State Street Corp. will become the largest asset servicer in the world through its acquisition of Brown Brothers Harriman & Co.'s investor services business, the latest move in the custodial industry aimed at consolidating assets and gaining scale.
The deal will add $5.4 trillion in assets under custody to State Street's existing $31.9 trillion, making it the largest asset servicer in the world, Chairman, President and CEO Ronald Philip O'Hanley said during a conference call to discuss the deal. State Street is paying $3.5 billion in cash to snag "probably the last remaining independent consolidation opportunity of scale in the global asset servicing landscape," O'Hanley said, according to a transcript.
Asset servicers and custodians have sought to gather more and more client assets under their roofs in order to spread costs over a larger fee base. Custodian banks like State Street, Northern Trust Corp. and The Bank of New York Mellon Corp. serve public pension funds, investment advisers and asset managers like BlackRock Inc. by holding the securities in their funds to prevent mishandling or theft. They also conduct much of the back-office logistics of asset ownership, such as receiving and distributing dividends and proxy statements. The industry is dominated by a handful of the largest firms that have worked to acquire smaller competitors and add their assets to their own, allowing them to charge low fees on an expanding base of assets and still generate billions of dollars in revenue.
Most of Brown Brothers Harriman's $1.4 billion in full-year 2020 revenue came from outside the U.S., according to a presentation given during the call. The U.S. represented less than one-third of revenue, while Europe, the Middle East and Africa represented 43% and Asia-Pacific 28%.
Brown Brothers Harriman is on track to grow servicing fees, or the revenue from custodial activities, about 12% in 2021, partly due to rising equity markets, State Street CFO Eric Aboaf said during the call. But State Street estimates that "at least 2 to 3 percentage points of that is driven by net new business growth, sort of core underlying growth in the franchise," Aboaf said, according to a transcript.
"That's a testament to what this boutique midsized provider could offer," he said.
Investors showed some skepticism of the deal, with State Street shares down about 3.77% as of 12:26 p.m. ET on Sept. 7. Analysts at Piper Sandler were largely positive in a research note, writing that while all large deals carry some risk, State Street has a successful track record of integrating targets.