Are State Street's recent moves to clean up its business having the effect of putting it into play? That may be what the stock market is telling sharp-eyed observers. Yesterday State Street's stock price jumped 2.6 percent to $42.31 on published reports that the firm may be a target.

The speculation may have started when Boston Globe columnist Steven Syre wrote on Tuesday that Citigroup would be a logical buyer of State Street. Two analyst firms -- Fox-Pitt, Kelton and Hoefer & Arnett -- jumped into the fray by stating that Citigroup is interested in a deal. Jon Balkind, an analyst at Fox-Pitt, went so far as to speculate that State Street go for as much as $16.6 billion, an 18 percent premium to its Tuesday closing price on the NYSE.

Two lines of thought interweave to ground the speculation in seeming reality. The first is Citigroup's reported intent to make a purchase, the second are the recent actions taken at State Street that have served to remake it as a pure play in the custody and securities-processing business.

Within the past year Citigroup has reorganized transaction services unit, which provides custody and cash management services. Its goal with the reorganization was to boost sales and profits in the unit. That reorganization more than doubled profits during the first quarter, but the buzz is that the unit can best build scale and its margins by making acquisitions. A recent Reuters report cites sources "familiar" with the Citigroup business as saying that the bank is on the lookout for acquisition targets as part of an effort to cross sell products among more clients and grow its volume.

Frank Bisignano, chief executive of the Citigroup division since last August, did little to quell the speculation in a written response to Reuters. "Transaction services has great potential to grow," said Bisignano.

Citigroup's unofficial but transparent interest in doing a deal has started tongues wagging in Boston. The most mentioned target has been Fleet. Syre, though, does not believe that Fleet would even be the most attractive acquisition target in Boston for Citigroup.

Indeed, State Street has taken a number of actions in recent months that may even make it a more attractive target. Two weeks ago it sold its private-asset business to Schwab's U.S. Trust division for $365 million. Late last year it also purchased Deutsche Bank's Global Securities Services custody business for $1.5 billion. It has also spent the past quarter cutting overhead.

Cuts in the newly acquired business will save $125 million in expenses this year above and beyond the $125 - $150 million executives predicted would be realized through synergies at the time of the deal, David A. Spina, State Street's chairman and CEO, told shareholders yesterday. He added that State Street would continue to focus on managing costs while using its significant economies of scale to improve its operational leverage. The bank will also continue "aligning resources to support growth areas," he added.

The "aligning resources" reference may allude to State Street's continued efforts to slice costs by cutting its headcount. State Street offered a voluntary buyout package to employees last April to overwhelming response. Spina estimates that, all else being equal, the buyout will create $125 million in cost savings through the fourth quarters of 2003 for the bank.

"We have significantly reduced our cost structure while retaining key talent and ensuring continuity in our high-quality client service through staggered departures and selective ongoing hires," said Spina.

Yet, the package may have been too well received. State Street is in the awkward position of having to fill 800 to 1,000 jobs vacated by staff that took up the offer during the next year. Although the bank wanted to cut 1,800 jobs with the buyout, it reports that roughly 3,100 employees took the firm up on the offer. State Street employs 20,000 workers worldwide.

The offer's generosity -- State Street awarded an extra week of pay for each year of employment and allowed those taking the package to exercise their stock options under their original terms -- may have driven the high acceptance rate. A State Street spokesperson provided a second explanation for the high response: Long-term employees were simply seduced by State Street first-ever voluntary buyout offer.

So, has the newly svelte State Street caught the eye of Citigroup? That is a question that only time will answer at this point. If it has, it does not mean that Citigroup can force a marriage. State Street must be a willing partner, notes Syre. In his column he pointed to the Bank of New York's effort to force a deal six years ago. In that case, State Street turned to Massachusetts regulators who blocked the deal after BoNY bought 9.9 percent of the bank.

This time, though, the ending could be different. After all, the two parties are already living together metaphorically. For the last four years the pair have each held a half stake in CitiStreet, a retirement plan administrator. The force driving that joint-venture deal was State Street's desire to cut costs after its expensive foray into the large plan market with its Florida-based Wellspring unit. For its part, Citigroup was seeking a way to quickly gain scale in what it saw as a strategically important niche within the industry (retirement plan administration).

Perhaps history will repeat. 

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