It is often said that President of the US might be the strongest man in the world, but the world is operated by the Wall street. And the movers and shakers of the wall street are the investment banks. In their swanky cars and with their acumen, investment bankers have many a times caused the downfall of the US economy and have brought prosperity too. US has some of the world’s biggest investment banks, and I will take Goldman Sachs for this case study.
Goldman Sachs or GS is one of the world’s biggest investment bank and a main dealer in the US treasury market. It is a complete market maker. During the subprime mortgage crisis, GS received a lot of flak and was ridiculed by one and all. As the firm became too big to fail, it received a $10 Bn bailout from the US government. The bank’s core competency is its employees which are handpicked from world’s best graduate and post graduate schools. Also, most of the partners of investment banks are based in Wall Street, but GS’ partners are moving closer to their clients to build a lasting relationship. Its network within the government as well as within the wall street is incomparable, which gives the bank an edge over its competitors. According to Bloomberg data, GS did most M&A deals in 2018, having a total greater by 30% from its closest competitor. They did 330 deals, totalling $924 bn. Although the number and the total size of GS deals was bigger, Morgan Stanley deals were significantly bigger. Average deal size of Morgan Stanley was $ 2.8 billion while that of GS was $2.2 billion.
One of the biggest deals that GS will take part in will be Uber’s IPO.
The revenue of GS has increased from $22.2 billion in 2008 to 36.6 billion in 2018. The uncharacteristically low revenue in 2008 was also due to the GFC. As we have seen the government has been trying hard to avoid a repeat of 2008 crisis and for that has brought in multiple new regulations, this has also led to a decrease in the revenue.
We see all the positive numbers in the below table. But the biggest jump has been in the trading and principal investment activities. As the number of High net worth individuals have increased, their asset management requirement has also helped the banks in making money. I feel this is the biggest reason for the jump in these numbers.
Investment banking activities have obviously gone up considering the number of M&A deals that are going around. GS has made a point to penetrate in the market of medium deals as the number there makes up for the smaller amount that the bak is used to by cracking the big budget deals. The small to medium deals have gone through the roof in the past few years and that fact has not gone unnoticed.
|Trading and principal investments||9063||15274||68.53%|
|In millions except per share data||2007||2018||% change|
|Net revenues||$ 45,987.00||$ 36,616.00||-20.38%|
|Pre-Tax Earnings||$ 17,604.00||$ 12,481.00||-29.10%|
|Net Earnings||$ 11,599.00||$ 10,459.00||-9.83%|
|Net Earnings applicable to common shareholders||$ 11,407.00||$ 9,860.00||-13.56%|
|EPS||$ 24.73||$ 25.27||2.18%|
|DPS||$ 1.40||$ 3.20||128.57%|
|Book Value per share||$ 90.43||$ 245.23||171.18%|
|Ending Stock Price||$ 226.64||$ 230.31||1.62%|
|Book to market value||$ 0.40||$ 1.06||166.86%|
|In millions except per share data||2007||2018||% Change|
|Total Assets||$ 11,19,796.00||$ 9,31,796.00||-16.8%|
|Secured Financing||$ 33,300.00||$ 1,11,964.00||236.2%|
|Long Term Borrowings||$ 1,64,174.00||$ 2,64,651.00||61.2%|
|Total Shareholders’ Equity||$ 42,800.00||$ 90,185.00||110.7%|
|Debt||$ 10,76,996.00||$ 8,41,611.00||-21.9%|
From the analysis above, it can be seen that assets of the firm have reduced in the past decade. It has increased its secured financing, both long term and short term pumping the whole category by 236% which is huge. Shareholders’ equity has also increase by a heathy percentage of 110. As has been mentioned above, GS is one of the biggest banks in the world and such healthy numbers are expected from this firm. A CAGR of 7.7% in Shareholders’ equity is something that only a bank like GS can manage.
There is a significant increase in book value to market value, which shows a true picture of the stock of the firm. One thing of note here is the share price. In 10 years, the share price of GS has almost remained constant. This has led to the increase in the book value to market value ratio.
In the article, the regulations that have been proposed and implemented have been done to safeguard the interests of the taxpayers. The subprime mortgage crisis was an eye opener for the reckless investment banks and the government regulators as it showed everyone, how the smartest of minds can hole the whole world for ransom. The crisis was banks own making. Beforre the crisis happened there were multiple calls for regulations in the derivative markets and the exotic products that common man had quite trouble in comprehending. But those requests and appeals fell on deaf ears.
The regulations, it can be seen had a profound impact on GS as well, as can be seen from their balance sheet. Their revenue have gone down, because of the trades that they can made are no longer on debt but have to be limited. The leverage exposure has gone down by 21%. If we put things into perspective, 21% is a huge number considering the number of deals that are going on these days. The financial products have also been evolving over the period of time and such financial prudence bodes well for the future. It is a shame that it took a crisis of that magnitude for banks to realise their reckless behaviour.
We can also see that the revenue of GS has actually gone down in the last few years. Now as mentioned earlier, GS is the biggest M&A advisor, and considering the consolidation that has been going on in the last 5 years, it is startling to see the revenue numbers go down, but the regulations have ensured that the traders are treading carefully and are not being extravagant while dealing.
|Scenario 1||$ 23,12,50,000.00||$ 24,97,50,000.00||$ 1,85,00,000.00|
|Scenario 2||$ 23,12,50,000.00||$ 22,66,25,000.00||$ -46,25,000.00|
We can see the dollar return in both the scenarios. As the IB is underwriting 18.5 million shares at $ 12.5 per share, its investment comes at around 231 million dollars. With this investment, in scenario 1 if the share is oversubscribed and sells at 13.5, the bank makes 18.5 million dollars which is nothing short of staggering, considering the type of deal. It is a good return, one that ever banker would take with both hands.
Second scenario is a bit twitchy. If the share is undersubscribed and trades at 12.25, the bank loses 4.6 million dollars. Now this is a huge loss, that is sure to create some ripples across the firm. But the sensitivity analysis shows that a single dollar amount change in share price can really drive up the dollar return for the bank.
- Mary, F. (2019) List Top investment banks in PE-backed deals: KPMG, Houlihan, GS, William Blair Available at: https://www.themiddlemarket.com/organization/goldman-sachs [Accessed 29 Apr, 2019]
- Franklin, Joshua. (2018) Goldman Sachs, mega-M&A purveyor, looks for smaller dealsAvailable at: https://www.reuters.com/article/us-goldman-sachs-deals/goldman-sachs-0mega-ma-purveyor-looks-for-smaller-deals-idUSKCN1NA1DE [Accessed 29 Apr, 2019]
- Vanderwerff, T (2019) US M&A News and trends Available at: https://www.factset.com/hubfs/mergerstat_em/monthly/US-Flashwire-Monthly.pdf [Accessed 29 Apr, 2019]
- Flint, J. (2019) Who were Wall Street’s biggest dealmakers of 2018? Here’s the tally. Available at: https://www.bizjournals.com/houston/news/2018/12/31/who-were-wall-streets-biggest-dealmakers-of-2018.html [Accessed 29 Apr, 2019]
- Son, H. (2018)How Goldman Sachs is changing its culture to win more dealsAvailable at: https://www.cnbc.com/2018/10/08/the-new-goldman-sachs-hungry-humbled-and-moving-to-a-neighborhood-near-you.html [Accessed 29 Apr, 2019]
- Goldman Sachs official Website
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