BBH is back in the game, after a good deal was killed by dumb regulators.
In 1996, The Bank of New York made an audacious, and doomed, bid to take over State Street. It was not BNY’s finest hour. Its C-suite executives had completely misread the resolve of State Street’s board, senior management team and shareholders to remain independent. BNY had become accustomed to buying businesses, rather than growing organically, and it was obviously of the opinion that this would simply be another feather in its cap. (Incidentally, Citibank offered to be a white knight, another offer State Street was quick to reject).
After a near-death experience during the 2008 meltdown – with one particularly unimpressive stock pundit screaming on air that State Street needed to be sold – it has been fairly serene progress, save for one ill-judged and much-criticised acquisition. The 2012 purchase of Goldman Sachs Administration Services, for a whopping USD550m, was popular with practically no one – and especially Wall Street, which thought the money would be better spent on stock buybacks.
Lesson learnt. Management spent the next six years sitting on its hands, even though it had never stopped eyeing Charles River, a Bostonian neighbour and operator of an order management system. Ever since Marsh Carter, State Street’s visionary CEO from 1992 to 2001, had sketched out his “egg chart” of the investment management lifecycle, the bank had felt that an OMS would be a great addition to its asset servicing product range. The problem was that the market was very fragmented and nothing offered the sort of scale the bank was looking for.
Until 2018. Having deflected all offers in the past, the owners finally decided to accept State Street’s advances. Predictably, Wall Street reaction was far from enthusiastic, whilst competitors scoffed at the deal. But the proof of the pudding is in the eating, and Charles River has turned out to be a superb investment, even at the sticker price of USD2.6bn.
This potted history of State Street’s ups and downs in the M&A space serves as context for the failure of its plan to acquire BBH’s investor services business. State Street has been on the right end – and, occasionally, the wrong end – of many M&A deals. The BBH transaction looked like a winner, but neither side bargained for the hostility of some regulators to the deal nor the political agenda behind them. Granted, there were other issues, but State Street eventually concluded that the cost/risk/benefit analysis no longer justified the deal. Time to move on.
State Street is big enough and ugly enough to move on. But what about BBH? It is highly unlikely that a white knight will appear – State Street was not the only bank to have preliminary discussions with BBH – because all bidders would face the same regulatory hostility. So, for now, it is back to the eternal challenge of how to generate enough capital to feed the needs of the investor services business. Longer term, maybe it needs to consider a corporate partner with deep pockets – its Japanese client base would probably jump at the chance – or other innovative ways to raise capital without abandoning the partnership structure.
What hasn’t changed is the quality of the people. The partners sat tight, and many of their best staff did too (there were, reportedly, no defections at MD level). There was leakage lower down the ranks, and a few really good ones escaped, but BBH can rebuild (in fact, it had already started adding senior RMs before the official deal termination). And, don’t forget, it has a great franchise (read my Analysis here), great technology, and great client service. That was the whole rationale behind the deal in the first place, and nothing has changed.