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Amid an industry consolidation, Northern Trust keeps its power dry.

The global custody BUSIness is undergoing a wave of consolidation as big players strive to get even bigger so that they can deliver high-priced services. It's an ever-accelerating arms race: In December, Bank of New York Co. said it would acquire Pittsburgh-based Mellon Financial Corp., to create a world-beating behemoth with $16.6 trillion in assets under custody. In February, Boston's State Street Corp. announced its crosstown acquisition of Investors Financial Services Corp., whose $2.2 trillion in assets under custody will vault State Street to $14 trillion in assets. Then JPMorgan Chase & Co., with $13.9 billion in custody, said it would acquire Western & Southern Financial Group's Integrated Investment Services, a fund accounting, fund administration and transfer agency services business based in Cincinnati, Ohio.

Not since the 1990s has the funds services arena been so active. But in the midst of this flurry of dealmaking, Chicago's Northern Trust Co., with $3.5 trillion in custody, is keeping its powder dry, content to remain independent -- a midsize boutique among Wal-Marts. The bank's executives believe that increasingly finicky clients will prefer its personalized service to the megafirms' volume-based business models. "I've been in this job for 12 years, and through it all everyone says, 'It's all about size,'" says William Osborn, chairman and CEO of Northern. "But I've watched big retailers come and go, big automobile manufacturers come and go. Size is a factor in all industries, but success also depends on technology execution and creativity in serving clients."

Osborn says these attributes will be critical as global custodians compete for the world's investable assets, which according to McKinsey & Co. stand at $140 trillion, of which only $60 trillion is under custody. Northern Trust boasts some of the best margins in the industry. As of December 31, 2006, Northern had a 39 percent pretax profit margin on its asset servicing business. The industry average for the same period was 28 percent, according to Northern Trust.

The firm has made select acquisitions of its own to get into new markets and geographies or to reach new clients. In 2006, for example, Northern spent $500 million for Baring Asset Management's Financial Services Group to get into hedge fund administration. But Osborn stresses that the bank won't make acquisitions purely for reasons of size. As for being acquired, he says that Northern's organic growth, which is near the top of the industry, could be jeopardized were the bank to become just one part of a bigger organization. Northern's assets under custody grew at a 16.5 percent compound annual rate between 2001 and 2006, beating that of Bank of New York and State Street.

Northern Trust's success hinges in part on its technology strategy, adds Timothy Theriault, CTO of worldwide operations and technology. The bank runs on one platform that covers global operations and technology and can handle five times the existing book of business, or about $15 trillion in assets. Two data centers back up the central platform. Theriault notes that Northern Trust has achieved horizontal scale, or the ability to reuse its technology, for different clients. As an example, Northern has started offering middle-office services for fund managers, recently winning London-based Insight Investment. Northern now runs all investment operations for Insight's $190 billion in assets.

Frederick Waddell, president and chief operating officer of Northern, points to specific examples of why the bank would lose out if it were part of a megafirm. He says Northern Trust gets 50 percent of its new business from existing customers, whether that means selling private banking services to executives in institutional investors or selling custody to investment management clients. Waddell also says Northern is able to develop innovative services, which allow multinational corporations -- Unilever is a recent client -- to aggregate their pension plans for investment purposes. Northern is now patenting the systems and methods underlying cross-border pooling, which has attracted $10 billion in assets.

As for the competition, Bank of New York president Gerald Hassell sees more acquisitions in BoNY's and other custodians' futures. "The smaller players will argue that we can't be nimble. But I think the large firms can enjoy those attributes and get the benefits of scale." Northern, he concedes, has done quite well for shareholders, however "we can outspend them on investments in technology and other services. It might be tougher on them in the future, and we're not going to make it easy."