State Street Corp. announced Tuesday it has reached an agreement with Intesa Sanpaolo, a Milan banking company, to buy its securities services business for $1.87 billion in cash.

State Street will buy the global custody, depository banking, correspondent banking and fund administration portions of the business, which operate in Italy and Luxembourg. The business had $500 billion of assets under custody as of June 30.

The Boston company said that it plans to support the acquired business’s balance sheet with $800 million of additional capital when the deal closes in the second quarter. State Street, which is planning to finance the deal with available capital, expects to add $16 billion in cash deposits.

As a result of the deal, State Street would add 555 employees, with 420 in Italy and 135 in Luxembourg.

Revenue in 2009 for the Intesa Sanpaolo’s securities services business is expected to be approximately $427 million. The agreement also includes a long-term investment servicing arrangement with Intesa Sanpaolo to service all of its investment management affiliates, including Eurizon Capital, one of the largest fund managers in Italy, which had $197 billion in assets under management as of Sept. 30.

International expansion through acquisition has been part of State Street’s strategy for the past three years under Ronald Logue, its chairman and chief executive officer. Logue, who announced in October that he plans to retire in March, has said that he wants the company to be able to generate 50% of its revenue from international channels.

Earlier this month, the company agreed to acquire a European fund administrator, Mourant International Finance Administration that is based in Jersey in the Channel Islands to expand its alternative servicing capabilities. That deal, which is expected to close in the first quarter, will add $170 billion in assets under administration to State Street and approximately 650 employees in Dublin, Singapore and New York.

State Street derived 35% of its annual revenue in 2008 from non-US operations. After these acquisitions, it would increase that total to 38%. The company has had an investment servicing presence in Milan since 2003, when it bought Deutsche Bank’s global securities services business.
Tuesday’s announced acquisition in Italy “is consistent with our long-term strategic plan to increase State Street’s scale and presence in high-growth markets outside of the United States,” said Jay Hooley, the president and chief operating officer of State Street, who will replace Logue as CEO in March.  “It will also provide State Street with access to a new customer base to which we can cross-sell additional products and services and will give us additional traction in the insurance market.  Additionally, it will build on our leadership position in the high-growth areas of fund accounting and offshore fund servicing.  Lastly, this acquisition will provide us with a long-term servicing relationship with one of Europe’s premier fund managers.”  

State Street said it expects its capital ratios would remain strong after closing. For 2010, State Street’s total capital ratio is estimated to be approximately 16.8%, tier 1 capital ratio is estimated to be approximately 15.6%, tier 1 leverage ratio is expected to be approximately 7.4%, and tangible common equity ratio is estimated to be approximately 5.5%.  

“We feel that our strong capital position allowed us to take advantage of this attractive market opportunity which will further enhance our international presence and add to our financial profile and capital-generation capabilities,” Hooley said. “As always, we are focused on growth opportunities such as this to build an ever-stronger company and to enhance shareholder value.”