Boston-based State Street
A recent company presentation at the annual Lehman Brothers Financial Services Conference shed light on management's current strategy -- and gave it an avenue to tout the $4.5 billion, all-cash deal for Investors Financial.
The scoop on State Street
A Lehman Brothers analyst introduced State Street as "one of the largest custodians in the world," alongside industry titans such as Mellon Financial
It matters little to State Street which product investors prefer, as it recently reported $12.3 trillion in assets under custody and $1.8 trillion in assets under administration. By its own estimation, it touches 75% of "the world's largest money managers and asset owners" with its services, as well as 38% of all domestic mutual funds and 13% of hedge funds, with a growing presence in international markets.
State Street's strategy
CEO Ron Logue opened his presentation by highlighting State Street's long-term financial goals, including continuing its streak as a "consistent earner" with 8% to 12% revenue growth, 10% to 15% growth in continuing earnings, and return on equity of 14% to 17%. Those are some pretty aggressive goals, and management has been able to deliver; it has posted a 14% annual gain in revenue over the past 15 years and a 15% increase in annual operating earnings over the past decade.
Management expects the Investors Financial deal to boost fiscal 2007 top-line growth to 16% to 18% but reduce operating earnings growth and ROE. It is currently calling for a neutral impact in 2008 as cost-cutting moves begin to take hold. Logue described Investors Financial as a "mirror image of State Street," and therefore sees an ability to eliminate most U.S. corporate staff. Only the chief operating officer, "customer-facing management," and select other lucky souls will remain; what is good for business isn't always ideal for employees, it seems.
More on Investors Financial
Logue detailed that Investors Financial will add $2.2 trillion in assets under custody and about $800 million in revenue once the deal goes through. He touted the deal's potential to "truly accelerate our leadership in high-growth areas [like] mutual fund custody administration," as well as hedge and offshore fund management.
One drawback is that "the majority of IFIN's assets under custody are U.S.-based" and will drop State Street's international revenue percentage from 43% to 37%. This is unfortunate, since management cited its overseas business as growing twice as fast as operations here at home. As such, it appears the deal's motivation is to increase penetration in a more mature U.S. market and cut costs to keep double-digit earnings growth moving past 2008.
The Foolish bottom line
State Street believes it has a "simple formula for success," and there's little reason to doubt it, given its stellar growth track record. The acquisition of Investors Financial adds execution risk as management works to integrate two very large organizations, but it could prove less cumbersome than past deals, since both companies are based in Boston.
Other investors are concerned that the deal's price tag will offset any cost-cutting benefits, but the custody business benefits greatly from scale, and this should help State Street keep pace with Mellon and BoNY. In that respect, the decision may not look as wild, and it may scare smaller rivals such as Northern Trust
For related Foolishness:
- Fool on the Street: Comerica's Growth Markets
- Warren Buffett's Priceless Investment Advice
- Shareholder Nightmare on State Street
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.