State Street buys Goldman Sachs hedge-fund unit as revenue falls

July 17 (Bloomberg) -- State Street Corp., the third- largest custody bank, agreed to buy the hedge-fund administration unit of Goldman Sachs Group Inc. to boost growth as second-quarter revenue fell amid declining global markets and record low interest rates.

State Street agreed to pay $550 million in cash for Goldman Sachs’ unit to become the world’s largest servicer of alternative assets such as hedge funds, the Boston-based company said today in a statement. State Street’s revenue on an operating basis decreased 1.9 percent to $2.43 billion from $2.47 billion a year earlier as assets fell and fees declined.

“The industry is plagued by some pretty significant macro headwinds,” James Shanahan, an equity analyst at Edward Jones & Co. in St. Louis, said in an interview before results were announced.

Custody banks have struggled to increase profits as the Federal Reserve has held interest rates near zero since December 2008 and falling stock markets worldwide have cut the assets that the firms oversee for clients. State Street Chief Executive Officer Joseph Hooley has cut more than 2,200 jobs in the past two years to contain expenses, raised the company’s dividend in April to boost shareholder returns and searched for acquisitions such as the Goldman Sachs unit to increase assets.

‘Continued Caution’

“We are approaching the second half of 2012 with continued caution,” Hooley said in the statement. “The global economic environment remains challenging and so we are focused on controlling what we can.”

Assets under custody fell 2.4 percent to $16.4 trillion and the money State Street invests for clients fell 9 percent to $1.9 trillion.

The acquisition of the Goldman Sachs’ hedge fund servicing unit adds $200 billion in assets, and gives State Street $877 billion in alternative funds under administration.

Second-quarter profit rose 2.3 percent after the firm sold investment securities for an operating-basis gain of $19 million. Net income on an operating basis increased to $494 million, or $1.01 a share, from $483 million, or 96 cents, a year earlier.

The MSCI ACWI Index of global stocks declined 8.7 percent in the year ended June 30. State Street’s custody fees in the second quarter fell 3.4 percent from a year earlier to $1.09 billion and investment management fees dropped 1.6 percent to $246 million.

Operating basis expenses decreased 1.7 percent to $1.73 billion as employee compensation costs fell 6.6 percent.

Low Rates

Low interest rates hurt custody banks by trimming the return on their investments and lending. State Street has also waived some fees on money-market funds to keep client returns above zero. The Federal Reserve has held its benchmark interest rate at zero to 0.25 percent for more than three years in an attempt to stimulate lending and economic growth.

State Street’s operating profit excludes money earned from the sale or maturing of bonds whose value was written down in May 2009, which the company records as “discount accretion” within net interest income.

Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.

Results were announced before the start of regular U.S. trading. State Street rose 9.5 percent this year through yesterday, compared with the 9.7 percent increase by the Standard & Poor’s 20-company index of asset managers and custody banks.

(State Street is scheduled to hold a conference call for investors at 9:30 a.m. New York time. The call can be accessed at www.statestreet.com/stockholder and by telephone at +1-888-391-4233 inside the U.S. and +1-706-679-5594 (Conference ID # 92602998).)

Bloomberg News

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