Reports that State Street Corp. may sell or spin out its $3.1 trillion asset management business have been met with “mixed feelings” from analysts and other industry observers.
Bloomberg reported Friday afternoon that State Street was “exploring options for its asset management business,” State Street Global Advisors, including a possible merger with a rival asset manager. The report said that State Street had evaluated potential deals with competitors including the asset management units of UBS Group and Invesco, citing people familiar with the matter.
A separate report from the Wall Street Journal, published later that same day, offered more details on the rumored merger talks between State Street and UBS, adding that the two firms appeared close to reaching an agreement this summer. “State Street and UBS had settled on roles for some of the venture’s top executives and were considering names for the new stand-alone manager,” the Journal report said, citing people familiar with the matter.
Spokespeople for State Street, UBS, and Invesco declined to comment. But Wall Street analysts had plenty to say about a potential deal.
A sale of SSGA would make sense for State Street, according to bank analysts at Wells Fargo. In a note distributed to clients on Friday, analysts Mike Mayo, Robert Rutschow, Christopher Spahr, and Eric Chan noted that the giant asset manager has delivered “subpar” margins, far below those of rival BlackRock.
State Street “has not been able optimize its asset management business for over a decade,” they wrote. “Considering serial underperformance on margins for what should be a very large and automated asset management business, a sale makes sense.”
However, the analysts argued that divesting the more stable asset management unit could make State Street’s earnings more volatile and jeopardize the growth of the Charles River platform, which State Street acquired in 2018.
Still, there’s at least one potential advantage for State Street’s other businesses, according to the Wells Fargo analysts: “Eliminating a potential conflict of interest/competitive disadvantage that results from one of the largest asset managers trying to sell services to other asset managers.”
Whether that conflict is actually eliminated, however, depends on the structure of any potential deal, according to Graham Steele, director of the Corporations and Society Initiative at Stanford Graduate School of Business. Steele recently authored a paper on the “outsize influence” of State Street and the rest of the “Big Three” asset managers for the American Economic Liberties Project, a non-profit focused on antitrust policy.
In the paper, Steele advocated for breaking up State Street and its rivals Vanguard and BlackRock in order to reduce what he views as risks to financial market stability. One option, he said, was to separate State Street’s “systemically important” custody business — and the data it gathers — from SSGA’s “concentrated” asset management business. This won’t necessarily be achieved by the deals that are reportedly under consideration, according to Steele.
“There are ways of spinning stuff out that would remain a joint venture where the two entities could be linked in some way,” he said. “That would still create some of the same issues.”
Meanwhile, Steele said a merger between SSGA and another asset manager would increase the concentration of assets and stock holdings among the top three managers. However, he said regulators are likely to support any combinations with firms outside of the “Big Three.”
“Anything that increases competition among those three or adds a fourth or fifth player is seen as good for competition because it’s not all concentrated into the hands of one entity,” he said.