Strong Q3 M&A Performance Boosts Goldman’s Advisory Fees To Multi-Year High

by Trefis Team
Goldman Sachs
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The third quarter was an overall lukewarm period for the global M&A advisory industry, as fears of an impending trade war resulted in the total volume of deals announced for the period falling from almost $1.3 trillion in the previous quarter to just $743 billion this time around. Fortunately, the strong pipeline of M&A deals announced over previous quarters helped mitigate the impact on total volume of deals that closed over the period, which fell sequentially from $889 billion to $765 billion. Notably, the total volume of deals closed in Q3 2018 was nearly identical to the figure a year ago ($768 billion) – something that points to little change in M&A advisory fees for the largest investment banks year-on-year. However, the substantial reduction in new deals announced will hurt these fees for the last quarter of the year.

Goldman Sachs did well to regain the top spot in terms of total M&A deals closed, after Morgan Stanley held top honors in the previous two quarters and Citigroup was the leader prior to that. Goldman played a role in deals worth $280 billion for the quarter – representing a market share of almost 37% – thanks to its work on several mega-deals that closed in Q3. We capture the trends in M&A advisory fees for each of the five largest U.S. investment banks over recent years in detail as a part of our interactive model on M&A fees, while also forecasting how these revenues are likely to be for full-year 2018. The chart below captures the total size of M&A deals completed by the five largest U.S. investment banks since Q3 2017. The green-to-red shading for figures along a row show the variations in deal size for a particular bank over this period.

M&A advisory deal volumes for individual banks were taken from Thomson Reuters’ latest investment banking league tables. The table below captures the respective market shares for each of these banks over this period. The green-to-yellow shading for figures along a column should help compare the relative standings of these five banking giants in a particular quarter.

It should be noted that the largest M&A deals employ many investment banks, so the market share figures are not exclusive – explaining why the total market share for these five banks are often above 100%. As the total volume of deals closed in a quarter is quite volatile from one quarter to the next, and as M&A activity in the Asia-Pacific region has grown over recent quarters to surpass deal volumes in Europe, there have been considerable fluctuations in the average market share of these banks, as detailed above.

This would also explain why each of the five largest U.S. investment banks have ranked #1 in terms of total M&A deals completed in at least one of the last seven quarters (with Goldman Sachs and Morgan Stanley capturing the top spot on two occasions each). Despite this, Goldman has grabbed the largest wallet share in the industry in each quarter since Q2 2011 – something we attribute to the fact that the bank usually acts as lead advisor in many of the biggest M&A deals that close in a given quarter.

Thomson Reuters estimates total M&A advisory fees for the industry to increase from $9.7 billion in Q3 2017 and $10.8 billion in Q2 2018 to $11.1 billion in Q3 2018. While the five largest U.S. banks are expected to report an increase in these fees compared to the figure a year ago, the visible reduction in deal volumes for these banks compared to the previous quarter is likely to result in their combined fees shrinking by around 6% sequentially. However, the surge in Goldman’s deal volume for Q3 is expected to help its advisory fees improve by 6% compared to Q2 – pointing to one of the best performance by the bank’s M&A unit in its history.

Details about how changes to M&A Advisory Fees (and other Investment Banking Fees) affect the share price of these banks can be found in our interactive model for Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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