Ron O’Hanley, chairman and chief executive of State Street Corporation, said he was disappointed at not completing the acquisition of BBH’s Investor Services business but he remained confident in the firm’s organic growth potential.
O’Hanley and Eric Aboaf, vice chairman and chief financial officer of State Street Corporation, spoke at the Goldman Sachs 2022 US Financial Services Conference in New York on 7 December.
In November State Street announced that it has mutually agreed with Brown Brothers Harriman & Co. (BBH) to terminate its proposed $3.5bn acquisition of BBH’s Investor Services business as regulatory approval would involve further delays, and all the necessary approvals were not being resolved.
O’Hanley said that after considering regulatory feedback and the impact on State Street’s operating model from the potential modifications required to the transaction, the benefits of the acquisitions would have been limited relative to original expectations.
“We determined that it was not in the best interest of State Street shareholders, clients or employees to continue to invest time and resources in the transaction in this challenging financial services M&A environment,” he added. “While we are disappointed, this was the right decision and our franchise has demonstrated core growth potential.”
The cash transaction had been announced in September 2021 and included the purchase of BBH Investor Services’ custody, accounting, fund administration, global markets and technology services. The deal had been targeted to complete at the end of 2021, subject to regulatory approvals and customary closing conditions.
State Street said at the time of the announcement that the acquisition was expected to advance its strategy as an enterprise outsource solutions provider by creating the number one asset servicer globally, strengthening competitive positioning, expanding geographic coverage and enhancing client experience.
O’Hanley highlighted that State Street had already said that if the acquisition did not go forward, the firm intended to return significantly more capital to shareholders. On 7 December State Street announced an incremental increase of up to $500m to its previously announced fourth quarter common stock share repurchases of $1bn. The company will now repurchase up to $1.5bn of its common stock in the fourth quarter of this year. .
“We continue to expect to return significantly more capital than our medium-term target payout of 80% of earnings in 2023,” added O’Hanley.
State Street had said the acquisition would bring innovative data connectivity tools that were additive to its product suite and BBH Investor Services’ Infomediary platform, which facilitates data transmission and integration among buy-side and sell-side systems, would have supported its Alpha platform and expanded the base of potential users. State Street Alpha is a front-to-back asset servicing platform for institutional and wealth management firms.
The addition of BBH Investor Services would also have boosted State Street’s strategic goal of expanding outside the US markets, including developed markets such as Japan, Luxembourg, and Ireland, as well as Latin America.
Organic growth
O’Hanley said he remained confident in the organic potential of the business.
“BBH was a subset of what we do in terms of geographic footprint and the business itself, so it does not really change what we do going forward,” he added. “Certainly on the geographic piece, we already have a foothold in Latin America.”
State Street has been building in Latin America for the last five years, according to O’Hanley. The firm has a presence in Chile and from this year, can provide custody and administration in Mexico.
“The acquisition is something we would have liked to have done but it is certainly not going to change our strategy,” said O’Hanley. “I and the team are pleased with what we have been able to achieve so far in 2022, and optimistic about what this means for future success.”
He continued that key strategic priorities for 2023 include the Alpha proposition, which he described as a clear differentiator that continues to land with clients.
“The Alpha front-to-back platform has significantly changed and amplified our Investment Services go-to-market strategy and is propelling the business in private markets where the revenue pool is growing faster than the core servicing market,” added O’Hanley.
He also highlighted the recently launched peer-to-peer financing platform, Venturi, and growth in exchange-traded funds.
“State Street Global Advisors has the third largest ETF franchise by assets under management and second largest by revenue,” O’Hanley said. “We are a leader in active ETFs and mutual fund to ETF conversions.”
Markets have been very volatile but client retention rates have stayed “rock solid” according to O’Hanley, with the largest clients interested in doing more business. In addition, he argued that the Covid pandemic accelerated the trend towards outsourcing: “State Street Alpha has put the firm in the right place at the right time and is driving sales.”
