A Good Time to Visit State Street

This column was originally published on RealMoney on Feb. 6 at 11:00 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Large acquisitions -- with their accompanying press releases, conference calls, PowerPoint presentations and eventually proxy statements -- provide analysts with reams of data about the businesses of both the target and the acquirer.

While analysts are poring through these data, investors who are fortunate enough to be long shares of the target are considering whether to hold or sell their shares. Meanwhile, risk arbitragers are busy buying shares of the target and shorting those of the acquirer, frantically estimating the risks and timing of a deal as well as the possibility for other bidders.

This process was set in motion yesterday, when State Street (STT Quote) announced the acquisition of crosstown Boston rival Investors Financial (IFIN Quote), sending State Street's shares down 6.5% on the day.

I bought some shares of State Street for my fund as a trade on Monday. After the proxy statement is filed (probably in April), I'll write a follow-up column about whether this trade will turn into a long-term investment. In the interim, I will continue to research this deal.

Opportunity Knocks

State Street and Investors Financial are both in the global custody business, providing back-office services to asset managers, pension plans and endowments. Investors Financial has a larger presence in the hedge-fund and private-equity spaces, which are good places to be, but the company has recently stumbled.

In the third and fourth quarters, Investors Financial experienced negative operating leverage (meaning that expenses grew faster than revenue), and in January, the company forecast 2007 revenue growth of 15% to 18%, less than its expense growth of 21% to 24%. The stated reason is that it needs to add to its personnel, technology and office space to attract new clients. Some say this is necessary to service its existing clients, particularly Barclays Global, which contributes 20% of its revenue. Investors Financial has said it would return to positive operating leverage in the second half of 2007.