State Street Corporation and Brown Brothers Harriman & Co. (BBH) have announced that they have entered into a definitive agreement for State Street to acquire BBH’s Investor Services business, including its custody, accounting, fund administration, global markets and technology services, for USD3.5 billion in cash.
Following the transaction, BBH will continue to independently own and operate its separate Private Banking and Investment Management businesses. The parties are targeting year-end 2021 to complete the acquisition, subject to regulatory approvals and customary closing conditions.
BBH Investor Services is a global asset servicer with a track record of client service and deep expertise in cross-border, alternatives, ETFs, and other high-growth asset classes. As of June 30, 2021, BBH Investor Services had USD5.4 trillion in Assets Under Custody (AUC), adding to State Street’s USD31.9 trillion in AUC.
The acquisition is expected to advance State Street’s strategy as an enterprise outsource solutions provider by creating the number one asset servicer globally, the joint statement says, strengthening competitive positioning, expanding geographic coverage and enhancing client experience.
“The Investment Servicing industry enjoys strong fundamentals 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,” says Ron O’Hanley, Chairman and Chief Executive Officer of State Street Corporation. “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.”
“We made this decision after careful consideration of the current and future landscape of the global securities servicing industry, including how best to support and innovate for the growing breadth and complexity of our clients’ servicing requirements,” says Bill Tyree, managing partner of BBH. “State Street is the ideal partner – a firm that shares our core values of unmatched client service, integrity, trust, and a long-term commitment to sustainability.”
Upon closing of the transaction, BBH Investor Services employees will move to State Street. The senior management team will transition to State Street in executive leadership roles, and Seán Páircéir, currently partner and Global Head of Investor Services at BBH, will join State Street’s Management Committee.
The acquisition creates meaningful shareholder value by increasing State Street’s earnings growth potential and its pre-tax margin medium-term target. As a result of the anticipated earnings growth from this transaction, State Street is now targeting an increased pre-tax margin of 31 per cent.
Post close, the transaction provides the potential for significant benefits for State Street shareholders from estimated fully-phased in expense synergies of USD260 million in year as a result of efficiencies in operational systems and infrastructure, as well as overhead consolidation, the joint statement says. Additionally, State Street has identified an estimated USD35 million of EBIT from known balance sheet actions and USD40 million of EBIT from estimated net revenue synergies in Investment Servicing and Global Markets in year.
State Street expects the transaction will be primarily financed through the issuance of common equity, the suspension of common share repurchases before resuming during 2Q22, and cash on hand. The acquisition is expected to be accretive to earnings per share in year one.
Leveraging the best technology and capabilities from each company will enhance State Street’s current set of product solutions for new and existing clients, the statement says.
BBH Investor Services brings innovative data connectivity tools to the broad marketplace that will be additive to State Street’s product suite and provides a toolset that represents an important enhancement to its service offering, the statement says. BBH Investor Services’ Infomediary platform, which facilitates data transmission and integration among buy-side and sell-side systems, will also support the State Street AlphaSM platform and facilitate integration of clients onto the platform while mitigating future development cost. Adding BBH Investor Services’ list of premier clients to State Street will also expand the base of potential users of State Street Alpha.
The addition of BBH Investor Services will further State Street’s strategic goal of expanding and deepening its presence in key non-US markets, including developed markets such as Japan, Luxembourg, and Ireland, as well as Latin America, which State Street has targeted for growth, the statement says.
The transaction will also add additional depth to State Street’s expertise in relationship management, client service, operations and technology that can be integrated across all of State Street’s global client segments.
“One of the most attractive elements for us is BBH Investor Services’ first-rate talent and team of professionals with client service excellence, which strengthens our value proposition and is completely aligned with our focus and vision of being our clients’ enterprise outsourcer and essential partner,” says O’Hanley.
“We found in State Street a partner who shares our singular focus on delivering exceptional client outcomes, without exception,” says Páircéir, head of BBH Investor Services. “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.”
Goldman Sachs & Co. LLC served as financial adviser and Davis Polk & Wardwell LLP served as legal adviser to State Street in connection with the transaction. Lazard served as financial adviser and Sullivan & Cromwell LLP served as legal adviser to BBH in connection with the transaction.