State Street Corp.'s investment services unit says it wants to deepen its penetration of seven major European markets, raise its profile in Asia, and develop share by more cross-selling in the United States.
Jay Hooley, an executive vice president and the head of investment services at State Street, said in an interview in his Boston office that it will expand its $9.5 trillion of assets under custody through both organic growth and strategic acquisitions.
"It is our view that the investment services business will ultimately consolidate," he said. "I think the demand for service providers to provide an integrated global platform is pretty straightforward in the marketplace, and I think that there will be a separation between those that can compete on a global scale and those that cannot."
He added, "There will be a shakeout in the next two to three years as the threshold to play increases." Mr. Hooley said growth will come from matching the company to multinational customers.
"We want to develop more customers [that have] a global footprint in the United States, Europe, and Asia," Mr. Hooley said. "We are unique in our focus in that we can offer our customers common services across many geographies internationally."
Large U.S. banking companies like Bank of New York Co., JPMorgan Chase & Co., Northern Trust Corp., Mellon Financial Corp., and Citigroup Inc. will vie with State Street for market share as the shakeout occurs, Mr. Hooley said, but they are not as well positioned as State Street.
"The competition has a presence in some markets but not all," he said. "The largest investment managers need a service provider with a true global footprint."
One analyst said that State Street has done a good job of extending its global reach but may not have made its capabilities sufficiently known to customers.
"State Street's reputation is as a global custodian, and it has developed a strong footprint from that beachhead, but to grow from here it has to do more," said Burton Greenwald, a Philadelphia analyst. "State Street offers an array of services beyond custody that global customers are still unaware of."
The Boston company has been developing its global footprint in the past two years. In January 2003, it bought the global securities services business of Deutsche Bank AG and last year made a deal with Axa SA, the big Paris-based insurer.
State Street Investment Services supplies custody, accounting, record keeping, trade execution, and investment management to asset managers, investment managers, pension funds, and insurance companies. Mr. Hooley said his unit knew it was crucial to have scale and a range of products in Europe's seven largest markets - the United Kingdom, Germany, the Netherlands, Italy, France, Switzerland, and what it calls the "offshore markets" of Ireland and Luxembourg.
The Deutsche deal gave State Street a market-leading position in Ireland, Germany, and Italy, Mr. Hooley said, and the Axa deal gave it entry into France.
Mr. Hooley said State Street wants to focus on developing further scale in the seven markets, which supply about 90% of the company's assets under custody. "We think the best way to develop scale is to work in these seven markets," he said. "Increasingly, our business is focused on providing broader and deeper services to the very largest investment managers."
Developing more services globally, he said, would help State Street increase cross-selling in the United States.
"For growth opportunities you can almost make a geographic cut," Mr. Hooley said. "In the United States the opportunities are weighted to cross-selling, and in Europe and Asia the new opportunities are related to customer acquisition."
State Street has relationships with 90 of the top 100 investment managers, Mr. Hooley said. Its top 100 customers use an average of 13 products each, and the top 1,000 customers average seven State Street products apiece.
"It is rare to have a customer buy one product from us," he said.
Executives in other State Street units agree that the best way to develop market share is to work more closely with existing State Street customers to cross-sell products and services.
"The only way to add new customers is through acquisition, cross-selling, or to win new customers," said Robert Tarter, an executive vice president and head of institutional investor services at State Street. "Acquisition is difficult, and there are few new defined benefit and defined contribution plans being created. Cross-selling is a big driver for our growth."
Anne Tangen, an executive vice president and head of wealth manager services, agreed that customers need scalability and global reach. Interest is growing in having just one service provider, she said.
"We tend to stick pretty close to the State Street client base," she said. "People are having discussions with the firm, and if the CEO begins to discuss a wealth management strategy then they bring us in. State Street offers a lot of different services."
Mr. Hooley said the slow-growth market environment has created opportunities for State Street to sell outsourcing services. And this has helped units such as wealth manager services.
"Over the past four to five years, returns are down, and anyone that is managing assets is striving to optimize the return on their portfolio by focusing on core competencies," he said.
Though outsourcing and cross-selling will continue to be principal initiatives at State Street Investment Services, Mr. Hooley said, his unit will also look for strategic acquisitions.
"We aren't a natural acquirer; we are an opportunistic acquirer," he said. "We have set our foundation, and we will look to acquire strategically from there."
Mr. Hooley said a disproportionate number of expansion opportunities exist in Europe and Asia so that, for now, State Street has its sights set overseas.
"We have made a strong market entry in many markets in Europe, and we want to maintain that momentum," he said.
On Monday: a look at State Street's wealth manager services unit.
