Goldman Sachs Group Inc. (GS) is poised to win the top spot among advisers on both global takeovers and equity offerings for the first time in five years, a sign the bank hasn’t lost the trust of corporate executives.
The global mergers-and-acquisitions team, led since May by Gene T. Sykes, 53, in Los Angeles and London-based Yoel Zaoui, 50, climbed to No. 1 on deals announced this year after trailing Morgan Stanley in 2010 and 2009, according to data compiled by Bloomberg. The bank, the fifth-largest by assets in the U.S., also dominated equity, equity-linked and rights offerings, overseen by London-based Matthew Westerman, 46, the data show.
Lloyd C. Blankfein, 57, a former head of fixed-income trading who became chairman and chief executive officer in 2006, has sought to repair the firm’s reputation after the Securities and Exchange Commission and a Senate subcommittee accused the company of misleading buyers of mortgage-linked investments. Protesters, angry at Wall Street paying billions of dollars in bonuses after governments bailed out the financial system, also targeted Goldman Sachs in protests as recently as last week.
“As much as maybe the public looks down upon them, they’ve been able to overcome it in boardrooms,” said Ralph Cole, senior vice president of research at Portland, Oregon-based Ferguson Wellman Inc., which manages $2.7 billion and doesn’t own Goldman Sachs stock. “Their reputation has taken such a hard hit, it’s surprising to me that people would still choose them over others.”
Goldman Sachs did the most deals outside the Americas among the top five advisers on global takeovers and equity offerings, according to Bloomberg data. Half of the New York-based bank’s takeover assignments involved a target in Europe, the Middle East, Africa or Asia, while 59 percent of its equity deals were from those regions, the data show. The rankings are based on the total dollar value of the transactions.
The success of Goldman Sachs’s investment bankers hasn’t been enough to stem a decline in the firm’s stock and profit this year. The bank reported a loss in the third quarter, only its second in more than 12 years as a public company, because of writedowns on assets. Profit for the first nine months declined 43 percent from a year ago. The stock has dropped 46 percent to $90.10, a discount to Goldman Sachs’s tangible book value of $120.41 per share at the end of September.
Fees from takeover advice and equity offerings have contributed 11 percent of revenue this year, dwarfed by the 62 percent provided by trading. The firm’s investment portfolio, which holds equity, debt, real estate and stakes in private- equity funds, produced 77 percent less revenue during the first nine months compared with the same period in 2010.
Advisory fees generate profit margins of almost 40 percent before tax, Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman Sachs’s stock “outperform,” said in an e- mail. That makes it an important business for the firm, he said.
More important will be how new regulations, including the so-called Volcker rule, affect trading revenue, Hintz said. He said in October that Wall Street’s fixed-income trading desks could suffer a 25 percent drop in revenue if regulators adopt a recent draft proposal. Fixed-income, currencies and commodities trading, known as FICC, produced more than triple the revenue for Goldman Sachs in the first three quarters of 2011 than M&A and equity capital markets, known as ECM, combined.
“The fundamental question facing Goldman Sachs is the impact of the Volcker rule,” Hintz said. “And good advisory numbers or strong ECM market share does not address the uncertainty of the changes being pursued by the regulators.”
Investment banking serves as “the front end of the house” at Goldman Sachs because of its ability to win clients for other businesses such as derivatives, Blankfein told investors in a November 2006 presentation. At a conference last month, he reiterated the importance of the investment-banking business.
“Our ability to retain industry-leading market shares in strategic parts of the business, particularly during this period of the economic cycle, strongly positions the firm for when the economy inevitably improves,” Blankfein said at the Nov. 15 conference in New York, where he also predicted the economy and markets will “snap back” faster than people think.
“There may be a concentration on their part to make that a bigger chunk of their business,” William Fitzpatrick, a Milwaukee-based financial-services analyst at Manulife Asset Management, said in a telephone interview. “We would absolutely encourage that because it’s a little bit more predictable than the trading side of things, and we know that those other businesses are going to be challenged by regulations.”
Companies have announced $2.22 trillion of M&A transactions this year, up from $2.19 trillion in 2010 and $1.77 trillion in 2009, Bloomberg data show. The pace of deal-making is still about half the level of 2007, when $4.04 trillion of takeovers were announced, the data show.
