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State Street to Buy Investors Financial for $4.5 Billion

State Street said it would acquire Investors Financial Services
for $4.5 billion in stock, the latest takeover in the mutual and hedge fund servicing industry.

State Street, the world's third-largest custodian of investor assets, will move into the No. 2 spot with $14 trillion in assets under custody in the deal with its smaller Boston-based neighbor. The company will still trail chief competitors Mellon Financial and Bank of New York, which announced a tie-up late last year.

The purchase values Investors Financial at $65.01 a share -- a 38% premium to its closing price on Friday -- and marks State Street's second acquisition this year, signaling that the institutional investment manager is acting quickly to reposition itself as the industry consolidates around it.

Eventually, the deal will allow State Street to service about one-third of the $10.4 trillion mutual fund market and one-quarter of the $1.3 trillion hedge fund industry. But it will take about two years for the full benefits to be felt, and State Street paid a steep price, analysts said.

State Street's share price, which had climbed nearly 20% in the last 12 months, fell over 6% on the day. Other trust and custody banks, including Mellon, Bank of New York, and Northern Trust were higher.


"State Street did not go to Filene's basement but instead went to Neiman Marcus," said RBC Capital Markets analyst Gerard Cassidy, referring to Boston's bargain basement retailer and its more expensive rival. "They were facing competition and had to pay up for this one," he added.

With Investors Financial, State Street acquires a new line of business -- servicing private equity clients -- and becomes the biggest servicer of hedge fund assets, State Street Chairman and Chief Executive Officer Ron Logue said.

State Street, which already counts Bank of America, Merrill Lynch and Charles Schwab among its clients, will also add asset manager Barclays Global Investors under the deal, which State Street expects to close by the third quarter.

The company will then take 18 months to integrate the company, its biggest acquisition since it paid $1.5 billion for Deutsche Bank's securities services business four years ago to gain a bigger foothold in Europe.

Investors Financial shareholders will receive 0.906 State Street share for each of their shares.

Savings Now, Profit Later

The acquisition will not add to State Street's operating earnings until 2009, the company said, but it expects to see savings as it consolidates staff, technology and real estate.

In the first two years after the deal closes, State Street expects to see pretax cost savings of $345 million to $365 million. It said the deal will dilute operating earnings this year and be neutral in 2008.

On a cash basis, the deal will add to earnings in 2008.

Logue has long said the company would be ready to make an acquisition if the conditions were right.

"We did not feel compelled to do this because of the Bank of New York/Mellon deal but because the industry is consolidating and when great opportunities present themselves we moved," Logue told journalists on a conference call.

He said the company would continue to search for acquisitions in business segments or geographical regions that are growing faster than all others.

Last month, State Street said it would buy Currenex for $564 million to add electronic foreign exchange services.

These two deals will fill whatever gaps State Street may have had in its product lineup, Logue said.

The boards of State Street and Investors Financial have approved the deal. State Street will issue about 62 million shares in the transaction.

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