State Street Walks Away From Acquiring Brown Brothers

State Street announced on Nov. 30 that it has terminated its proposed acquisition of Brown Brothers Harriman and Company. While we believe the deal had strategic merit as there are few custody players left that could be acquired, we think walking away is the right move for a number of reasons. Firstly, the deal ran into substantial regulatory hurdles and even if State Street had prevailed, the process would have cost its management time, uncertainty, and the potential for ill will with government regulators around the world. Secondly, market values have fallen, which weighed on Brown Brothers' asset-based fees. Thirdly, with lower potential accretion from the deal than initially anticipated, State Street may be better off buying back shares. Finally, as the deal was more than one year from announcement, either party could walk away without penalty. We will maintain our wide-moat rating and $90 fair value estimate on State Street's shares.