(Updates share price in fifth paragraph.)
Oct. 17 (Bloomberg) -- Billionaire investor Nelson Peltz admonished the board of State Street Corp. over poor performance and urged it to adopt a multistep plan for raising profit that included a possible sell-off of the custody bank’s money- management unit.
The recommendations, outlined in a statement yesterday, also included a call for a clearer commitment to cost-cutting and prioritizing returns to shareholders over acquisitions. Peltz’s Trian Fund Management LP, based in New York, owns about 3.3 percent of State Street shares, the firm said.
“It’s important that you have a very credible guy standing up and making these issues public,” Jeffrey Hopson, an analyst with Stifel, Nicolaus & Co. in St. Louis, said in a telephone interview. “As someone with buy on the stock I’m thrilled you have a voice that potentially could be heard.”
Custody banks have suffered from flat or falling equity markets and from record-low interest rates, which reduce the returns they earn on investments and on the lending of cash and securities to institutional investors. State Street Chief Executive Officer Joseph Hooley last year began job cuts that would reduce staff at the Boston-based firm by about 8 percent and announced a reorganization of information-technology systems in an attempt to reduce costs.
State Street fell less than 0.1 percent to $33.87 at 4:15 p.m. in New York trading. It has fallen 27 percent this year, compared with a 28 percent drop for the Standard & Poor’s index of asset managers and custody banks.
‘Very Expensive’ Acquisitions
Peltz is an activist investor who takes stakes in companies and then frequently pushes for changes designed to boost their share prices. Best known for investments in consumer-oriented companies such as Kraft Foods Inc., ketchup maker H.J. Heinz Co. and luxury retailer Tiffany & Co., Peltz made a foray into financial services by joining the Legg Mason Inc.’s board in 2009.
Since Peltz joined Legg Mason’s board, the asset-management firm has cut jobs and announced a restructuring plan to lift operating margins.
The Trian letter said State Street’s ongoing IT reorganization “lacks credibility in the absence of explicit consolidated margin targets.”
Peltz further criticized the company for allowing costs to grow faster than sales, for making “very expensive” acquisitions and for reporting “recurring ‘non-recurring’ charges” that, according to the letter, accounted for 30 percent of pretax earnings each year since 2007.
“Between 2006 and 2008, State Street allowed a massive run-up in compensation expense,” Trian said in the statement, which included a copy of a letter sent to board members.
State Street said in a statement that it had “engaged in constructive discussions” with Trian over the past year. The statement didn’t directly address the critiques or recommendations.
“Despite the challenging operating environment over the past several years, our business has remained resilient,” the company said.
If State Street were to successfully adopt Peltz’s recommendations, the bank’s implied target value could rise to approximately $99 a share, according to the Trian letter.
“We, as well, think there’s lot of potential in the company and for whatever reason the fundamentals haven’t necessarily matched the potential,” Hopson said.
Tougher Action Possible
Hopson said the firm “doesn’t get full potential value” from State Street Global Advisors, the unit that manages $2.1 trillion in assets for investors.
Peltz’s letter suggested tougher action should State Street not follow his advice.
“If management and the board fail to make progress, Trian may decide to become significantly more active in evaluating its alternatives as a large shareholder,” Peltz’s firm said.
State Street oversaw $22.8 trillion in assets under custody and administration as of June 30, the company said.
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.
--With assistance from Sree Vidya Bhaktavatsalam in Boston. Editors: Andreea Papuc, Steven Crabill, Josh Friedman
To contact the reporter on this story: Christopher Condon in Boston at firstname.lastname@example.org
To contact the editor responsible for this story: Christian Baumgaertel at email@example.com