Bank of New York Co.'s plan to increase its investment in State Street Boston Corp. sent the latter's stock price up 13% Friday as analysts contemplated a potential merger of two leaders in the securities processing businesses.
The market looked beyond the official words of Bank of New York that the doubling of its stake, to 9.9%, would be just for investment purposes.
As industry experts focused on the complementarity of the companies - a merger would bolster Bank of New York's No. 1 position in securities processing - State Street's stock rose $8 a share, to $71, on 6.5 times its average daily trading volume.
Bank of New York closed up 87.5 cents, to $34.125.
Their still highly speculative merger would be a seismic event in the rapidly consolidating securities processing specialty. The companies have a combined 30% to 40% of that market, said Octavio Marenzi, a consultant at the Tower Group in Newton, Mass.
"If either company were to consider who would make a perfect marriage, his is who they would pick," said George Salem, bank analyst at Gerard, Klauer, Mattison & Co., who Friday morning issued a report saying that a merged entity could reduce costs by 40%.
Shortly after Bank of New York's announcement after the stock market closed Thursday, State Street, the third-largest securities processor, issued a statement that it planned to remain independent.
David Berry of Keefe, Bruyette & Woods Inc. said Bank of New York's position in State Street, pending regulatory approvals, would exceed $500 million - a sum that should not be taken lightly. He viewed the move as more significant than the "stakeout positions" of under 5% that Bank of New York had in some regional banks and, to this point, in State Street.
But Michael Martin, managing director in Credit Suisse First Boston's financial institutions group, said, "People shouldn't rush to judgment on this. State Street has been buying back stock, and Bank of New York has had a 4.9% position for a long time.
"It could be a case of Bank of New York's having to file with regulators to reflect their new position as a result of the buyback."
Bank of New York, Chase Manhattan Corp., and State Street are considered the most important players in securities processing. Citicorp, Mellon Bank Corp., and Northern Trust Corp. also have significant presences.
State Street, with $2.7 trillion of assets under custody and $280 billion under management, is a leader in the mutual fund area, industry observers said. It is particularly prominent in international aspects including currency exchange and marking foreign assets to market.
"The proportion of overseas investments by American investors has grown and State Street Boston has done a good job tapping this market," said Thomas Theurkauf of Keefe Bruyette.
Bank of New York, which has $3 trillion under custody and $40 billion under management, is said to draw most of its revenue from domestic, more traditional trust management services.
A merger could be dilutive for Bank of New York shareholders. Highly specialized State Street's price-earnings multiple of 20.3 exceeds the banking norm; Bank of New York's is 13.8.
"State Street Boston holds most of the cards in this poker game," said Mr. Theurkauf. "I think they intend to remain independent and can do so."