As merger deadline passes, State Street, Brown Brothers Harriman keep talking

$3.5b deal has been slowed by scrutiny from federal regulators but both sides say they’re committed to closing it.

State Street is planning to move into a new office tower under construction in downtown Boston.Pat Greenhouse/Globe Staff

State Street Corp. and Brown Brothers Harriman had set Sept. 6 as a deadline to complete a proposed merger.

Now that the deadline has passed, rather than walking away, both companies plan to keep talking.

Both sides are now free to terminate the transaction without penalty. But that doesn’t look likely: State Street said Tuesday that it is still working on a modified structure and financial terms for State Street’s proposed acquisition of BBH’s investor services division, after the deal ran into some resistance from federal regulators. State Street did not specify the changes that are under consideration.

New York-based BBH issued a similar statement on Wednesday, saying the two companies “believe in the strategic rationale of combining our businesses to create superior experiences for our clients and employees.”

When State Street announced the $3.5 billion acquisition of BBH’s investor services group one year ago, the Boston-based financial services giant said the deal would make it the world’s biggest custodian of investment assets. (BBH’s investment banking group would not be part of the sale.) The initial plan was to close by the end of 2021. Since that time, State Street has said federal regulators have been scrutinizing the transaction, although the particular agency or agencies involved have not been disclosed, nor has the precise reason.

No new deadline has been announced. State Street chief executive Ron O’Hanley has previously indicated he expects the deal to close later this year, though the talks could drag into 2023.

“There’s an open-endedness to this negotiation which doesn’t necessarily give you clarity,” said Ken Usdin, a bank analyst with investment bank Jefferies. “The longer that the transaction sits in a pending mode, the greater the risk that employees get offers from other companies and clients perhaps have more time to think about where they would like their servicing business to be housed.”

This scrutiny follows delays in more traditional bank mergers, between consumer-facing banks, following a July 2021 executive order from the Biden administration that directed various federal agencies to give these mergers additional scrutiny.

The State Street-BBH deal could have a major impact on Boston: About 1,600 people work for BBH here, based out of the Art Deco tower at 50 Post Office Square. Most of them would join State Street’s 8,500-person local workforce.

Acquiring BBH’s investor services business would give State Street more heft in its primary business line — providing services such as accounting to fund managers and institutional investors — as it jockeys for clients with rival market leaders JPMorgan Chase and Bank of New York Mellon. BBH brings geographic diversity, as Usdin noted on Tuesday, as well as unique data and foreign exchange capabilities.

Usdin said the deal still makes sense, although some State Street investors wouldn’t mind if the company walked away and instead used stock buybacks to return that cash to shareholders. He believes a price renegotiation is the highest priority right now for State Street management, to reflect the reduced value of the deal, the time that has passed since it was announced, and any changes in its structure that might be required to receive full regulatory approval.

“There’s a debate in the investor community that perhaps the better outcome is a walkaway and potentially the excess capital turns into a sizable share repurchase,” Usdin said. “The question is, what’s a reasonable price adjustment to make people still feel comfortable that they’re still getting what they [originally] paid for?”