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State Street (STT) Closes the GE Asset Management Deal

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In a bid to ramp up its profitability against a tough operating backdrop, last week, State Street Corporation (STT - Free Report) completed the acquisition of GE Asset Management (“GEAM”), a wholly owned subsidiary of General Electric Company (GE - Free Report) .

Following the acquisition, GEAM is integrated into State Street Global Advisors (“SSGA”), enhancing SSGA’s assets under management by roughly $100 billion. About 270 former GEAM employees joined the SSGA team. The sale is part of GE’s strategy to transform and focus on its core industrial businesses.

SSGA and its clients will benefit highly from the deal. These advantages include addition of new alternatives capabilities, strengthening fundamental equity and active fixed income teams and also providing SSGA with an outsourced chief investment officer services.

“This transaction is a key step in our strategy to invest in higher growth and return businesses,” said Jay Hooley, chairman and chief executive officer of State Street Corporation. “It is also an important part of SSGA’s continued evolution as a premier provider of solutions to clients.”

Financial Impact

In the 12 months following the closure of the deal, State Street will receive fee revenues in the range of nearly $270–$300 million, while merger and integration costs are expected to be $70–$80 million through 2018.

Moreover, the transaction is likely to be accretive to State Street’s operating earnings for the first year following the closure. Further, the company targets to exceed client retention by 90%.

However, State Street’s capital ratios are projected to be adversely impacted by the deal. The company anticipates a reduction of 40–50 basis points (bps) to its fully phased-in risk-based capital ratios under both standardized and advanced approaches.

Further, the company’s fully phased-in tier 1 leverage and supplementary leverage ratios are expected to fall 15–20 basis points (bps). Nonetheless, in order to lessen this adverse impact, State Street intends to issue its preferred shares before the completion of the deal.

Additionally, the deal is not likely to have any material impact on State Street’s share repurchase program.

Road Ahead

The transaction comes at a time when State Street is going digital. The company, through its transformation and cost saving plan – State Street Beacon – is further planning to digitalize its operations and create cost efficiencies.  

State Street has announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings by the end of 2020 through nearly 7,000 layoffs.

Therefore, the deal is a step in the right direction for State Street. This transaction will help the company in growing its business and managing money for insurers and defined-benefit plans.

A couple of finance stocks worth considering include Stifel Financial Corp. (SF - Free Report) and First Midwest Bancorp Inc. .

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