Activist investors have recently notched a number of wins by getting companies to agree to break up (McGraw-Hill, L-3 etc.) in order to generate shareholder value. I am sure they also don’t mind the boost in their returns either. As a result of these successes, it is worth noting when one of the ‘big guns’ starts pressing for a breakup as Nelson Peltz’s Trian Fund is now doing at State Street (STT).
Trian is best known for its dealings in the retail industry (ex. Wendy’s) however, it does possess a hefty stake in asset manager Legg Mason (LM). The fund, which currently owns over 3% of State Street, admonished the company for its poor stock performance and suggested that the company separate its investment management arm (State Street Global Advisors or ‘SSGA’) from its investment servicing business. Check out Trian’s dedicated State Street website (yes, they did) for additional details and a copy of their action plan (which is full of ‘suggestions’ for State Street).
Why the fuss over SSGA? In addition to investment management, SSGA operates the popular SPDR brand of ETF’s. The logic behind such a move is that investment management companies such as Blackrock (BLK) tend to trade at much higher multiples than servicing companies which is really what State Street is best known for. Since that side of the business comprises the bulk of its revenues (well over 80%), it is no surprise that it trades accordingly.
Here is a look at the financials for the segments (Source – CapIQ):
| $MM | 2006 | 2007 | 2008 | 2009 | 2010 |
| Revenues | |||||
| Investment Servicing | 5,086.0 | 6,800.0 | 8,791.0 | 7,369.0 | 8,200.0 |
| Investment Management | 1,197.0 | 1,512.0 | 1,486.0 | 1,115.0 | 1,072.0 |
| Net Profit Before Tax | |||||
| Investment Servicing | 1,344.0 | 2,060.0 | 3,092.0 | 2,449.0 | 2,695.0 |
| Investment Management | 406.0 | 24.0 | (40.0) | 118.0 | (20.0) |
Bear in mind that these numbers do no reveal the assets under management or under custody, which as this article points out, are truly massive.
In the no surprise department, State Street disagrees with Mr. Peltz although, within the same statement, the company seemed to acknowledge plans for returning capital to shareholders. That is definitely a positive sign, however the fact that decisions such as these require discussions with the Federal Reserve seem to indicate that a spinoff could be time consuming. Add in a big lawsuit regarding FX payments and times have been better for the company. It will also be interesting to see what, if any, effect Legg Mason can have on this situation.
As always, we will keep you updated as more information is released.
Disclosure: Author holds no position in any stock mentioned.
