State Street looks at merger or sale options for SSGA

State Street Corp., Boston, is seeking to expand the investment management capabilities of State Street Global Advisors or possibly sell the asset management unit, which as of Sept. 30 reported $3.15 trillion in assets under management.

Industry sources who spoke on condition of anonymity confirmed that Goldman Sachs Group Inc.'s New York-based investment banking unit has been discussing SSGA with potential acquirers, merger partners or collaborators, including Invesco Ltd., UBS Group AG and The Vanguard Group Inc.

Edward Patterson, a State Street spokesman, said in an email: "We are not commenting on … rumor or speculation" in response to a request for information.

Spokesmen for UBS, Vanguard and Goldman Sachs declined to comment and Invesco representatives did not respond to an email request for comment.

It's not clear what State Street Chairman and CEO Ronald P. O'Hanley might be considering.

"It's still a guessing game as we don't really know what they're contemplating. It could be an outright sale where (State Street) completely monetizes (SSGA) and moves away; it could be a merger with a rebranding; or it could be (that) they retain some ownership," said Brian R. Lauzon, managing director at InCap Group Inc., a Philadelphia-based investment bank.

He noted that "rebranding would be really interesting. They could change the name at the top, but not the products as (SSGA) really has built a phenomenal franchise and brand on the product side."

An observer who asked not to be named said, "Ron O'Hanley is in a great position to be a consolidator, to be acquisitive."

The source said "big banks with deep balance sheets in a perpetual low interest-rate environment are really reaching for fee revenue. State Street, with a really smart strategist like Ron O'Hanley at the helm, would be a logical buyer."

Another source who knows State Street well, but isn't privy to inside information about the bank's goals for SSGA, spoke on background, stressing that despite managing more than $3 trillion, mostly in passive strategies, SSGA needs yet more scale.

"SSGA benefits greatly from being part of State Street. About 35% of its AUM is from managing the cash and securities-lending accounts for the bank's massive asset-servicing business. That business is extremely profitable, accounting for 85% of the bank's revenues," the source said. State Street's ability to scale up the investment business is "staggering. The link to the bank's asset servicing side and its extensive ecosystem of asset servicing platforms means that any money management company it acquires can be smoothly and seamlessly incorporated," the source said.

SSGA, however, lacks investment strategies that are in demand by institutional investors and have higher fees, including actively managed traditional approaches, hedge funds, private equity, private credit and other alternative strategies, the source said.

"Even at 2- to 3-basis-point fees for trillions of passively managed strategies, SSGA is making a lot of money, but would make even more actively managing alternative and traditional strategies with up to 10 basis points of fees," the source said.

State Street could grow these businesses organically, the person said, but added "my bet is on merger, acquisition and collaboration."

Some sources are skeptical about how additive the acquisition of another money management firm would be to State Street's profitability.

Rajiv Bhatia, an equity analyst on the financials team at Chicago-based Morningstar Inc., noted that money management is experiencing a wave of consolidation, but said "it's unlikely that State Street Corp. would buy another money manager to bolt onto SSGA because it wouldn't improve the P/E ratio very much."

He stressed that the 15% of revenue SSGA contributes to the bank "isn't particularly additive to State Street's bottom line" and might not be attractive to another money manager contemplating a purchase of SSGA.

That said, the contributions to revenue of other banks' asset managers are similar to State Street's with New York-based The Bank of New York Mellon Corp.'s asset management unit contributing 16% to the corporation's revenue. Northern Trust Asset Management contributes about 18% to parent company Northern Trust Corp., Chicago, data provided by Mr. Bhatia showed.

SSGA's total assets under management have experienced growth in the five years since Mr. O'Hanley joined State Street as president and CEO of SSGA. Assets increased 43.1% to in the five years ended Sept. 30, according to the bank's quarterly earnings reports.

However, sources noted that SSGA's gradual loss of dominance over the ETF industry as a likely factor in State Street's quest to rebuild or divest its asset management unit.

SSGA created the investment industry's first ETF in 1993 — the SPDR S&P 500 ETF Trust — which now is the world's largest ETF with $320 billion, Bloomberg reported.

SSGA lost market share over the years to ETF rival managers BlackRock Inc., New York, and Valley Forge, Pa.-based Vanguard, noted industry observers.

SSGA now is the third largest ETF/ETN manager with $732 billion invested worldwide as of June 30, behind BlackRock in first place with $2.28 trillion in ETFs and Vanguard with $1.18 trillion, according to data provided to Pensions & Investments for its annual survey of index and ETF managers.

SSGA may have lost some of its sheen as a dominant ETF manager, but it is still a top player in the investment industry, especially in passive management, industry watchers said.

The opportunity to buy a top-three passive business should be "extremely attractive" to buyers or merger partners, said Domonkos L. Koltai, co-founder and partner of merger and acquisition advisory firm PL Advisors, New York, noting that he doesn't have inside knowledge about State Street's intentions regarding SSGA.

"SSGA has been growing (more slowly) than BlackRock and Vanguard, so in that sense they have underperformed. But an ETF/index business of that scale has incredible scarcity value. All of the large asset managers with active businesses would love a chance to tilt their mix in one stroke of the pen. It is going to be a very rare chance to do that if there is a deal to be had," Mr. Koltai said.

A senior industry analyst who asked not to be identified said Atlanta-based Invesco is the only firm "known to be in the game at present, based on substantially expanding their ETF business."

Whether a deal can get done is a key question. "I am a doubter. Index exposure is rapidly becoming a give-away product thanks to the ETF pricing at (Fidelity Investments Inc.), (Charles Schwab Investment Management Inc.) and BlackRock," the analyst said.

A veteran industry observer who requested anonymity disagreed.

"My guess is that Invesco buys the business because Nelson Peltz has a seat on the board (of Invesco), owns … 10% of the business and has been working for 10-plus years to get out in front of BlackRock."

Mr. Peltz is CEO and founding partner of activist hedge fund manager Trian Fund Management LP, New York, which acquired a 9.9% stake in Invesco in October, noting in an SEC filing that the company is "undervalued and (represents) an attractive investment opportunity."

Staff writers Sophie Baker and Danielle Walker contributed to this story.