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State Street to buy Investors Financial Services

The $4.18-billion acquisition would allow the firm to expand into higher-growth areas serving hedge funds.

February 06, 2007|From the Associated Press

State Street Corp. said Monday that it would buy Investors Financial Services Corp. for $4.18 billion in stock to expand into providing institutional asset services for the fast-growing hedge fund industry and funds managed overseas.

State Street said it eclipsed other bidders in reaching a deal between two Boston-based firms that would pay investors a 38% premium on the value of their shares. Shares of Investors Financial Services soared 27%, and State Street's stock tumbled 6%.

Investors Financial provides investment services for $2.2 trillion in assets. Its revenue has grown at an annual rate of 18% over the last three years. State Street is far larger, with $11.9 trillion in assets under custody.

The transaction is expected to yield cost savings by eliminating about 1,700 redundant staff positions while combining real estate holdings and technology, State Street said.

State Street Chief Executive Ronald Logue confirmed to reporters during a conference call that there were other bidders, but he declined to identify them.

"I think it's a very fair price," Logue said. "You have a property here that has been growing top-line revenue dramatically."

He called the deal a logical step to combine two Boston companies with complementary strengths amid consolidation among other firms that serve as custodians for assets of clients such as pension and mutual funds and insurance companies. For example, Bank of New York Co. in December agreed to take over Mellon Financial Corp. for $16.5 billion.

Logue said State Street and Investors Financial would be relatively easy to integrate because both were in similar lines of business. The two companies, Logue said, "already share a similar focus, service model and customer type, which makes for a seamless and swift consolidation."

Whereas State Street's business involves a wide range of back office processing for large clients, Investors Financial has moved into higher-growth areas serving hedge funds: a risky but often high-yield investment vehicle initially favored by wealthy individuals that has grown rapidly in popularity among institutional money managers.

Logue said Investors Financial was one of the few remaining players in the business available for State Street to purchase. The deal also would help State Street expand into investment services for the growing private equity market.

Investors Financial shareholders will receive 0.906 shares of State Street common stock for each Investors share.

Shares of Investors Financial rose $12.85 to $59.80, and shares of State Street fell $4.67 to $67.08. The drop by State Street cut the deal's value from $4.5 billion before it was announced, based on last week's closing stock price.

State Street has about 21,000 employees -- including 12,000 in the Boston area -- compared with about 4,500 at Investors Financial.

Logue said about 1,700 jobs would be eliminated over about 18 months through a combination of layoffs and vacancies left unfilled, with some workers transferring to different posts. He declined to offer a number on how many jobs would be cut.

Together, the companies employ nearly 2,000 people in Dublin, Ireland, serving offshore investment clients. Because of overseas investment growth, Logue said he didn't anticipate cuts there.

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