* Bernstein report: SSgA sale poses strategic risk
* Nelson Peltz's Trian Partners has been pushing for spinoff
* State Street shares have rallied over past several months
March 23 State Street Corp's asset
management unit, which activist investor Nelson Peltz says
should be spun off, is worth up to $3.8 billion, Bernstein
Research analysts said on Friday.
However, State Street could lose the ability to offer
competitive pricing if it were to spin off or sell State Street
Global Advisors, Bernstein analyst Brad Hintz said in his
Boston-based State Street has said it does not want to spin
off or sell the second-largest asset manager in the world with
$1.86 trillion in assets under management.
Hintz said SSgA's value as a spinoff is somewhat diminished
because its 27 percent profit margin is well below the mid-30
percent range generated by many asset manager peers.
SSgA may be better off remaining part of the parent company,
"Some believe having a full-scale internal asset manager is
a strategic imperative in the custody business," he said in the
State Street Chief Executive Jay Hooley says most of the
company's top investment servicing clients use SSgA to manage a
portion of their assets.
Peltz, the billionaire who runs Trian Partners, is pushing
for a sale of SSgA. Trian, which owns about 3 percent of the
company's stock, has criticized State Street's compensation
spending and stock price. But State Street shares have surged
more than 30 percent since Trian's critique of the company
became public in October.
Scott Powers, SSgA's top executive, may provide more color
on the debate on Friday afternoon when he gives a presentation
at the UBS asset gathering conference.
Meanwhile, analyst Hintz said in his report that SSgA might
better maximize profits as a separate entity.
"However, since we believe SSgA's valuation is not
overlooked, we think an SSgA sale may not justify the unintended
strategic risks," he said. "At the very least management should
concentrate on improving SSgA's margins and consider providing
better disclosure around cost allocations."
Hintz valued SSgA between $2.6 billion and $3.8 billion,
using methods that included discounted cash flow analysis and
comparisons to other asset managers. State Street's current
market capitalization is $22 billion. The company's stock is up
2.75 percent over the past year, outperforming the 4.4 percent
decline on the Dow Jones U.S. Asset Managers Index.
State Street shares were up 0.6 percent at $45.27 on Friday
morning on the New York Stock Exchange.
SSgA is unique among large asset managers because most of
its client assets are managed passively through index funds and
exchange-traded funds. Its S&P 500 Index ETF and gold ETF rank
among the most popular ETFs.
State Street management said the synergies between the
company's custody business and SSgA are an important part of its
strategy. But Hintz said his discussions with the company
suggest State Street rarely, if ever, bundles custody and asset
management to new clients.
Nevertheless, Hintz said it is clear that SSgA's assets
under management represent nearly 10 percent of the parent
company's assets under custody, adding scale to the servicing
"The loss of this client could, therefore, reduce State
Street's ability to offer more competitive pricing," Hintz said.
"However, the point is whether State Street has been optimizing
the pricing decisions across both businesses. If the firm is
using asset management cash flows to subsidize acceptance of
uneconomic returns in servicing, and vice versa, this could
arguably destroy value in both businesses."