State Street Corp. plans to acquire a Burlington software business in a $2.6 billion deal that would be the largest for the Boston-based financial giant in the past decade.
The pending purchase of Charles River Development reflects State Street chief executive Jay Hooley’s ongoing effort to transform the 225-year-old bank into more of a technology firm. The deal is expected to close by the end of the year, just as Hooley hands the CEO job over to lieutenant Ron O’Hanley.
State Street is known for providing back office services, such as accounting and regulatory reporting, to fund companies and other big money managers. The Charles River deal helps State Street expand into the “front office,” to handle functions such as portfolio modeling and risk management. Charles River says its subscription software increases clients’ efficiency and cuts costs by consolidating systems onto one secure platform.
“The magic to this deal is our ability to digitize all the way through the front office,” Hooley said. “In the world of financial software, they’re a real household name.”
State Street plans to keep the Charles River brand, and officials there said they do not expect disruption to the firm’s 750-person workforce as a result of the deal. (State Street employs about 36,500.) Charles River chief executive Peter Lambertus will transition into a “strategic advisory role” with State Street, a spokesman said. The privately held Charles River generated more than $300 million in revenue last year.
“We want to keep their esprit de corps [and] their software engineering that has defined their success,” Hooley said.
In a note to investors, Morningstar analyst Eric Compton wrote that “many of the strategic aspects of the acquisition make sense,” even though it could take several years for the deal to fully pay off.
Nonetheless, many investors didn’t seem impressed. Shares in State Street plunged 7.4 percent, to $85.87 a share on Friday after the announcement. One likely factor: State Street would partially finance the Charles River deal by suspending plans to buy back about $950 million worth of shares from investors.
“This is a sizable deal for State Street,” said Gerard Cassidy, an analyst with RBC Capital Markets. “It took the market by surprise.”
It’s also a sizable deal for the industry. Cassidy said the banking sector hasn’t seen many large deals — particularly those worth more than $2 billion — since the Great Recession. Banks have become more cautious, in part because of new requirements placed on them by regulators.
State Street hasn’t signed a deal this big since it acquired crosstown rival Investors Bank & Trust in 2007 for nearly $4.5 billion.
Hooley said the Charles River acquisition, which has been in the works for the past year, may act as a prelude to more deal-making within an industry that has largely been “locked down” since the financial crisis. “I’m hoping this is the beginning,” Hooley said.