion.

With the inclusion of global custody assets from Mellon, BNY became the largest asset-servicing company at the time, with $18 trillion in assets under custody and administration.

As of June 30, BNY Mellon's assets under custody totaled $34.6 trillion and J.P. Morgan Chase had AUC of $32.1 trillion.

Equity analysts were generally supportive of the acquisition.

"This is a consolidation play. It's safe to say that State Street will be the largest custodian following the deal, slightly edging out BNY Mellon," said Rajiv Bhatia, equity research analyst at Morningstar Inc., Chicago.

"We believe the deal makes sense strategically and we don't believe the valuation is rich. Strategically, there are few independent custodians left to consolidate and Brown Brothers Harriman's $5.4 trillion in assets under custody is sizable. Given the fixed-cost structure of custody operations, we believe expense synergies are likely to be realized," Mr. Bhatia said in a Sept. 7 research report.

Regarding BBH Investor Services' role within State Street, the firm will add new, innovative data connectivity tools and a platform — Infomediary — that facilitates data transmission and integration among buy-side and sell-side systems to State Street's current systems, said a State Street investor report provided to Pensions & Investments.

Infomediary also will enhance and accelerate development of State Street Alpha, the bank's front-to-back investment management platform that provides a streamlined source of data throughout the investment process, the report said.

Infomediary also will play a role in other State Street units and product lines, including its Charles River Development asset-servicing business, Mr. Maiuri said. Charles River's software platform focuses on services such as trading.

"There's a mad rush right now for more and better data integration," said an industry source who knows State Street well and asked not to be named.

"Alpha is State Street's ... front-middle-back end enterprise platform and the fluidity of data is critical to its function. The Alpha platform will benefit greatly from the data aggregation Infomediary will provide to Alpha users," the source said.

The acquisition also will further the bank's goal of expanding its asset-servicing presence in non-U.S. markets, Mr. Maiuri said.

BBH Investor Services has clients in 90 markets. Its client breakdown is 43% in Europe, the Middle East and Africa; 29% in the Americas and 28% in Asia-Pacific, according to a State Street presentation.

State Street spokesman Brendan Paul said the firm doesn't have comparable geographic data about its asset-servicing client base.

State Street estimated that cost synergies of $260 million will be realized in the third year after the acquisition from efficiencies in operational systems and infrastructure as well as from overhead consolidation, its news release said.

BBH employees will join State Street after the deal has closed and the senior management team will transition to similar roles at State Street, Mr. Paul said in an email.

As additive as the data enhancements BBH Investors Services will bring to State Street's asset-servicing capabilities will be, Mr. Maiuri said "in a consolidation deal, you usually don't keep all the people (that come from the acquired company), but in this case, the most important part of the deal is the BBH people who will join State Street. The people are what make the company grow."