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State Street (STT) to Acquire Brown Brothers' Unit for $3.5B
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State Street Corporation (STT - Free Report) is set to acquire Brown Brothers Harriman & Co.’s (“BBH”) Investor Services business in a bid to ramp up and expand its core custodian business of servicing investment firms. State Street will shell out $3.5 billion in cash for this buyout.
As part of the deal, State Street will take on BBH’s fund administration, global markets, custody, accounting and technology services. The deal, likely to close by the end of this year, is subject to regulatory approvals and other customary closing conditions.
Overseeing assets under custody (AUC) worth $5.4 trillion, as of Jun 30, 2021, the BBH Investor Services business provides expertise in cross-border, alternatives, ETFs, and other high-growth asset classes, for asset managers and pensions.
Upon the deal’s closure, BBH Investor Services’ employees will move to State Street, and its massive AUC will also transition to State Street’s books, which already possesses $31.9 trillion, as of Jun 30, 2021. This will place the Boston-based company ahead of BNY Mellon (BK) in terms of AUC, making it the leading asset servicer globally. Following the completion, BBH will continue to independently own and operate its private banking and investment management businesses.
This acquisition is anticipated to support State Street’s strategy as an enterprise outsource solutions provider by bolstering its competitive hold, expanding geographic footprints and refining client experience.
Details
State Street’s current product suite for the new and current clients will be greatly enhanced as the deal will help it leverage the best technology and capabilities from BBH Investor Services. BBH Investor Services’ Infomediary platform, which garners data transmission and integration among buy-side and sell-side systems, will boost the development of State Street’s Alpha platform, while reducing costs. Also, it will position Alpha at the center of trade flows by automating messaging and integration. Apart from deepening the integration of Global Markets product mix into the Alpha platform, the deal will also permit State Street to expand the base of potential users of Alpha by adding BBH Investor Services’ list of premier clients. The onboarding for the Alpha and Global Markets clients will also be streamlined.
Further, the transaction will expand and fortify State Street’s international reach in the EMEA offshore markets (Luxembourg, Ireland), Japan, as well as Latin America. The expected proforma EMEA offshore AUC, after the deal’s closure, is pegged at $3.8 trillion, while the Japan AUC is estimated to be around $1 trillion. The Latin America AUC is estimated at $200 billion.
The transaction will also add another layer to State Street’s expertise in relationship management, client service, operations and technology, since two highly experienced management teams will be combined. The high compatibility between both firms’ cultures with an aim on client-centric product innovations, service excellency and employee engagement also bodes well for State Street.
Ron O’Hanley, chairman and chief executive officer of State Street, 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."
Financial Impact
State Street would finance the deal through the issuance of common equity, cash on hand and amount preserved by the suspension of share repurchases until the second quarter of 2022.
The total acquisition and restructuring costs are estimated at approximately $590 million through the third year following the deal’s success.
By the end of three years following the deal's closure, State Street will realize $335 million of earnings before interest and tax (EBIT) synergies. This consists of expected revenues synergies worth nearly $40 million, estimated total cost synergies of $260 million and estimated balance-sheet action synergies of $35 million. Cost synergies will result from gaining efficiencies in operational systems and infrastructure as well as overhead consolidation.
Moreover, the transaction will likely be accretive to State Street’s earnings per share (EPS) for the first year following the closure, reaching around 4% in the third year.
The identifiable intangible amortization is estimated to be $1.5 billion (amortized more than nearly 15 years). Nearly 1.5% would be added to EPS accretion, excluding the effects of incremental estimated intangible amortization.
The transaction will enable State Street to increase its medium-term pre-tax margin financial target by around 1% to nearly 31%, by the end of 2023 or on a run-rate basis for financial year 2024.
Road Ahead
The transaction is happening at a time when State Street is focusing on digitalization. The company, through its transformation and cost-saving plan, is further planning to digitalize its operations and create cost efficiencies.
The company is well positioned with respect to fundamental business activities, given its global exposure, and a broad array of innovative products and services (including formation of State Street Digital, a new division focused on catering to the industry's evolving shift to digital finance).
In July, it had agreed to acquire Mercatus, Inc., a preeminent front-and-middle-office solutions and data management provider facilitating the former to offer a fully integrated platform for growing private market segments. These efforts, along with new business servicing wins and inorganic growth strategy, are likely to keep supporting fee revenues.
Shares of the firm have gained 9.2% over the past six months, outperforming the industry’s rally of 7.6%.
Seacoast Banking Corporation of Florida (SBCF - Free Report) , the holding company for Seacoast National Bank, has announced two separate merger agreements. It has agreed to acquire Sabal Palm Bancorp, Inc., the parent company of Sabal Palm Bank based in Sarasota, FL, and Business Bank of Florida, Corp., the parent company of Florida Business Bank based in Melbourne, FL. Both deals are expected to close in the first quarter of 2022.
Santander Consumer USA Holdings Inc. has agreed to be acquired by its majority shareholder Santander Holdings USA, Inc. The deal is expected to be completed in the fourth quarter of 2021, following which, Santander Consumer will become a wholly-owned subsidiary of Santander Holdings.
Goldman Sachs Group, Inc. (GS - Free Report) has entered into an agreement to acquire NN Investment Partners from NN Group N.V. in a €1.6-billion (or $1.9 billion) all-cash transaction in a bid to boost its European distribution and fund management capabilities.
