State Street (NYSE:STT) is reportedly in the process of finalizing the acquisition of Goldman Sachs’ (NYSE:GS) hedge fund administration business.  The deal which could be finalized this month will make the custody bank the largest hedge fund administrator in the world with more than $700 billion in hedge fund assets. Goldman has been keen on selling this business to escape the increased oversight it now demands from the SEC.
Our $51 price estimate for State Street is about 20% above the current market price. We believe that this premium is largely due to the weak short-term outlook for global custody banking, coupled with the deteriorating European debt situation.
Hedge fund administrators help hedge funds value their portfolios and assess their risk levels. State Street, with around $500 billion hedge fund assets under management, is ranked among the top three hedge fund administrators in the world along with Citco – the global leader with assets around $650 billion – and BNY Mellon. Goldman Sachs is also a big player in the industry, coming in at the fourth position with its near-$200 billion hedge fund asssets under management.
State Street has been on the look out for acquisition targets in recent months in its bid to grow inorganically. The custody bank doesn’t seem willing to settle for any position but the top – something we spoke about in our recent article State Street Ready For $51 And Title As World’s Largest Custody Bank. And with Goldman eager to get rid of its hedge fund administration business, State Street is clearly more than happy to lap it up. Once the deal is finalized – something that is expected as early as this month – State Street’s assets under management will cross $2.2 trillion.
Goldman has been looking to exit the business with the SEC tightening the noose on hedge fund administrators after the Madoff Ponzi scheme came to light. The added oversight is bound to add to costs without helping revenues – making consolidation in the industry the best solution for all incumbents.Notes: