State Street has bought Investors Financial Services Corporation, the parent company of Investors Bank, for $4.5 billion. By buying its Boston neighbour, State Street has reinforced its position among fund managers in particular, since 17-year-old Investors Bank is a major provider of custody fund accounting services to the mutual fund industry, and to a lesser extent to hedge fund managers as well.
“Investors Financial Services Corporation and State Street already share a similar focus, service model and customer type, which makes for a seamless and swift consolidation,” says Ronald E. Logue, chairman and chief executive officer of State Street. “Based on our strong track record of managing large transitions and meeting our goals, we are confident that this acquisition will deliver considerable value to our shareholders, customers and employees. This acquisition by State Street, with more than 200 years of history in Boston, also ensures the city’s continued significance as a major global hub for investment servicing.”
Investors Bank, which has assets worth $2.2 trillion in custody, has been the subject of takeover speculation for some time. Its revenues have risen at a compound annual growth rate of 18 per cent over the past three years, with fee revenue up at a rate of 24 percent over the same period, but its client base is relatively small and the bank is heavily dependent on the outsourcing business of BGI in California
The transaction is all stock. Investors Financial Services Corporation shareholders will receive 0.906 shares of State Street common stock for each share of Investors Financial Services Corporation common stock, based upon the closing price of State Street common stock on 2 February2007. Approximately 62 million State Street common shares will be issued in the transaction.
The transaction is expected to be dilutive to State Street’s operating earnings in 2007, neutral to earnings in 2008 on an operating basis, accretive to earnings in 2008 on a cash basis and accretive to operating earnings in 2009, based on anticipated pre-tax cost savings of approximately $345-$365 million during the first two years following closing.
The anticipated savings will result primarily from technology, staffing and real estate consolidations. State Street also expects pre-tax restructuring charges of $625-$675 million.
The transaction, which is subject to customary conditions, including regulatory and Investors Financial Services Corporation’s stockholders approval, is expected to close by the third quarter of 2007.
“State Street and Investors Financial Services Corporation have for decades invested resources and talent into expanding capabilities beyond basic custody to focus on key value-added services for customers,” says Joseph (Jay) L. Hooley, vice chairman and head of global investment servicing and investment research and trading at State Street. “We will continue to build on this strong focus, create additional capacity for continued growth as well as expand our global customer base, which will provide further opportunities to cross-sell more products and services.”
Once the transaction has closed, State Street will have more than $14 trillion in assets under custody including $3.5 trillion in mutual fund assets under administration. With more than $10 trillion in assets under management, the mutual fund industry grew by 15.5 percent in 2006(1). State Street will also become the leading investment service provider to the offshore and hedge fund industries and gain capabilities for servicing the growing private equity fund market.
Offshore funds have more than $2.7 trillion in assets under administration domiciled in Ireland, Luxembourg and Jersey and the industry has grown at a CAGR of 29 percent over the last three years. Upon closing of the transaction, State Street will provide services for $298 billion of these assets. The hedge fund industry has $1.4 trillion in assets worldwide and its growth is expected to continue at a rate of 15-20 percent per year. Upon close of the transaction, State Street will service more than $340 billion in hedge fund assets.
“We’re thrilled to have entered into this agreement with State Street,” says Kevin J. Sheehan, chairman and chief executive officer of Investors Financial Services Corporation. “This represents a significant milestone for our company. We are delivering tremendous value to shareholders through this transaction, as we have done since becoming a public company in 1995. With State Street’s resources and global capabilities, our clients now have an investment servicing partner that is unmatched in the industry.”