State Street pulls plug on $3.5 billion Brown Brothers Harriman acquisition

Regulatory scrutiny scuttled the big move by the Boston-based financial services giant.

The new State Street Bank headquarters in Boston, pictured in early November.Michael Dwyer/Associated Press

State Street Corp. executives had hoped to once again become the biggest custody bank in the world, by gobbling up the investor services division of Brown Brothers Harriman.

Now, they’ll have to find a different way to get back to the top.

State Street and BBH on Wednesday declared that the $3.5 billion deal was off the table, ending more than a year of regulatory uncertainty.

Maybe it was the right deal for Boston-based State Street, but it came at the wrong time. In mid-2021, the Biden administration announced plans to step up federal scrutiny of major bank mergers. About two months later, State Street and BBH reached their initial agreement. At the time, State Street said the transaction would make it the number one provider of asset services in the world, combining $5 trillion of assets under custody at BBH at the time with State Street’s $32 trillion.

The two companies had hoped to complete the deal by the end of 2021, an aggressive goal regardless of the climate in Washington. Then the closing kept getting postponed as State State executives confronted regulators’ concerns. State Street chief executive Ron O’Hanley had hoped to address those concerns by modifying the deal, possibly paring back the price as well as the business lines that would be sold. It recently became increasingly clear, though, that the deal might not happen at all. In the end, State Street and BBH could not come up with a satisfactory resolution, and instead mutually agreed to drop the deal. Neither will pay a breakup fee.

“The decision not to proceed with this transaction was not taken lightly and is in no way a reflection of the quality of the BBH franchise,” O’Hanley said in a statement. “We will continue to be deliberate in managing our capital in the best interest of our shareholders.”

Investors appeared to be relieved the saga was over: State Street’s stock was up 5 percent Wednesday morning, trading around $78 a share.

Per usual, State Street didn’t specify the federal agency or agencies that got in the way, or the exact problem that regulators had raised. Instead, State Street said that to clear federal approval, the company expected further delays, an increasingly complex deal structure, and additional operational risk, while limiting the “deal synergies” and other anticipated benefits.

“It is disappointing that State Street’s inability to secure regulatory approval precluded the compelling vision that they brought to us,” said BBH managing partner Bill Tyree, who added that BBH has no additional plans to sell its investor services business. In other words, back to business as usual.

The deal would have had a significant impact in downtown Boston. State Street is based at One Lincoln in the Financial District, with about 8,500 local employees, and is planning to relocate its headquarters to a new tower at One Congress next year. BBH, meanwhile, is based in New York but has about 1,600 people in Boston in the Art Deco building at 50 Post Office Square. Most of BBH’s Boston employees would have joined State Street.

State Street has jockeyed with JPMorgan Chase and Bank of New York Mellon for years for the title of the world’s largest custody bank — a catchall category that includes a variety of services, such as transaction processing and accounting, for big fund managers. As reported in their respective annual reports, BNY Mellon led the way at the end of last year, with $47 trillion in assets under custody or administration, with State Street close behind, at $44 trillion. As of the end of September, with the BBH deal still in limbo, State Street had $36 trillion, while BNY Mellon was at $42 trillion.