Is this really on?
The months of July and August have long been known as ‘the silly season’ in newspaper circles.
In keeping with this fine tradition comes the recent story in the Boston Globe newspaper that Citigroup is looking to purchase State Street – a story that, on the face of it, would appear to have the word ‘silly’ looming over it in 20 foot high letters.
After all, why exactly should State Street want to sell out at this particular juncture? In purchasing Deutsche Bank Global Securities Services last year, State Street leapfrogged the other big US custodians to displace The Bank of New York – probably its fiercest rival – as the world’s largest global custodian, with some US$8trn (E7trn) in assets held.
Already the largest offshore service provider, the largest mutual fund provider both globally and in the US and the largest pension plan service provider in the US, the Deutsche deal was moreover a massive boost for the Boston-based bank in its ongoing efforts to crack Continental Europe, giving it a significantly expanded presence and momentum in the region.
1, the associated merger and acquisition costs have predictably dented both State Street’s share price and revenues: the firm recorded a net loss of $23m on revenue of $1,082m over the second quarter of this year, compared to earnings of $178m on $1,003m during the same period in 2002. But after many years of toil, the long-coveted prize – Europe – is finally there for the taking, so why give up on the dream now?
It has been suggested that the inherent complexities of integrating the Deutsche GSS business, and the $125m programme of cost cutting precipitated by that integration process, leaves State Street vulnerable. Other commentators, exhibiting no small degree of poor taste, have sought to conjure significance from the fact that State Street chief executive David Spina (a) owns 1m shares in the company, with options on a further 2m, and (b) has just undergone heart surgery.
Both of these suppositions unfortunately ignore the fact that – unlike many of its competitors, Citigroup included – for State Street asset servicing is a core competency, an offering around which it has built a streamlined business to which it has demonstrated, and continues to demonstrate, an unswerving commitment.
State Street has been accused of arrogance, but this perception is perhaps merely a consequence of the bank’s single-mindedness, an adherence to its chosen course, which can come across as superiority. As one executive commented when describing its asset servicing capabilities: “This is what we do” – the unspoken corollary being: “What is it that you do, exactly?”
However, if State Street has little motivation to sell the farm, Citigroup has plenty of reasons to try and buy it. It has been suggested that, by buying State Street, Citi could at a swoop double the size of its securities services business, which currently only accounts for some 5% ($3.6bn) of its revenue and just 4% of its net income. Just as importantly, such an acquisition would obliterate, once and for all, the persistent doubts within the industry regarding Citi’s long-term commitment to the securities services business.
In particular, it should be remembered that Citi is, as more than one wag has remarked, ‘the US custodian with no US business’. While this is certainly overstating the case – Citi has a significant mutual fund business in the US – there is no doubt that it is not punching its weight in what is ostensibly its ‘home’ market. It is a point that Tom D’Andrea, global product head for global custody securities services at Citigroup Global Transaction Services, concedes: “As far as securities services goes, Europe is actually a bigger business for us than the US – we view Europe as our local business and from a pure product point of view our European offering has been more competitive,” he noted recently.
This perceived weakness is now being addressed, with Citi planning to introduce the IGEFI Multifonds global fund administration platform – which it has already successfully rolled out in Luxembourg, Dublin and Singapore – in the US early next year. Acquiring State Street, however, would obviously reinvigorate Citi’s business, both in the US and globally, to a far, far greater degree. Indeed, it would completely lift Citi’s securities services business to a new level.
The combination of State Street’s highly focused asset servicing capabilities with Citibank’s peerless geographical reach – it has bricks and mortar operations in no less than 50 countries – would, on paper at least, be unmatched and, for the foreseeable future, unmatchable.
Assuming, of course, that Citi could overcome the not insignificant challenges posed by integrating the two businesses without alienating existing State Street clients. And assuming that the regulators in Massachusetts would approve such a deal in the first place – certainly, they were not too well disposed to The Bank of New York’s hostile overtures some years back. And, needless to say, assuming that State Street itself is willing to sell.
Commenting on the second quarter results, Spina does not sound like a man preparing to throw in the towel. “I feel very good about our business,” he says. “We are laying a solid foundation for State Street’s continued long-term growth.” Citibank may indeed have the inclination, and the cash, to buy, but it may have to look elsewhere.