Running Its Own Boston Marathon by Jack Willoughby
Summary: State Street (STT) shares fell 13% after it bucked shareholder opinion and forged ahead with its $4.5 billion acquisition of Investors Financial Services (IFIN), despite diluting 2007 EPS by $0.14. Punk Ziegel's Richard Bove says investors are short-sighted: "Shareholders are furious with the company, believing they don't care about the short term and the dilution. They don't. The acquisition has only enhanced their superb international position. The lower multiple (16x 2008e vs. a typical 20x) certainly creates a buying opportunity." State's services unit (80% of revenues) provides high-tech financial services (accounting, clearing, administration, research) to major institutions. A full 15% of global securities trades pass through its networks. The other 20% of its revenue comes from its State Street Global Advisors [SSGA] money management arm, which boasts $714 billion in index operations, $115 billion in ETF assets, and $188 billion under active management. Four-fifths of its revenue comes from existing customers, and its top 25 customers have been with the company for an average of 19 years. CEO Ronald Logue says the IFIN deal will add $0.10/share by 2009, and expects to retain 90% of IFIN's customer base, while eking out a 50% expense reduction. The company is positioned to cash-in on global capital market expansion. Bove's target is $85, giving shares over 20% upside.