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State Street (STT) to Acquire Brown Brothers' Unit for $3.5B
State Street Corporation (STT - Free Report) is set to acquire Brown Brothers Harriman & Co.’s (“BBH”) Investor Services business in a bid to ramp up and expand its core custodian business of servicing investment firms. State Street will shell out $3.5 billion in cash for this buyout.
As part of the deal, State Street will take on BBH’s fund administration, global markets, custody, accounting and technology services. The deal, likely to close by the end of this year, is subject to regulatory approvals and other customary closing conditions.
Overseeing assets under custody (AUC) worth $5.4 trillion, as of Jun 30, 2021, the BBH Investor Services business provides expertise in cross-border, alternatives, ETFs, and other high-growth asset classes, for asset managers and pensions.
Upon the deal’s closure, BBH Investor Services’ employees will move to State Street, and its massive AUC will also transition to State Street’s books, which already possesses $31.9 trillion, as of Jun 30, 2021. This will place the Boston-based company ahead of BNY Mellon (BK) in terms of AUC, making it the leading asset servicer globally. Following the completion, BBH will continue to independently own and operate its private banking and investment management businesses.
This acquisition is anticipated to support State Street’s strategy as an enterprise outsource solutions provider by bolstering its competitive hold, expanding geographic footprints and refining client experience.
Details
State Street’s current product suite for the new and current clients will be greatly enhanced as the deal will help it leverage the best technology and capabilities from BBH Investor Services. BBH Investor Services’ Infomediary platform, which garners data transmission and integration among buy-side and sell-side systems, will boost the development of State Street’s Alpha platform, while reducing costs. Also, it will position Alpha at the center of trade flows by automating messaging and integration. Apart from deepening the integration of Global Markets product mix into the Alpha platform, the deal will also permit State Street to expand the base of potential users of Alpha by adding BBH Investor Services’ list of premier clients. The onboarding for the Alpha and Global Markets clients will also be streamlined.
Further, the transaction will expand and fortify State Street’s international reach in the EMEA offshore markets (Luxembourg, Ireland), Japan, as well as Latin America. The expected proforma EMEA offshore AUC, after the deal’s closure, is pegged at $3.8 trillion, while the Japan AUC is estimated to be around $1 trillion. The Latin America AUC is estimated at $200 billion.
The transaction will also add another layer to State Street’s expertise in relationship management, client service, operations and technology, since two highly experienced management teams will be combined. The high compatibility between both firms’ cultures with an aim on client-centric product innovations, service excellency and employee engagement also bodes well for State Street.
Ron O’Hanley, chairman and chief executive officer of State Street, 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."
Financial Impact
State Street would finance the deal through the issuance of common equity, cash on hand and amount preserved by the suspension of share repurchases until the second quarter of 2022.
The total acquisition and restructuring costs are estimated at approximately $590 million through the third year following the deal’s success.
By the end of three years following the deal's closure, State Street will realize $335 million of earnings before interest and tax (EBIT) synergies. This consists of expected revenues synergies worth nearly $40 million, estimated total cost synergies of $260 million and estimated balance-sheet action synergies of $35 million. Cost synergies will result from gaining efficiencies in operational systems and infrastructure as well as overhead consolidation.
Moreover, the transaction will likely be accretive to State Street’s earnings per share (EPS) for the first year following the closure, reaching around 4% in the third year.
The identifiable intangible amortization is estimated to be $1.5 billion (amortized more than nearly 15 years). Nearly 1.5% would be added to EPS accretion, excluding the effects of incremental estimated intangible amortization.
The transaction will enable State Street to increase its medium-term pre-tax margin financial target by around 1% to nearly 31%, by the end of 2023 or on a run-rate basis for financial year 2024.
Road Ahead
The transaction is happening at a time when State Street is focusing on digitalization. The company, through its transformation and cost-saving plan, is further planning to digitalize its operations and create cost efficiencies.
The company is well positioned with respect to fundamental business activities, given its global exposure, and a broad array of innovative products and services (including formation of State Street Digital, a new division focused on catering to the industry's evolving shift to digital finance).
In July, it had agreed to acquire Mercatus, Inc., a preeminent front-and-middle-office solutions and data management provider facilitating the former to offer a fully integrated platform for growing private market segments. These efforts, along with new business servicing wins and inorganic growth strategy, are likely to keep supporting fee revenues.
Shares of the firm have gained 9.2% over the past six months, outperforming the industry’s rally of 7.6%.
Image Source: Zacks Investment Research
Currently, State Street carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Acquisitions in the Finance Industry
Seacoast Banking Corporation of Florida (SBCF - Free Report) , the holding company for Seacoast National Bank, has announced two separate merger agreements. It has agreed to acquire Sabal Palm Bancorp, Inc., the parent company of Sabal Palm Bank based in Sarasota, FL, and Business Bank of Florida, Corp., the parent company of Florida Business Bank based in Melbourne, FL. Both deals are expected to close in the first quarter of 2022.
Santander Consumer USA Holdings Inc. has agreed to be acquired by its majority shareholder Santander Holdings USA, Inc. The deal is expected to be completed in the fourth quarter of 2021, following which, Santander Consumer will become a wholly-owned subsidiary of Santander Holdings.
Goldman Sachs Group, Inc. (GS - Free Report) has entered into an agreement to acquire NN Investment Partners from NN Group N.V. in a €1.6-billion (or $1.9 billion) all-cash transaction in a bid to boost its European distribution and fund management capabilities.