At the end of 2006, Ronald E. Logue, State Street Corp.'s chief executive officer, pledged that his company would be an "island of stability in a sea of chaos" in the wake of the Bank of New York-Mellon merger announcement.
But in the past six weeks, the Boston banking company has announced plans for two significant purchases.
The deals and his "island of stability" pledge are not incompatible, Mr. Logue says. "Making acquisitions does not necessarily mean instability."
"The biggest reason I think we will maintain our stability is because I can answer every question that customers and employees may have," he said in an interview on Thursday. "I can tell them who is in charge, what system they will be on, will people have to move, and where will the work be processed. I can answer all of those questions, and I don't think other organizations that are merging right now can. That is why I don't think there will be chaos."
Mr. Logue said that, after sitting on its hands for four years, State Street was ready for dealmaking.
"We haven't done a deal in four years since the Deutsche Bank deal, and we have been building our capacity in terms of both our infrastructure and our capital. We have a lot of capacity, and now we are going to use it," he said.
He said State Street set up a team in January to pursue customers ready to defect from Bank of New York Co. or Mellon Financial Corp. "They are doing something very different from this consolidation effort," Mr. Logue said during the conference call. "This merger won't interrupt what they are doing whatsoever."
The comments echoed those Mr. Logue had made earlier in the week, when he told investors and analysts during a conference call that the latest deal, for Investors Financial Services Corp., would not interfere with an effort to attract customers away from Bank of New York and Mellon as they consolidate. Executives at those companies, for their part, have pledged to try to lose no customers during their integration.
On Jan. 23, State Street announced that it planned to buy Currenex for $564 million in cash. On Monday, it said it would buy Investors Financial for $4.5 billion in stock to make itself the second-largest global custodian, with $14.1 trillion of assets under custody, and the largest hedge fund administrator, with $340 billion of hedge fund assets.
Analysts said they think State Street's deals for Investors Financial and Currenex Inc., an independent foreign exchange in London that trades hedge funds, were motivated by market opportunities rather than competitive pressures.
"State Street has sent the message to shareholders, investors, and analysts for the last year that business is good and, with the Deutsche Bank acquisition completed, the company was back on the hunt for more deals," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets.
Andrew Collins, an analyst at Piper Jaffray & Co., said State Street is more interested in expanding its other businesses than in attracting a small amount of custody business from the Bank of New York-Mellon deal.
"The Bank of New York-Mellon deal is dealing mostly with public and private pension processing," Mr. Collins said, "and there will be some opportunities there for State Street. But senior management is spending more time with their own merger [with Investors Financial] than with trying to benefit from any disruption over there" at Bank of New York or Mellon.
Mr. Logue said in December that the pending merger between Bank of New York and Mellon would not force State Street to change course. Before the deal, he said, State Street was looking for pools of assets, and the company would keep doing that. "We have sufficient size to continue doing what we are doing," he said in December, "but if there are opportunities, we will continue to consider them."
Mr. Cassidy said he was not surprised that Investors Financial was up for sale. "Investors Financial put itself on the block sooner than we all thought, but no one believed Investors Financial was going to be independent forever," he said. "State Street will be independent indefinitely. It has the size and the scale so that it doesn't have to sell."
He said he was surprised that State Street paid such a hefty price, though. It agreed to pay $65 a share, or a 38% premium over Investors Financial's closing stock price last Friday. The price was 29 times Investors Financial's estimated earnings for this year.
State Street will be active as consolidation continues, Mr. Cassidy said. "They could do another deal," he said, "though I don't think that they are looking, but if Bisys or another processing company puts their book of custody business up for sale, it makes sense for State Street. If it makes sense, they are going to deal. They are not knocking on doors, but they are prepared."
Mr. Logue said that Investors Financial was "the last pure play" custody bank, had businesses that could easily be assimilated, and is based in Boston, as State Street is.
"The businesses that come with [Investors Financial] are exactly the business we had," Mr. Logue said Tuesday. "There isn't any private banking or lending or any banking or processing. I can't think of too many other banks in the custody business that are just in these businesses that we are taking."
Jay Hooley, a vice chairman at State Street and its head of global investor services, said during the conference call that the company would continue to target "fast-growing business segments," including hedge funds and private equity, for acquisitions.
The Investors Financial deal would enhance State Street's position in global asset servicing, high-growth hedge fund and offshore fund servicing, and investment manager operations outsourcing. Investors Financial has 500 customers, including 12 of the world's top 25 investment advisers, Mr. Hooley said.
State Street will be able to retain 90% of Investors Financial's customers, he said. "We are ideally situated to execute this transition because we have the same customer service model, the same delivery model, and we are both headquartered in Boston," he said.
Mr. Hooley said the deal positions State Street as the second-largest global custodian but, more importantly, gives it a fresh customer base to which it can cross-sell. "We are acquiring attractive customers and then we want to find ways to cross-sell to them from our extensive product base and extend them into Europe and Asia," he said.
"We are a growth company, and we are continuing to refine our focus on the fastest-growing segments of the market," Mr. Hooley said. "The acquisitions of Investors Financial and Currenex were opportunities to acquire attractive customers, new capabilities, and new market spaces that are growing at faster rates than the rest of the market."
Mr. Logue said the company is especially interested in making deals overseas. Its international businesses generated 39% of State Street's revenue last year, he said, but he would like to raise that share to 50%.
