Hoping to capitalize on the boom in serving the superrich, State Street Corp. said Thursday it had agreed to buy a majority stake in Bel Air Investment Advisors LLC for $217 million in cash and stock.
With 28 employees and $3.7 billion of assets under management, Los Angeles-based Bel Air manages the personal portfolios of 200 ultrawealthy clients, among them the celebrities Barbra Streisand, Lee Iacocca, and Geraldo Rivera.
The deal is a shift in strategy that is likely to lead to similar acquisitions in the New York metropolitan area and in San Francisco, and is an effort by State Street to go head-to-head in the wealth management business with the likes of Chicago-based Northern Trust Corp. and Mellon Financial Corp. of Pittsburgh.
"Private asset management represents an enormous opportunity and is a sector that we have long recognized as key to expanding our investment management business," said David A. Spina, State Street's president and chief executive officer. "Acquisitions to support our growth in investment management are a part of State Street's overall strategy."
Until recently State Street had concentrated on servicing assets rather than managing them - its assets under administration total about $6.2 trillion - and was focused on building its back-office processing business. Institutional and individual asset management supplied only 22% of its revenues of $2.71 billion and 19% of pretax profits of $1.03 billion for the first three quarters.
But with the global institutional and administration business on track to continue its double-digit growth, the company has turned its attention to beefing up its private banking arm.
"There are operational synergies with the institutional business," said Susan Roth, a banking analyst at Credit Suisse First Boston. "These are individuals who are mini-institutions themselves. It's completely and totally logical."
Bel Air would become a part of State Street Global Advisors, the company's investment group, which has $712 billion under management. It would operate in a largely autonomous fashion, according to Timothy Harbert, group president.
State Street currently has $20 billion of private assets under management and offices in Boston; Greenwich, Conn.; Naples, Fla.; and Boca Raton, Fla.
"This helps our national growth," Mr. Harbert said. "With the intergenerational transfer of wealth to and from the baby boomers, we need more distribution capability. The acquisition of Bel Air assists us in that. It gives us greater geographic reach."
Bel Air, which was created three years ago when senior managing director Todd Morgan defected from the Goldman Sachs Group and took a team with him, concentrates on large and mid-cap U.S. equity investing. Over time, it is expected that its seven portfolio managers would benefit from State Street's expertise in small-cap, private equity, and international stock picking, as well as its trust and estate planning, tax advisory, financial planning, family office, and custodial skills.
"There will be no change in management of Bel Air," said Thomas Theurkauf, a banking analyst at Keefe, Bruyette & Woods Inc. "Their brand will stay in place. But over time, they are going to introduce new products and a wider array of investment styles."
During the past year, Bel Air had gotten several unsolicited acquisition offers and had hired Goldman Sachs to "sort through them all," Mr. Harbert said. Goldman Sachs brought the deal to State Street eight or nine months ago, he added.
Under terms of the agreement, Bel Air's key officers would sign employment and noncompetition agreements that will extend up to five years after the deal closes. State Street would also pay retention bonuses during the next three years to senior managers and employees who remain with Bel Air.
State Street is to buy 75% of Bel Air Investment Advisors and 100% of its registered broker-dealer. It would have the option to buy part of the outstanding portion in 2006 and the rest in 2010. The transaction is expected to close early next year.
The deal is expected to dilute earnings by 5 cents per share in 2001 and 3 cents per share in 2002.
State Street shares closed Thursday's trading up 55 cents, at $130.29.
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