“There’s pent-up demand for M&A because we didn’t see a lot of deals the last couple of years,” said Fitzpatrick, whose team manages about $800 million and owns Goldman Sachs stock. “It would make sense for Goldman Sachs to concentrate their efforts there.”
Goldman Sachs handled 333 M&A assignments with a total value of $529 billion this year, giving the firm a 24 percent market share, according to Bloomberg data. That compares with a 20 percent in 2010 and 27 percent in 2009, the two years the company came in second to Morgan Stanley (MS), according to Bloomberg data. Market shares add up to more than 100 percent because multiple banks are awarded credit for the same deals.
Until 2009, Goldman Sachs held the No. 1 position every year since 2000, the data show.
“We’ve been in the top two or three for 10 years, and that’s really what counts because the consistency matters,” Zaoui, the global M&A co-head, said in a telephone interview.
Sykes and Westerman declined to comment, according to Michael DuVally, a spokesman for Goldman Sachs in New York.
Goldman Sachs’s biggest deal in 2011 was advising pipeline company El Paso Corp. (EP) on its planned $21 billion sale to Kinder Morgan Inc. The bank is the second-largest shareholder in Houston-based Kinder Morgan, with a stake of about 20 percent.
The Louisiana Municipal Police Employees Retirement System, an El Paso shareholder, has alleged in a lawsuit against Goldman Sachs that the firm has a conflict of interest in the takeover because it acted as an adviser to the seller and a shareholder in the buyer. The two Goldman Sachs partners on Kinder Morgan’s board, Henry Cornell and Kenneth A. Pontarelli, recused themselves from the negotiations, Kinder Morgan said in a regulatory filing.
Goldman Sachs will get a $20 million fee for advising El Paso on the sale to Kinder Morgan if it goes through, according to the filing. That was less than the bank would have received if Houston-based El Paso had proceeded with a plan to spin off its exploration and production division, the filing showed. Goldman Sachs’s DuVally declined to comment.
The bank’s second-biggest assignment this year was advising Sumitomo Metal Industries Ltd. (5405) on its 726.5 billion yen ($9.3 billion) all-stock sale to Nippon Steel Corp., which will create the world’s second-largest steelmaker. Lakshmi Mittal, chairman and CEO of Luxembourg-based ArcelorMittal (MT), the world’s biggest steelmaker, is a Goldman Sachs director.
The total value of stock, equity-linked and rights offerings has dropped to $553 billion this year, the lowest since 2008, Bloomberg data show. The value compares with $803 billion in sales last year, when Goldman Sachs lagged behind Morgan Stanley and JPMorgan Chase & Co. (JPM) The last time Goldman Sachs held the No. 1 position was in 2006.
Goldman Sachs leads with a 9 percent share of the market, boosted by a secondary stock offering for Hannover, Germany- based car-parts maker Continental AG and a stock and equity- linked offering for New York-based MetLife Inc., the largest U.S. life insurer.
The five initial public offerings on which Goldman Sachs won the most deal credit this year were the Singapore listing of Hutchison Port Holdings Trust, Hong Kong sales for Milan-based Prada SpA and Shanghai Pharmaceuticals Holding Co., China’s second-largest drug distributor, and U.S. offerings by Nashville, Tennessee-based HCA Holdings Inc. and Yandex NV, owner of Russia’s most popular search engine.
All five are trading below their initial sale price. The 53 IPOs managed globally by Goldman Sachs have declined an average of 7.6 percent through Dec. 16, compared with a 0.6 percent average drop for all IPOs, according to Bloomberg data.
Reclaiming No. 1
Goldman Sachs’s equity-underwriting revenue of $894 million in the first nine months of this year was down 1 percent from the same period a year earlier and trails Bank of America Corp. (BAC), Morgan Stanley and JPMorgan, according to company reports. “Financial advisory” revenue at Goldman Sachs, which includes fees for mergers and acquisitions, climbed 6 percent to $1.52 billion from $1.43 billion in first three quarters of 2010 and leads all competitors.
Retaking the top spot in the league tables may be more important psychologically than financially.
“For the investment bankers it’s a big deal -- you get back to No. 1 and you start attracting talent back again instead of losing talent,” said Ferguson Wellman’s Cole. “Momentum is a big part of any business, and they need to find the way to regain some momentum. This may be the first step.”
To contact the reporter on this story: Christine Harper in New York at firstname.lastname@example.org