State Street's Purchase of IFS Will Make It Number Two in Custody
February 12, 2007
Acquiring Boston-based IFS will also boost the hedge fund administration arm of State Street, which in 2002 acquired independent administrator International Fund Services.
The announcement of the IFS deal came two months after Bank of New York Co. (BNY) agreed to buy Pittsburgh's Mellon Financial Corp. for $16.5 billion. "We did not feel compelled to do this because of the Bank of New York-Mellon deal, but because the industry is consolidating," Ronald Logue, State Street's chairman and CEO, said in a conference call last week. State Street expects its acquisition to close in the third quarter, pending shareholder and regulator approvals.
State Street has $11.9 trillion in assets under custody. Adding the $2.2 trillion of IFS, for a total of $14.1 trillion, would put it second to the post-merger BNY-Mellon's projected $16.5 trillion. That deal is also scheduled to close in the third quarter. JP Morgan Chase & Co. has $12.9 trillion in assets under custody, according to data from State Street that credited globalcustody.net.
State Street estimates that the IFS purchase will also make it the largest hedge fund administrator: Its $340 billion in hedge fund assets would put it ahead of Citco Fund Services' $310 billion. After the deal, State Street will be servicing $298 billion in offshore funds.
"We will continue to build on this strong focus, create additional capacity for continued growth as well as expand our global customer base," said Joseph Hooley, State Street's vice chairman and head of global investment servicing and investment research and trading.
Securities servicing, which includes custody and an array of transaction processing functions, is a profitable business for the three largest banks in the market--State Street, BNY and JP Morgan. Some competitors have sold out to larger rivals over the past decade because they could not keep up with the technology costs involved.
"This is a business where scale matters, and State Street and Investors Financial have shown exceptional revenue growth," said Denise Valentine, a New York-based analyst in the securities and investments group of research firm Celent.
"The writing on the wall [about putting itself on the block] came when Investors Financial gave its projections for 2007," said Gerard Cassidy, a senior bank analyst with RBC Capital Markets in Portland, Maine. "The indication that operating expenses would exceed revenues is a sure sign that the bank was struggling to keep up with its larger competitors."
In 2006, IFS's earnings dropped to $153.8 million from $159.8 million in 2005, despite a 15 percent increase in revenues, to $803.6 million from $696 million. The company cited the hiring of new staff and the costs of technology upgrades as reasons for the decline. By contrast, State Street's income rose to $1.1 billion on $6.3 billion in revenues, versus $838 million on $5.5 billion in revenues in 2005.