January 20, 2016 / 8:09 PM / 2 years ago

Goldman Sachs sees M&A business weathering market slump

3 Min Read

A view of the Goldman Sachs stall on the floor of the New York Stock Exchange July 16, 2013.Brendan McDermid

(Reuters) - Goldman Sachs Group Inc (GS.N), the 2015 M&A champion, is putting a brave face on the prospects for its dealmaking business this year even with markets plunging.

The Wall Street firm, which last year topped the global dealmaking charts, is not yet concerned about the impact declining oil prices and China's slowing economy will have on dealmaking.

"We'll have to see, obviously, if markets stay under stress ... but we wouldn't say that two weeks of volatile markets would stop a pretty powerful M&A trend," Goldman CFO Harvey Schwartz said on the bank's fourth-quarter analyst call on Wednesday.

The need for Goldman to maintain a strong business advising companies on deals is crucial. The bank is increasingly generating a larger chunk of its revenue from investment banking as its bond trading arm, once a profit center for the bank, comes under pressure.

During the fourth quarter, investment banking, which includes advisory, equity and debt underwriting, comprised 21 percent of the bank's overall revenue, up from 15 percent in 2012.

Other Wall Street executives struck a more cautious tone over the last week about the deal environment.

"In the first couple of weeks, it's not been particularly strong and we do need to see some of the stability to come back for us to really see that conversation start to pick up," JPMorgan Chase & Co (JPM.N) CFO Marianne Lake said Thursday on the bank's fourth quarter earnings call, noting that M&A dialogue still remained active.

Goldman, which ranked No. 1 in advising on both announced and completed mergers and acquisitions globally in 2015, saw revenue from the business rise 27 percent during the fourth quarter to $879 million.

Jeff Harte, an analyst with Sandler O’Neill, said that while Goldman’s revenue from advising companies on deals was strong, it remains unclear if the bank can keep up this momentum given market turmoil.

"Sustainability for advisory revenue will be a question. Volatility for a little bit doesn’t derail the cycle, but if it continues for an extended period of time it gets more concerning," he said. "At this point it won’t halt the market, but with every month that goes by, it gets a little more worrying."

Portales Partners analyst Charles Peabody said he believes M&A activity has peaked, noting that while there is a strong pipeline of announced deals that have not yet closed, there is plenty of execution risk that could derail these deals from closing, like financing or regulatory uncertainty.

Deal volume industry-wide globally rose 42.2 percent to a record $4.7 trillion in 2015, according to Thomson Reuters data. That was spurred by mega mergers like Anheuser-Busch Inbev SA's $106 billion acquisition of SABMiller Plc and oil major Royal Dutch Shell Plc's $70 billion purchase of BG Group Plc.

Reporting by Olivia Oran in New York; Editing by Christian Plumb and Nick Zieminski

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