Why Goldman’s M&A Advisory Fees Are Largely Level Despite 68% Spurt In Deal Value

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Goldman Sachs

Goldman Sachs (NYSE: GS) is a leading global investment bank that provides investment banking, securities trading, lending and investment management services to hedge funds, financial institutional, government and high-net worth individual (HNIs) clients. It is a market leader in the M&A advisory space, with M&A advisory fees contributing around 10% of Goldman’s Revenues. As a result, the value of M&A deal completed is an important metric that can impact the segment revenues. In the first nine months of 2019, Goldman’s completed M&A deal value has increased by 68% on a year-on-year basis, however M&A advisory fees have increased by a mere 3%.

Trefis details Why Goldman’s M&A Advisory Fees Have Shown Meager Growth Despite High Deal Value In The First Nine Months Of 2019 in an interactive dashboard. We estimate Goldman Sachs’ valuation to be $229 per share (slightly higher than the current market price) after incorporating changes based on the Goldman Sachs’ earnings release for the third quarter.

What Happened?

  • Goldman offers advisory services in Mergers & Acquisitions (M&A) and financial restructuring across sectors. Its M&A Advisory Fees increased 3.2% y-o-y in the first nine months of 2019 – a figure considerably lower than the 68% jump in M&A Deal Volume for the premier investment bank.
  • In the first nine months of 2019, Goldman’s M&A advisory desk played a role in deals worth $934 billion (as per Refinitiv- Deal Logic report) – an increase of 68% from $557 billion in the year-ago period, and the highest figure in the last 5 years.
  • Notably, Goldman was the lead banker for several high profile deals like Ultimate Software, Tableau & Salesforce, Symantec & Broadcom among others.
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Details about factors driving revenues for Goldman Sachs’ individual segments along with our forecast for the next three years are available in our interactive dashboard.

Why Did It Happen?

  • The apparent discrepancy can be attributed to a sharp reduction in the fee Goldman earned as a proportion of the M&A Deal Value.
  • The primary reason for lower fees per deal is intense competition among M&A players during a period that has seen a sizable reduction in new M&A deals.
  • Also, deals greater than $10 billion in value increased 21% y-o-y. As large deals have several investment banks working together, the fees are also distributed among the various banks involved.
  • Finally, as playing a less prominent role in a large deal would mean a smaller share of the fees earmarked for the deal, Goldman very likely also had a supporting role in many of the largest deals that closed over the period.

So What?

  • Goldman is a market leader in the M&A advisory space, with M&A advisory fees representing roughly 10% of Goldman’s Total Revenues.
  • A reduction in M&A advisory activity is likely to weigh on the bank’s revenues as well as profits over the near future, with the bank likely to contend with lower fees in order to maintain its market share.

Per Trefis, Goldman Sachs’ Revenues (shows key revenue components) are expected to cross $35 billion in 2019, leading to an EPS of $22.24 for the year. This EPS figure coupled with a P/E multiple of 10.3x, works out to a price estimate of $229 for Goldman Sachs’ stock (shows cash and valuation analysis), which is slightly higher than the current market price.

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