The State Street acquisition machine was poised to swallow up a smaller rival within the next few weeks, a move that would put the Boston-based financial services giant back in the top spot of its industry.
Now it turns out the purchase of Brown Brothers Harriman’s investment services unit won’t be done by the end of the year, as it was floated to investors, after all. State Street executives are expected to address this change, due to the timing of securing regulatory approvals across multiple jurisdictions, at an investor conference on Wednesday.
Not to worry. When the deal was announced in September, year-end seemed an ambitious goal for a $3.5 billion transaction that spans continents. Instead, Boston should focus on this: The acquisition, once it is complete, will solidify State Street’s status in a rare spot for a publicly traded company.
State Street is not only too big to fail. It’s too big to be sold.
Analysts say State Street, with its $35 billion market value, has already reached this top tier. It doesn’t need another deal to get there.
But it wasn’t so long ago — particularly when you consider the company’s 230-year-history — when State Street was regularly talked about as an acquisition target.
Such a takeout would have been a big blow to Boston. Consider the likes of Fleet, Gillette, and John Hancock. They’re all still here, in one form or another, but much smaller than in their heydays.
The city’s most recent report to its bond investors, issued a year ago, underscores why State Street matters to Boston. It is listed as the city’s sixth-largest private employer, with about 7,500 employees here in 2017, and the biggest that is not a hospital or university. (A recent breakdown by the company offers more clarity on this figure: nearly 4,500 employees based in Boston and more than 3,100 in Quincy.)
Sure, State Street has fallen from third place in 2010, thanks in part to several rounds of layoffs. But the company remains a dominant force in the business community and in civic life — and a major player in the financial services world.
Chief executive Ron O’Hanley is determined to keep it that way.
“We view ourselves as an industry leader and industry consolidator,” he said. “We’ll be the largest in the industry after this transaction. I think that speaks for itself.”
State Street’s trajectory goes back to a decades-old management decision. The company over the years focused on back-office services for the investment world, such as accounting and cash management. It’s a low-margin business that rewards those with scale and size.
State Street has that in spades. It became the largest so-called custody bank on the planet two decades ago, after acquiring Deutsche Bank’s investment services business.
State Street has been fending off competition ever since. Rivals Mellon and Bank of New York ganged up on State Street by merging in 2007. State Street responded by buying crosstown rival Investors Bank & Trust. JPMorgan Chase eventually claimed the No. 2 spot, in part by luring away a significant chunk of business from a key State Street client, giant money manager BlackRock, a few years ago.
Now, State Street is poised to leapfrog both of them, by bringing Brown Brothers Harriman into the fold.
RBC Capital Markets analyst Gerard Cassidy cites another reason State Street is destined for independence: It is one of a few financial institutions deemed “too big to fail” during the Great Recession. In banking lingo, it’s a Systemically Important Financial Institution — or SIFI for short. For practical purposes, Cassidy said that means federal regulators would be highly reluctant to clear a combination with another SIFI; the risks of disrupting the financial system would be too great.
State Street’s dominance hasn’t come without some pain in its hometown. The company faces constant pressure from Wall Street to keep costs in line, which often means cutting payroll and real estate expenses. Expensive cities such as Boston feel the brunt.
O’Hanley and chief financial officer Eric Aboaf took layoffs off the table at the start of the COVID-19 pandemic in 2020, to calm an understandably jittery workforce. But O’Hanley and Aboaf were back at it a year ago, announcing 1,200 jobs would be cut in 2021 across a global workforce of 39,000, mostly in middle management.
Analysts expect more cost-cutting once State Street absorbs Brown Brothers Harriman’s investment services business. State Street has promised $260 million in annual expense savings within three years. That money has to come from somewhere.
However, O’Hanley plays down the impact on employment, saying the talent at BBH is a driving reason for the deal. He said he hopes to keep the vast majority of its workforce, which includes about 1,600 people in Boston.
The fate of BBH’s local real estate — it occupies most of the Art Deco tower at 50 Post Office Square, in a lease that expires at the end of 2028 — remains less clear. All State Street is saying now on that front is that it is committed to moving into its new headquarters, in the tower under construction at One Congress, in early 2023.
Boston’s history is littered with corporate names that have been subsumed or lost completely at the hands of out-of-state buyers: big fish swallowed by even bigger fish. As it regains the top rank among custody banks, State Street aims to be the biggest fish in that pond — and to stay that way.