By Ian Fraser
Published: Sunday Herald
Date: 21 December 2003
Beethoven’s Ninth Symphony resounded around his fourth-floor office as David Spina looked down on Boston’s Post Office Square and pondered the fate of the investment industry. Bob Dylan’s The Times They Are A Changin’ would have been more apt as he reflected on how much easier it was for a US bank to become a global player in the more innocent 1960s.
Spina, who has spent 34 years working at Boston-based State Street, latterly as its chairman and chief executive, joined the bank after a tour of duty skippering a patrol boat off Vietnam in the late 1960s. “Back then a US regional bank that wished to go global would send someone to London,” said Spina. “They had their picture taken, wearing a Chesterfield coat, in Trafalgar Square, with a red bus behind. Then you could say you were global.”
But it is more complicated today. Clients are globalising and are more discerning. So for a financial services player to achieve a global presence it often requires a series of chunky acquisitions or slow organic growth. Furthermore, being a US business is not quite such a strong calling card as it was before the Americans alienated many of their oldest allies via the war on terrorism.
The way in which the US demonised Germany and France over the Iraq war was unhelpful for a firm such as State Street, which in January 2003 acquired a sizeable presence in Germany through its acquisition of the custody operations of Deutsche Bank. “In some parts of the world that can be a tricky subject,” says Spina. “I’ve been looking out for [potential anti-American feeling], but I don’t see it. I am saddened the globalisation process has been set back. The greatest good for the most people will be when we can get that trend going the other way again.”
Globalisation itself may have taken a knock, but State Street is not to be deterred from its international growth plans, which have been partly fuelled by its dominant position on home turf. Last year it successfully out-manoeuvred its arch rival Bank of New York (BoNY) to become the world’s biggest global custodian. It pulled this off this through the Â£0.9 billion acquisition of Deutsche Bank’s global custody businesses, which BoNY, Mellon and a number of other rivals had been eyeing up.
When that deal – which in Scotland brought control of the WM Company and increased staff in Edinburgh to 900 – completed in January there were fears it would lead to job losses, mainly because of synergies with State Street’s existing 180-man operation on Lothian Road. But Spina insists these are now unlikely, as the deal has already become “earnings accretive”.
He said: “It was the biggest acquisition we had ever done. We could justify paying that price and knew we would develop a good return for our stockholders on expense synergies alone, through reducing redundancies over time and dealing with multiple systems. The icing on the cake – which we didn’t put into our model – is what we call cross-sell revenues. We would argue that the Deutsche client base in the US, UK, Germany and Asia-Pacific is undersold.”
The firm is also planning to rejuvenate the WM brand and expand the range of performance measurement products available. “There is talk that the WM brand needs refreshing,” said Spina. “We will retain the brand and we’re already dealing with how to ensure client service is at the levels our clients want in terms of responsiveness.”
State Street also recently appointed Michael Walsh, previously head of investment services at HSBC, to oversee some of the changes as managing director of WM.
Spina adds that because of the institutional investment review of Paul Myners and because of the three-year bear market “people are wondering how do I manage? How do I measure? My guess is we’ll have more product in that area that goes beyond [basic] attribution and measurement of performance.”
He adds that State Street has moved around 30-40 jobs from London to Edinburgh in fund administration and fund accounting and that Scottish Financial Enterprise assisted “on real estate”.
In order to build up scale in the UK and European markets State Street bought the corporate trustee services businesses of the Bank of Scotland back in 1997. In 2000, State Street also took over the entire £80bn back office of Lloyds TSB’s asset management operations, which are now grouped under the Scottish Widows Investment Partnership banner. These include the back offices of Andover-based Lloyds TSB Life, London-based Hill Samuel Asset Management and Bournemouth-based Abbey Life.
Spina was surprised the deal had to be sold twice. “We thought we had won it as a Lloyds TSB deal. Then Lloyds designated Scottish Widows as their main brand for investment management and people at Scottish Widows decided they needed to make that decision [as well]. We had to go and sell that deal twice. Once in London and once in Edinburgh.”
Some observers suggested that integrating these back offices has proved troublesome. But Spina says: “Actually, that one’s gone well. [State Street president and chief operating officer] Ron Logue is a master at taking very large transitions, conversions and organising to meet them.” But Spina does acknowledges the recent management changes at the top of Scottish Widows – which have seen chief executive Mike Ross replaced by Archie Kane, and SWIP chief executive Bill Main retire to be replaced by Chris Phillips “could cause problems”.
Spina acknowledged such mega deals in the European investment servicing market are taking longer to materialise than he envisaged. He said: “We and others have been guilty of making that opportunity sound more immediate than it is.” One reason it has taken longer for the next blockbuster deal is “because there is no standard”.
“The analogy I would make is to an interior decorator – you can’t standardise that because everybody likes to arrange their furniture themselves. You can’t standardise these middle offices, because they are intimately associated with fund managers and traders. There’s a balance. Customers may want to have something totally tailored but may not want to pay the price. I don’t blame them for that. So we have to find a medium.”
He concedes, however, that the market for pensions servicing in the UK has been “a real Donnybrook” (the Irish term for an ‘ugly brawl’). “The difference between servicing a unit trust and a pension is that the unit trust has to be valued daily. In pensions, it’s only done when you tick and tie down the last farthing. So there have always been more competitors in pensions. Everyone in this business wants to be in pension funds in the UK. They want that picture in Trafalgar Square.”
Asked how difficult it is to get the balance right between being a global player and earning the respect of clients in each local market, Spina replies: “The balance we have to get to is strengthening our local look and feel while maintaining the global. There’s no doubt we will have more senior management in UK or Europe as time goes on. The opportunities are tremendous. We’ve been growing faster in Europe than we have in the US for the last five years.”
As he concludes the well-known choral finale of Beethoven’s Ninth is sounding over his in-office sound system. Very appropriate for a firm that is determined it should be as at home in Europe as it is in the US of A.
State Street employs 20,000 people in 23 countries. It has a dominant share of servicing of US mutual and pensions funds. The firm sold its banking arm to Citizens, part of Royal Bank of Scotland, in 1999, to focus on investment operations, including custody, performance measurement and securities lending. It invests 20-25% of its spend on IT, $400-$600m.
Copyright 2003 SMG Sunday Newspapers Ltd. Photo: David L Ryan, Boston Globe