It’s been nearly one year since State Street Corp. unveiled its $3.5 billion proposal to buy Brown Brothers Harriman’s investor services business. It was a big day: State Street bragged the deal would make it the biggest global player in its field. The game plan: to wrap everything up by the end of 2021.
So much for that idea.
As State Street approaches the anniversary of its BBH agreement, it remains unclear when the deal will be completed — or, frankly, if it gets done at all. The implications are big for Boston. The two companies are signature tenants for two prominent downtown buildings: State Street in a new tower opening next year on Congress Street and BBH in the grand Art Deco tower at 50 Post Office Square. About 1,600 people work at BBH in Boston, and most would join State Street’s 8,500-person local workforce.
State Street chief executive Ron O’Hanley is still enthusiastic about the deal, though he expects the BBH business that State Street would acquire to be restructured to help achieve regulatory approval. As a result, State Street may need to negotiate a lower price with BBH. O’Hanley hopes to close by the end of 2022 now but cannot promise the talks won’t slip into 2023.
When the deal was first announced, completing it in four months seemed ambitious. But 14 months-plus? No one saw that coming.
Maybe they should have. Two months before State Street announced the acquisition, President Biden made it clear, in stark terms, that his administration would give bank mergers a much closer look. He issued an executive order encouraging federal agencies responsible for overseeing these deals — such as the Department of Justice, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency — to update their guidelines to “provide more robust scrutiny.” The Biden administration argues that excessive consolidation raises costs for consumers and small businesses and harms lower-income communities. How easy was it to get a bank deal approved? Federal agencies had not formally denied one in more than 15 years.
Small deals don’t seem to be running into much of a slowdown. The bigger ones? That’s another story entirely.
Of interest in New England, M&T experienced delays with its plan to acquire Bridgeport, Conn.-based People’s United. The $8 billion deal ended up closing in April, giving the Buffalo-based banking giant a new foothold in Boston.
A merger between First Citizens and CIT Group also took longer than expected, as the two banks awaited Fed approval. And all eyes are now on Mitsubishi UFJ Financial Group’s effort to sell its UnionBank subsidiary to US Bank, a transaction that was supposed to happen in June but has now been pushed back to later this year.
What’s strange about State Street-BBH is that these two are not traditional retail banks. State Street provides custody, accounting, and other administrative services for large institutional investors — mutual funds, pensions, private equity firms, and the like — as does the division that BBH is selling to State Street. (BBH will hold onto its investment banking group.) State Street got out of the business of serving consumers more than two decades ago. Yes, State Street’s initial announcement essentially bragged that it would end up ahead of rivals Bank of NY Mellon and JPMorgan Chase in the No. 1 spot for asset servicing, with the $5 trillion in custody assets that BBH would bring. But it’s not as if State Street’s clients wouldn’t still have numerous other places to park their money if they prefer.
O’Hanley fielded questions about the BBH deal status in an earnings call with analysts last month. He said State Street is seeking to amend the transaction terms, including a “price adjustment” (read: discount) to reflect changes to the operational model and legal structure of the business, and the regulatory approvals necessary. While he felt obligated to note that either side could walk away without penalty after Sept. 6, the year anniversary of the announcement, O’Hanley expressed optimism that the deal will be done by the end of 2022.
In an interview afterward, O’Hanley was no less upbeat. He said State Street remains “100 percent committed” to the BBH transaction even though the regulatory environment and politics around bank mergers have become more challenging in the past year. He declined to point fingers at a particular agency — “there’s lots of navigation that needs to occur” — nor would he specify how the deal is being restructured to accommodate the unnamed regulators’ concerns.
“We’re at the stage,” he said, “where we need to look at everything.”
The mystery has fueled different schools of thought among State Street shareholders. Jefferies banking analyst Ken Usdin said theories range from State Street going through the deal much like it was initially proposed, to the deal moving forward at a significantly lower price, to State Street opting to spend its hard-won capital in other ways. Usdin believes both State Street and BBH are compelled to complete the transaction: They have come so far that it’s tough to turn back. But the mention of a walkaway date does raise some questions about the situation.
Getting larger, of course, helps insulate State Street from unwanted takeover advances. But the company is so big already that its independence is all but guaranteed, at least for now.
Every State Street chief executive, it seems, finds his blockbuster deal. For David Spina, it was Deutsche Bank’s custody business. Ron Logue engineered the purchase of crosstown rival Investors Bank & Trust, while Jay Hooley led the acquisition of Burlington-based investment software firm Charles River Development.
Now, it’s O’Hanley’s turn.
From a bank chief executive’s perspective, bigger is usually better. But convincing the federal government, it turns out, is no longer an easy sell.