Could More State Street Acquisitions be on the Horizon?

In 2009 State Street (NYSE:STT) acquired the securities services business of an Italian bank, Intesa Sabpaolo for 1.3 billion, and more recently in April 2010 State Street acquired the London based Mourant International Financial Administration. As State Street extends its footprint in Europe, more acquisitions could be on the horizon from the securities services leg of European banks.

With around $23 trillion worth of assets under custody, State Street is one of the leading custodians of global financial assets after Bank of New York Mellon. We value State Street at a $47.78 stock price estimate , a premium to current market price.

Why Might Acquisitions of Securities Services Business in Europe Make Sense?

From State Street's Perspective…

Securities servicing is essentially a scale-intensive, information technology driven processing business, which mainly includes providing custody of assets (put simply, the physical and electronic safekeeping and record-keeping of financial securities for clients). Low-cost operations are key to success in the securities servicing business, which caters to financial services providers such as banks and asset management firms that outsource these operations in exchange for a fee (often a single-digit basis point commission on the size of assets under custody).

While acquisitions in Europe reduce State Street's dependence on the U.S., which currently accounts for over 70% of its assets under custody, they also add benefit through economies of scale. Diluting operating costs (those associated with technology setup and people) over a larger asset pool and investor base enables State Street to charge a more competitive fee and further improve operating margins. However, to fully exploit cost benefits, compatibility of IT platforms and migration synergies are equally important.

From European Banks' Perspective…

Securities servicing is an ancillary business to core banking, which can often be performed in a more cost-efficient manner if outsourced to a third-party focused solely on asset servicing. Also, several European banks, still recovering from the aftermath of the sub-prime crisis, could raise capital by shedding off the back-office operations such as securities servicing. While U.S. custodians such as State Street have a scale advantage over smaller European players, the operational and regulatory difference between countries in the European Union poses a challenge to non-European players.

How Sensitive is State Street's Stock Value to Such Acquisitions?

Investment servicing makes up over 48% of our $47.78 price estimate for State Street's stock . We forecast that the size of assets under custody and administration will grow at a compounded annual growth rate of almost 10% over our forecast horizon.

See our complete analysis for State Street stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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