State Street Corp. is paying nearly $3 billion in cash to prove it is serious about its transformation from sleepy custodian to tech-savvy data manager.
The Boston bank said Friday it had agreed to buy financial-data firm Charles River Systems Inc. The decision is its boldest move yet to step out of its financial-services clients’ back offices and onto their trading floors, where State Street can offer data, analytics and trading tools to investment staff.
“Our overall strategy even before we started talking to Charles River has been about data, and about this idea that information delivered in an appropriate way and in a usable way is the most powerful tool we can provide to market,” State Street President Ron O’Hanley said on a conference call with analysts.
Reacting to the agreement, some investors said they were concerned State Street is paying too much, and skeptical the company would be able to meet all of the revenue targets laid out in the deal. State Street’s shares fell $7.12, or 7.7%, to $85.62 in late-morning trading, on pace for their biggest one-day drop in more than two years.
To help pay for the acquisition, State Street canceled plans to buy back about $950 million in company stock this year. The firm will spend $2.6 billion on the acquisition — nearly nine times Charles River’s revenue in 2017.
Boston-based State Street also reported quarterly results that fell short of some analysts’ expectations.
“There’s definitely some strategic sense to it,” Glenn Schorr, an analyst with Evercore ISI, said of the Charles River deal. “Execution-wise, it will take time and will be hard to do.”
Charles River, a closely held firm based in Burlington, Mass., runs a software platform used by more than 300 investment firms, wealth managers and other financial-services companies — many of which overlap with State Street’s client list. It has 745 employees and tallied revenue of more than $300 million last year.
Mr. O’Hanley said Charles River’s founder and chief executive, Peter Lambertus, owns nearly all of his company’s equity. He will serve in a consulting role as State Street completes the acquisition.
The bank will appoint a new CEO to run Charles River, which will be a stand-alone division within State Street. The bank expects the deal will begin to add to its earnings in 2020.
The deal comes as State Street and other custody banks look to pull out of a yearslong rut of low revenue growth as financial-services firms push to lower the fees they pay for custody and accounting. The industry’s biggest players, including State Street and Bank of New York Mellon Corp., have slashed expenses in a bid to lift earnings.
But investors want them to boost revenue, too. Those firms are betting technology, and the sweeping digitization of financial markets, will emerge as a panacea, of sorts — allowing them to automate functions and lower costs, but also giving them the tools to harness the reams of data they collect from clients as custodian to trillions of dollars in assets.
State Street, which performs core administrative and accounting tasks for 86 of the world’s largest 100 money managers, has been steadily adding to its own data and analytics offerings. The bank estimates there is an $8 billion market for those tools. Bloomberg LP and BlackRock Inc.’s Aladdin unit are among Charles River’s biggest rivals.
The Charles River agreement is also the latest bid by Mr. O’Hanley to lean on acquisitions to speed up State Street’s transformation. As head of the firm’s asset-management business, he had championed State Street’s 2016 purchase of General Electric Co.’s investments division.
Mr. O’Hanley did a series of deals as president of BNY Mellon’s asset-management arm, and joined State Street in 2015 after a four-year stint at Fidelity Investments. He is slated to succeed Joseph Hooley as the bank’s chief executive at the end of the year.
State Street announced the Charles River agreement minutes before it reported second-quarter net income of $698 million, or $1.88 a share. The profit figure marked a 20% increase from a year earlier, when the firm earned $584 million, or $1.53 a share.
Included in the latest results was a $77 million charge, or 17 cents a share, related to job cuts and management changes related to its continuing push to automate functions and eliminate expenses.
Excluding the charge, State Street earned $2.05 a share. Analysts polled by S&P Global Market Intelligence had expected a per-share profit of $2.01.
Total revenue rose 7.7% to $3.03 billion.
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View more information: https://www.marketwatch.com/story/state-street-to-buy-charles-river-for-26-billion-2018-07-20-13485595