In a bid to ramp up profitability amid tough operating backdrop, State Street Corporation STT is set to acquire GE Asset Management (“GEAM”), a wholly owned subsidiary of General Electric Company GE. The company will be paying $485 million (subject to adjustments) in cash.
Expected to close in early third quarter 2016, the deal is subject to regulatory approvals and other customary closing conditions. Following the completion, GEAM will be integrated into State Street Global Advisors (“SSGA”) and will enhance SSGA’s assets under management by roughly $100 billion.
The sale is part of GE’s strategy to transform and focus on its core industrial businesses. Notably, in Sep 2015, GE had announced its plan to divest GEAM to another investment management firm.
Dmitri Stockton, Chairman, President and CEO of GEAM, said “This transaction will allow our firm to bring its active and alternative asset management capabilities to an even broader investor base, and enhance SSGA’s ability to grow its presence in the pension plan outsourcing segment.”
Details
State Street will manage the assets of GE pension plan, which is presently being overseen by GEAM. Following the completion of the transaction GEAM team of around 275 people will join SSGA, with an exception of few employees who will be retained by GE to offer investment insight into GE’s primary benefit plans. Also, GE will retain its responsibilities as plan sponsor and fiduciary for its plans.
Further, the transaction will not change “the benefits received by participants in the GE pension plan (or any affiliate pension plan), and does not change GE’s requirement to meet its pension funding obligations.”
Ron O’Hanley, President and Chief Executive Officer of SSGA said, “GEAM will bring new alternatives capabilities in direct private equity and real estate to SSGA while enhancing our existing active fundamental equity, active fixed income and hedge fund teams. In addition, GEAM’s OCIO and Insurance platforms significantly strengthen our capabilities in these fast growing areas.”
Financial Impact
In 12-months following the closure of the deal, State Street will receive fee revenues in the range of nearly $270–$300 million, while merger and integration costs are expected to be $70–$80 million through 2018.
Moreover, the transaction will likely be accretive to State Street’s operating earnings for the first year following the closure. Further, the company targets to exceed client retention by 90%.
However, State Street’s capital ratios are projected to be adversely impacted by the deal. The company anticipates a reduction of 40–50 basis points (bps) to its fully phased-in risk-based capital ratios under both standardized and advanced approaches.
Further, the company’s fully phased-in tier 1 leverage and supplementary leverage ratios are expected to fall 15–20 bps. Nonetheless, in order to mitigate this adverse impact, State Street intends to issue preferred shares before the completion of the deal.
Additionally, the deal is not likely to have any material impact on State Street’s share repurchase program. As part of 2015 capital plan, the company is authorized the repurchase up to $1.8 billion worth of shares through the end of the second quarter of 2016. As of Dec 31, 2015, approximately $780 million shares remained to be repurchased.
Road Ahead
The transaction is happening at a time when State Street is becoming digital. The company, through its transformation and cost saving plan – State Street Beacon – is further planning to digitalize its operations and create cost efficiencies.
State Street has announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings by the end of 2020 through nearly 7,000 job cuts.
Therefore, the deal is the step in right direction for State Street. This transaction will help the company in growing business and managing money for insurers and defined-benefit plans.
Currently, State Street carries a Zacks Rank #4 (Sell). Some better-ranked finance stocks include Fortress Investment Group LLC FIG and Legg Mason Inc. LM. Both these stocks carry Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment