State Street is set to acquire custodian Brown Brothers Harriman in a $3.5 billion deal marking one of the most significant and largest securities services deals of all time.
The news comes just a month after Global Custodian reported that BBH had been in talks with suitors including BNP Paribas Securities Services and Northern Trust, while also suggesting that State Street could be a good fit as an acquirer.
The agreement will see State Street acquire BBH’s Investor Services business, including its custody, accounting, fund administration, global markets and technology services.
The parties are targeting year-end 2021 to complete the acquisition, subject to regulatory approvals and customary closing conditions.
Upon closing of the transaction, BBH Investor Services employees will move to State Street, and $5.4 trillion in assets under custody (AUC) will transition to State Street’s books, which already hold $31.9 trillion.
“The investment servicing industry enjoys strong fundamentals as worldwide growth in financial assets drives industry revenues. This combination with BBH Investor Services helps us consolidate our position as the industry innovator and leader,” said Ron O’Hanley, chairman and chief executive officer of State Street Corporation.
“We are enhancing our leadership position across a range of services, augmenting our position in a number of key markets, growing relationships with many of the leading global asset managers and owners, and increasing our capabilities and scale. Additionally, BBH Investor Services brings us strong talent, including industry leading service excellence and quality execution.”
Following the transaction, BBH will continue to independently own and operate its separate private banking and investment management businesses.
“We made this decision after careful consideration of the current and future landscape of the global securities servicing industry, including how best to support and innovate for the growing breadth and complexity of our clients’ servicing requirements,” said Bill Tyree, managing partner of BBH. “State Street is the ideal partner – a firm that shares our core values of unmatched client service, integrity, trust, and a long-term commitment to sustainability.”
As one of the less public custodians when it comes to visibility, announcements and strategy, the BBH story and its future had become one of great interest, at a time when its rivals have shifted business models in light of industry headwinds in a public and vocal way. Among these shifts has been a focus on full front-to-back-office services and ambitions in digital asset servicing and products.
BBH has also seen a number of high-profile client departures, most notably in 2018 when Vanguard transitioned over $1 trillion of mutual fund and variable annuity portfolio assets to State Street. PIMCO, Oppenheimer, Pioneer Funds, and Mitsubishi UFJ Investor Services Luxembourg (MIBL) have all switched from BBH as their custodian for various funds, with the last of these set to move $630 billion of assets to Citi.
Last month, Global Custodian revealed that BBH has held merger talks with the likes of BNP Paribas Securities Services and Northern Trust over the past few years, however a deal could not be struck with either bank.
State Street was also highlighted as speculative suitor for its cross-town neighbour. Its $2.6 billion acquisition of Charles River Development (CRD) in 2018 showed that the bank is not shy in the M&A space. It has also gone through the process of integrating CRD front-office technology with its global middle- and back-office businesses.
Furthermore, State Street’s focus over the past few years has been to gain the most from its biggest asset manager and asset owner clients to ward off ongoing pressures on fees and pricing. This includes providing a full front-to-back outsourcing service which includes front-office software, middle-office services, custody and fund administration. The addition of BBH would also further strengthen State Street’s dominance in the exchange traded fund (ETF) servicing market.
A merger with BBH will leapfrog BNY Mellon as State Street now becomes the world’s largest custodian, giving it access to pool of large investment managers that it can offer its flagship State Street Alpha service too.