The last several years have been a bumpy ride for investment banks. Mergers and acquisitions hit a record high in 2021 but then dropped off a cliff in 2022 and 2023 due to inflation, high interest rates, recession fears, more stringent regulations and volatile markets, especially in the financial sector, to name a few of the major reasons.
According to an October report from Boston Consulting Group (BCG), the volume of deals in 2023 was down 14% year over year through August, while the value of those deals was off 41%. Those drops followed 2022’s declines of 9% in the number of deals and 38% in the value of the deals, according to BCG.
However, the skies seem to be clearing a bit, and the outlook is a little brighter for M&A in 2024. That would indeed be welcome news for investment bank Goldman Sachs Group (NYSE:GS) and its investors.
Are the gray skies going to clear up?
Some leading economists and market analysts say there should be an uptick in M&A and investment-banking activity in 2024.
Perhaps the biggest driver will be declining inflation rates leading to reduced interest rates, which should create a more favorable environment for deals. Beyond that, the market volatility has brought down some valuations, which could result in more mergers, distressed deals and actions spurred by activist investors.
Further, the BCG report indicated that there is an abundance of capital, or “dry powder,” waiting on the sidelines after two bad years. Private equity, venture capital, sovereign wealth funds and large companies are flush with cash and looking for opportunities to deploy it. An improving macroeconomic environment may provide that opportunity in 2024. Additionally, price expectations for buyers and sellers are converging as the market stabilizes, which could also lead to more deals.
It will likely be a slow climb that doesn’t accelerate until the back half of the year, but when it does, Goldman Sachs should stand to benefit significantly.
Goldman Sachs: Most M&A deals in 2023
Goldman Sachs has been the leading investment bank in M&A, booking the most deals over the past several years. That trend continued again in 2023, as Bloomberg reported this week. Goldman Sachs advised on 235 mergers and acquisitions in 2023, worth approximately $671 billion. That’s about 31% of the $2.16 trillion in deals done globally last year, and it beat out second-place JPMorgan Chase (NYSE:JPM).
Unlike JPMorgan Chase, which has a more balanced book of business, Goldman Sachs relies more heavily on investment-banking revenue, so its fortunes are going to be more tied to the ups and downs of the M&A market.
For example, in the most recent quarter, about $1.6 billion of Goldman Sachs’ $11.8 billion in revenue, or about 14%, came from investment-banking fees. At JPMorgan Chase, the revenue from investment banking was about the same, but it represented just a fraction of the firm’s $40 billion in net revenue.
Thus, in a year like 2021, when M&A deals boomed, Goldman Sachs’ stock price jumped 48%, while JPMorgan Chase was up 27%. In 2020, when deals surged in the second half of the year, Goldman Sachs saw its stock rise 17.5%, while JPMorgan Chase was down 5%.
That’s not to say that this year will be anything like 2020 or 2021, but if the M&A market does start to see an increase in activity, Goldman Sachs, the established market leader, will likely move up with it.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
