September 2021
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September 2021
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Analysis: State Street’s BBH deal underscores industry’s split into bulk and niche

State Street
By Paul Mackintosh   
September 15, 2021

Good to see it’s not just private equity investors making the headline deals. State Street kicked off the September season by announcing the acquisition of Brown Brothers Harriman Investor Services, comprising custody, accounting, fund administration, global markets, and technology services, for US$3.5 billion in cash. With the deal comes $5.4 trillion of assets under custody as of end-June 2021, adding to State Street’s $31.9 trillion. That would make State Street the world’s largest custodian. BBH, meanwhile, will continue to offer investment management, investment banking and private banking services.

According to some news reports, BBH has some real market-breaking technology that State Street was eager to get its hands on, especially its data integration engine. In analysing the deal, Fitch Ratings said BBH might end up with a narrower business profile but that its earnings margins could be stronger, and that the sale would reduce its exposure to operational risk, compliance risk, market risk, interest rate risk and liquidity risk. Fitch left State Street’s ratings and outlook unchanged.

The financial services industry continues to bifurcate into agglomerative megabrands like State Street, and smaller, highly-focused niche players like BBH. According to Bill Tyree, managing partner of BBH, “we made this decision after careful consideration of the current and future landscape of the global securities servicing industry”.

Does a private bank or an investment bank also need to be a custodian? Both of those models have been shown to work well for smaller niche players, and sticking to those niches is probably the best future for such players.

It’s worth noting that BBH’s roots go back to 1818 and that the firm is famed for its conservative culture, supported by a general partnership structure, and an alumni list that includes W. Averell Harriman and Alan Greenspan. A cutting-edge technology and servicing unit may not be the best fit for such a company but it certainly makes for a profitable sale.

And State Street? Well, look at the excitement surrounding news reports by Bloomberg last December that said State Street was considering a divestiture and merger of State Street Global Advisors, with UBS and Invesco since numbered among the suitors. Market observers speculated that even a giant like State Street Global Advisors, the world’s fourth largest asset manager with $3.9 trillion of assets under management as of end-June 2021, needed more scale to remain competitive in the breakneck exchange-traded fund space.