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State Street’s $3.5bn Acquisition of Brown Brothers Harriman’s Investor Services Unit

By Adil Amlaiky, Paul Bernard, Francois Herman, and Blake Dal Santo (McGill University), Athean Myat, May Takagi, and James Ludlow (Cornell University)

Photo: CDC (Unsplash)

 

Overview of the deal


Acquirer: State Street

Target: Brown Brothers Harriman & Co.

Implied Equity Value: $3.5 billion

Total Transaction Size: $3.5 billion

Closed date: December 31, 2021

Target advisor: Lazard


State Street Corp. acquired Brown Brothers Harriman & Co.’s BBH Investor Services business for $3.5 billion in cash, primarily through the issuance of common equity and available cash. The growth fueled by this acquisition leaves State Street as the industry’s leading asset servicing firm. State Street anticipates the transaction to be accretive to EPS in Year 1.


Brown Brothers recorded revenue of 1.4 billion last year, of which 70% comes from international customers. Their existing presence in key markets will accelerate State Street’s international expansion efforts.


Synergies present in both companies’ customer bases and technology are expected to improve margins and revenue growth. The acquisition allows State Street to integrate Brown Brothers’ Infomediary technology with its existing custodians’ system, further enhancing data integration. State Street anticipates 260 million in cost savings in technology.


“There’s a fair amount of economies of scale in this business…This combination with BBH Investor Services helps us consolidate our position as the industry innovator and leader.” (Ron O’Hanley - Chairman and CEO, State Street)

Company Details (Acquirer – State Street)


State Street, originally founded as Union Bank in 1792, is the second-oldest continually operating bank in the United States. It is a financial holding company that operates through investment servicing and investment management. The company has approximately $43 trillion in assets under custody/administration and $4 trillion in assets under management. It has a long and notable history of important financial events, such as becoming the custodian of the first mutual fund and the creator of the first ETF: SPDR S&P 500 Trust ETF. State Street operates in 25 countries currently and over 100 different geographic markets. The company’s clients include retirement plans, mutual funds, insurance companies, endowments, and investment managers.


Founded in 1792, headquartered in Boston, MA

CEO: Ronald O’Hanley

Number of employees: 39,000

Market Cap: $38B (as of 1/14/2022)

EV: $24B

LTM Revenue: $11B

LTM EBITDA: $5.82B

LTM EV/Revenue: 2.18x

LTM EV/EBITDA: 4.12x

Company Details (Target – Brown Brothers Harriman)


Brown Brothers Harriman (BBH) is a privately owned investment bank offering various services through its three main divisions of private banking, investment management, and investor services. It was formed through a 1931 merger between Brown Brothers & Co. and Harriman Brothers & Co, and headquartered in New York City. The current CEO is Diane Wiley and has 5,701 employees.


The private banking arm offers wealth planning and advisory services to high-net-worth individuals, businesses, endowments, and other institutions. The investment management arm oversees approximately $64B in assets, as of the 2020 annual report, invested across various equity and fixed income strategies. The investment services arm, the subject of this M&A transaction, specializes in global asset servicing, support of investment strategies, and data analytics. The clients who employ the solutions created by this division include asset managers, insurance companies, consultants, and banks. The investor services arm employs approximately 4,800 people and generated $1.4B of revenue during the 2020 fiscal year.


Founded in 1931, headquartered in New York, NY

CEO: Diane Wiley

Number of employees: 5,701

LTM Revenue: $1.3B

LTM EBITDA: $0.3B


Projections and Assumptions


Short-term consequences


State Street has struggled to find ways to earn more revenue, and in recent months has lost business to competitors such as Citigroup, JPMorgan Chase, and BNY Mellon. The most recent loss includes BlackRock’s pulling of $2 trillion in assets from State Street to other holding companies. Following the merger, BBH’s Private Banking and Investment Management services will operate separately from State Street. BBH’s Investor Services, as well as senior management, will be integrated into State Street’s existing Investment Servicing operations. This merger follows the firm’s intent on reducing the costs of servicing their clients in back-office functions such as tracking asset values. Recently, the asset-servicing industry has focused on lowering costs through Robotic process automation, which has increased pressure on bank holding companies like State Street to reduce costs. By consolidating a larger AUM, State Street seeks to improve its economies of scale and service quality.


Upon announcement of the deal, State Street shares immediately dropped 3.8%. They have since climbed 17.3%, and as of January 17th, 2022, are trading at 103.77. This transaction is the largest the firm has conducted since its $2.6 billion acquisition of Charles River Systems in 2018. That acquisition sought to bolster the firm’s analytics and financial data capabilities for traders.


Long-term Upsides


Acquiring BBH Investor Services not only positions State Street as the number one Asset Servicing provider with $37.3tn assets under custody but also accelerates State Street’s desire to expand its technological capabilities and global client base.


State Street’s current offering will considerably benefit from the addition of BBH’s innovative data connectivity tools by enhancing the services provided to its large customer base. In addition, the integration of BBH’s Investor Services’ Infomediary platform with the State Street Alpha platform will facilitate data transmission among buy-side and sell-side systems. Successfully accommodating these technological tools will be determinant for State Street to capitalize on vital cost synergies, reducing future development costs. As reflected in State Street’s projections, the cost synergies estimated at around $260M far outweigh the $40M in estimated revenue synergies.


As State Street continues to execute on its long-term vision of geographical expansion, the addition of BBH’s client base in EMEA, Latin America, and Japan (7%, 9%, and 5% industry growth rate, respectively) will fuel the growth prospects for the firm. State Street will thus benefit from the existing customer relationships, as well as the knowledge of the intricate local demand in these rapidly expanding markets.


By enhancing client experience and expanding geographically, State Street aims to diversify its operations in the global securities servicing industry and has estimated a 25% IRR on this acquisition. Through the strong client relationships, the drive for innovation, and the ability to adapt, State Street will continue to follow its expansion strategy, to maintain the quality of its services across all divisions and geographies.


Risks and Uncertainties


Certain gains from State Street’s acquisition of BBH Investor Services may be unrealized due to unexpected additional costs or other challenges in consolidating resources. Relationships with clients and employees could be disrupted during the transaction, potentially causing harm. Further, integrating Brown Brothers Harriman Investor Services could also be more challenging than expected, causing the full benefits of the merger synergies with State Street to remain unrealized.

Due to the significant international operations of BBH, any disruptions in the Asian or European economies could also negatively affect their financial position. BBH’s move away from the London Interbank Offered Rate (LIBOR, an interbank borrowing rate) could cause additional costs due to greater risk exposure and higher interest rates. Further, the transition of certain costs to a jurisdiction outside the U.S. and outsourcing could cause operational risk, reputational harm and might not result in the expected cost savings.


According to RBC Capital Markets Analyst Gerard Cassidy, State Street is an institution that is “too big to fail” or a Systemically Important Financial Institution (SIFI). This classification could make federal regulators hesitant in approving the deal because of the threats posed to the financial system.


“We view ourselves as an industry leader and industry consolidator. We’ll be the largest in the industry after this transaction. I think that speaks for itself.” (Ron O’Hanley - Chairman and CEO, State Street)









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