Financial services giant State Street Corp. (STT, Financial) announced before the opening bell on Tuesday it has agreed to acquire the investor services business of Brown Brothers Harriman & Co., creating the world’s top provider of asset servicing.
The $3.5 billion all-cash deal, which includes the New York-based private investment bank’s custody, accounting, fund administration, global markets and technology services units, is expected to extend State Street’s global reach as well as increase its mountain of assets under custody by $5.4 trillion. It currently safeguards about $31.9 trillion in AUC.
In a statement, State Street Chairman and CEO Ron O’Hanley noted the investment servicing space has strong fundamentals currently “as worldwide growth in financial assets drives industry revenues.”
“This combination with BBH Investor Services helps us consolidate our position as the industry innovator and leader,” he said. “We are enhancing our leadership position across a range of services, augmenting our position in a number of key markets, growing relationships with many of the leading global asset managers and owners, and increasing our capabilities and scale. Additionally, BBH Investor Services brings us strong talent, including industry leading service excellence and quality execution.”
Sean Pairceir, head of BBH Investor Services, also commented on the merger.
“We found in State Street a partner who shares our singular focus on delivering exceptional client outcomes, without exception,” he said. “We are committed to adopting best practices from both organizations to create an unmatched offering for the world’s most sophisticated asset managers and financial institutions.”
The Boston-based company’s international scale is anticipated to increase in both developed and emerging markets as well. According to Bloomberg, State Street told investors the deal will nearly double its revenue in Latin America, as well as bulk up the Cayman offshore fund’s expertise for Japanese investors.
State Street’s earnings per share are also projected to increase as a result of the combination. It is now targeting a pre-tax margin of 31% based on this growth.
Following the expected close of the deal later this year, Pairceir will join State Street’s management committee. BBH’s employees will also move to State Street, while the senior management team will transition to executive leadership roles. The company will continue to independently own and operate its separate private banking and investment management businesses.
Following the announcement, shares of State Street fell over 4% to $88.62. GuruFocus estimates the stock has climbed 22.44% year to date.
Of the guru invested in State Street as of the end of the second quarter, Dodge & Cox had the largest stake with 6.15% of its outstanding shares. Bill Nygren (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), Hotchkis & Wiley and the T Rowe Price Equity Income Fund (Trades, Portfolio) also have significant positions in the stock.
Accoding to GuruFocus’ Industry Overview, State Street is the sixth-largest company by market cap in the asset management sector. Other major players include BlackRock Inc. (BLK, Financial), Blackstone Inc. (BX, Financial), T. Rowe Price Group Inc. (TROW, Financial), Bank of New York Mellon Corp. (BK, Financial) and KKR & Co. Inc. (KKR, Financial).
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