Well, that didn’t age well. Barely a month after I argued that BBH’s investor services business should remain independent, it goes and does a USD3.5bn deal with State Street. Whilst the counterparties might hope that I would entitle this article “Stairway to Heaven”, it’s probably fairer to call it “You Might Think”, and here’s why.
You might think that this is a defensive move, rather like the USD4.5bn 2007 acquisition of Investors Financial (IFIN). But there almost no similarities: IFIN had some great clients, and some great client service people, but one of State Street’s primary motives for buying the business was to stop other banks – most notably Citi – from acquiring it and establishing a beachhead in Boston. BBH is completely different: it has a lot of product adjacencies that will add substantial value to the State Street franchise, including Infomediary; the Japanese business (the head of BBH in Japan, Noriyasu Sonobe, is moving as part of the deal) and its Cayman linkages; InfoFX; TA; and enhanced access to Latin America, inter alia.
Similarly, you might think that the deal is a relic of another age, when custodian banks bought lumpy books of assets for scale. But, although State Street will become the world’s largest asset servicer, that’s no more than a secondary consideration. Financially, it stands to benefit, forecasting that it will generate some USD260m in cost synergies by the end of year three. It is also looking at BBH’s franchise in Latin America, suggesting it will nearly double its revenue from the region, as well as a 4x improvement in its position with Cayman funds for Japanese investors.
You might also think that the cultures are so divergent that integration will be all but impossible. And yes, you might well have been right 10 years ago – but things have changed. State Street used to be famous for making it hard to do business with them. But a succession of client-focused managers – including Andrew Erickson and Donna Milrod – turned the ship around. (In fact, Milrod has now been charged with overseeing integration). You can be absolutely sure that the BBH partners will have looked very closely at the State Street client servicing model before deciding to do the deal.
Seán Páircéir, head of BBH Investor Services, who will join State Street’s management committee, said as much: “We found in State Street a partner who shares our singular focus on delivering exceptional client outcomes, without exception. We are committed to adopting best practices from both organisations to create an unmatched offering for the world’s most sophisticated asset managers and financial institutions.”
Finally, you might think that, following its 2018 acquisition of Charles River, State Street was no longer truly committed to the inserv business. Nothing could be further from the truth. Its Alpha front-to-back proposition is entirely reliant on all parts of the chain being best-in-class. It has specifically highlighted the importance of the BBH Infomediary communications platform to its Alpha franchise.
So, though you might think all of these things, and more, you probably need to take another look at the deal – because, ultimately, there are a lot more reasons for it to succeed than you might think.