Is a merger with State Street really in Invesco’s best interests?

Citi Research ponders whether focusing on profitability and distribution might be a more prudent path for Invesco

Jamie Gordon

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The proposed merger between State Street and Invesco has created quite a stir among the asset management industry with some predicting this will allow the combined business to challenge the likes of BlackRock and Vanguard in the ETF space, however, the deal would only be in the clear interests of one party, according to a new Citi report.

The discussion surrounding a potential acquisition of State Street’s asset management arm by Invesco began in earnest last December following hypothetical analysis published by Bloomberg Intelligence, which suggested a deal could see the $3.1trn State Street Global Advisors (SSGA) business offloaded to its fellow US giant.

Excitement about the merger was then reignited last month with new reports suggesting discussions were being held between the two parties, though sources close to the Wall Street Journal cautioned talks may not result in any agreement being made.

Adding another element of doubt to the issue, Citi’s recent paper,Framing The Debate Of A Potential IVZ/STT AM Merger, suggested the most likely course of action will be for Invesco to stay its current course, focusing on driving stronger flows, delivering margin improvement and reducing its debt levels.

Entertaining the idea of a merger, the bank said it believed a deal would most likely be in the form of an acquisition financed by a combination of equity and debt. It added if such a scenario were to play out the process would not be an imminent one, given State Street is not a distressed seller and has already had another approach by UBS fail to materialise.

Another possibility Citi entertained is a partnership or joint venture, rather than a merging of the two firms’ corporate structures. While State Street might prefer this route, Citi warned this would add operational risk and complexity – especially around the accounting capital treatment for State Street and how intangible amortisation would be accounted for and run through the joint venture.

A new behemoth 

Should the asset management arms find a way of coming together, it would have a significant impact on the global ETF market, with the combined entity claiming a 16% market stake, while owning the world’s largest equity, gold and technology ETFs.

Bloomberg Intelligence’s report also noted how the merger would also reduce the companies’ dependence on their respective flagship products – SSGA’s SPDR S&P 500 ETF Trust (SPY) and Invesco’s QQQ strategies. It added the relatively small overlap in product ranges would mean the new entity would actually cause a limited number of product closures, while allowing Invesco to fill gaps in its current product roster.

In Europe, the Invesco-SSGA giant would enter the race for the third-largest ETF issuer and benefit from economies of scale, including deeper liquidity and combined marketing and distribution efforts.

From State State’s perspective, the move makes sense. Its recent $3.5bn acquisition of Brown Brothers Harriman Investor Services sees it become the world’s largest custodian with $37.3trn in assets, edging ahead of BNY Mellon. This arm of its business also conflicts with the fee-cutting reality of the ETF issuer landscape, which puts the bank in competition with its fund servicing clients.

From Invesco’s perspective, the merger would be in keeping with its ‘buy upwards’ modus operandi for assets under management (AUM) growth. Over the past decade, this buy-rather-than-build approach has been evidenced by the acquisitions ofSource, PowerShares, OppenheimerFunds, Guggenheim ETFs and Van Kampen. 

Its $5.7bn acquisition of Oppenheimer in 2018 was followed by outflows and a profit slide – it is unclear whether snatching up SSGA would be a guaranteed win for Invesco’s long-term profitability.

Overall, Citi said it remains “cautious on a likelihood of a deal”. While it said acquiring State Street’s ETF business could enhance it passive business and provide additional wealth management capability, the bank believes Invesco focusing on its current strategy is the best path forward.

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