Invesco (IVZ) - Get Free Report shares rose sharply Friday, after a report that the money management firm is in discussions for a merger with State Street’s (STT) - Get Free Report asset-management division.
The report came from The Wall Street Journal, which cited knowledgeable sources. They said a transaction isn’t imminent. And the structure of a deal isn’t clear yet.
Presumably, State Street would acquire Invesco. State Street’s asset management arm manages almost $4 trillion in assets and has a huge ETF presence. Invesco manages $1.5 trillion and also is big in ETFs.
In addition to its money-management operation, State Street has one of the world’s biggest custody banks.
Invesco recently traded at $26.26, up 6%, and State Street at $87.08, barely changed.
The rise of passive investing has shrunk profit margins for asset managers, leading to mergers in the field. Earlier this month, State Street said it was buying Brown Brothers Harriman investor-services business for $3.5 billion.
Morningstar analyst Rajiv Bhatia puts fair value for State Street at $77. “We believe the custody business tends to have a wide moat built on cost advantages and switching costs,” he wrote.
“State Street is roughly tied with BNY Mellon BNY as the number-one custodian based on assets under custody and administration. Given the low basis points paid for custody services, we believe this is a business where scale matters.”
As for Invesco, Morningstar analyst Greggory Warren puts fair value at $28.
“We expect Invesco's adjusted operating margins, which were lifted into a 25%-28% range following merger synergies from the  OppenheimerFunds deal and cost-cutting, to deteriorate less than some of its peers,” he said.