Does State Avenue want a deal to save lots of its ETF enterprise?
Is Nelson Peltz on the verge of a deal to create a rival to challenge BlackRock and Vanguard, the two largest wealth managers in the world?
The seasoned activist investor acquired a stake in Invesco through his Trian Partners fund last year and immediately began discussing “strategic combinations” with the lead of the $ 1.5 trillion investment manager in Atlanta.
One tempting combination stands out: a marriage between Invesco and State Street’s $ 3.9 trillion wealth management business.
State Street played a vital role in the early development of the exchange-traded fund industry, launching the first US-listed ETF in 1993. The fund known as SPY has since then had assets of 400 billion.
The ETF industry now controls $ 9.7 trillion in assets, but State Street Global Advisors has long since given its early lead to BlackRock and Vanguard, who have benefited from the massive move to low-cost index funds over the past decade.
With State Steet’s ETF business trailing in third place, industry watchers wonder if the company could be persuaded to sell its wealth management line of business. And if it doesn’t find a deal, what will it do?
Mergers and acquisitions have accelerated across the investment industry in recent years, fueled by downward pressure on fees and rising costs.
The disclosed value of M&A deals involving investment managers reached $ 38.9 billion last year, the highest since the financial crisis, according to investment bank Piper Sandler. And in the first eight months of this year, $ 1.6 trillion in assets were exchanged between managers, compared to $ 2.9 trillion in all of 2020.
On paper, the combination of Invesco, a distant fourth place in the ranking of ETF providers, with SSGA is the kind of deal that excites activist shareholders and Wall Street’s M&A machine.
“The combination of their resources would create a $ 1.6 trillion ETF business with a 16.1 percent global market share that owns the world’s largest equity ETF, largest gold ETF, and largest technology ETF” said Deborah Fuhr, founder of ETFGI, a data provider.
State Street, Invesco and Trian declined to comment, but talks are still ongoing, according to one person who was briefed on the matter.
Peltz has already tried to get rid of the ETF business – Trian was involved in State Street between early 2010 and 2013, but his attempt to sell SSGA ultimately failed – and there is no guarantee he will have any luckier this time around.
Marty Flanagan, CEO of Invesco, knows how painful asset management mergers can be after barely digging through the $ 5.7 billion acquisition of smaller rival OppenheimerFunds in 2018, which was followed by heavy outflows and a decline in profits .
“These big deals have a terrible bottom line. There are cultural risks as well as operational challenges. . . State Street clearly wants to make a deal, but it’s not clear if Invesco is the right partner, ”said a dealmaker close to the talks.
It’s also unclear whether Invesco’s long-term profitability would be boosted by acquiring low-margin ETFs, which make up the bulk of State Street’s investment business, according to KBW, a New York investment bank.
“We do not believe that a transaction would materially improve Invesco’s competitive position in any of the industry’s key growth segments, including alternatives, fixed income, global stocks and solutions,” said Robert Lee, analyst at KBW.
KBW estimates Invesco will have to spend $ 4.2 billion in cash to buy SSGA and State Street will have $ 24 billion.
State Street has held talks with several other rivals, including UBS, who want to buy the company outright, according to two people who have been briefed on the matter.
State Street, however, would prefer a partnership or joint venture to a full sale, which Lee said would be “complex” and make cost savings difficult.
The road to a deal is made even more complicated by State Street’s role as one of the largest providers of basic fund services to wealth managers, which also generates the bulk of its revenue.
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This role has limited the ability of the State Street investment arm to compete aggressively in the predatory ETF price competition as the parent bank is in direct competition with its fund clients. Buying Invesco or agreeing to an ETF joint venture would only exacerbate this conflict.
“Everyone knows State Street for its ETF franchise, but most of its revenue comes from the custody side,” said Kyle Sanders, an analyst at Edward Jones.
The broker estimated that the sale of fund and custody services, which involve securing and managing assets for institutions, represented 46.2 percent of State Street’s total revenues for the first half of this year. Only 16.2 percent of the first half of revenue came from State Street’s own investment management business.
The custody business is also growing after State Street last month announced a $ 3.5 billion acquisition of Brown Brothers Harriman’s Investor Services business. This will make State Street the largest global custodian service provider, ahead of BNY Mellon with a current balance sheet of $ 31.9 trillion, which is increased by $ 5.4 trillion in assets from BBH.
If talks fail, State Street top management will be working on a Plan B, said Amin Rajan, CEO of Create Research, a London-based consulting firm: “It’s the size and reach to remain a big player, but a sharper solution is needed, focusing on costs, product innovation and customer service standards. “
But the problem is that if a deal can’t be struck, both State Street and Invesco could contemplate a future as perpetual followers alongside Vanguard and BlackRock – and that prospect could force their hands on.
