An increase in M&A activity this year could benefit this stock

The past few years have been difficult for investment banks. Mergers and acquisitions reached a record high in 2021, but fell off a cliff in 2022 and 2023 due to inflation, higher interest rates, recession fears, tighter regulations and volatile markets (especially in the financial sector). cause.

An October report from Boston Consulting Group (BCG) found that deal volume in 2023 was down 14% year over year through August, while the value of those deals was down 41%. According to BCG, the decline follows a 9% decline in deal volume and 38% decline in deal value in 2022.

However, the sky seems to be clearing a little, and the outlook for M&A in 2024 is also looking a little brighter. This will indeed be good news for investment banks. Goldman Sachs Group (NYSE:GS) and its investors.

Will the gray skies clear up?

Some leading economists and market analysts say M&A and investment banking activity will increase in 2024.

Perhaps the biggest driver will be lower interest rates due to lower inflation rates, which will create a more favorable environment for trading. Additionally, market volatility has caused some valuations to decline, which could spark more mergers, distressed deals, and action by activist investors.

Moreover, the BCG report pointed out that after two years of recession, there is an abundance of capital, or “dry powder,” waiting to sit on the sidelines. Private equity, venture capital, sovereign wealth funds and large corporations have plenty of cash and are looking for opportunities to leverage it. An improving macroeconomic environment may provide such opportunities in 2024. Additionally, as the market stabilizes, the price expectations of buyers and sellers are converging, which may lead to more transactions.

It’s likely to be a slow rise that won’t accelerate until later this year, but if it does, Goldman Sachs could reap significant profits.

Goldman Sachs: Most M&A Transactions in 2023

Goldman Sachs has been the leading investment bank in M&A over the past few years, booking the most deals. As Bloomberg reported this week, this trend continued again in 2023. Goldman Sachs advised on 235 mergers and acquisitions worth approximately $671 billion in 2023. This represents about 31% of the $2.16 trillion in deals concluded globally last year, surpassing second-place JPMorgan Chase (NYSE:JPM).

Unlike JPMorgan Chase, which has a more balanced book of business, Goldman Sachs relies more on investment banking revenues, so its fortunes will depend more on the ups and downs of the M&A market.

For example, in the most recent quarter, about $1.6 billion, or about 14%, of Goldman Sachs’ $11.8 billion in revenue came from investment banking fees. JPMorgan Chase’s investment banking revenue was about the same, but only a fraction of the company’s net income of $40 billion.

So in a year like 2021, when M&A deals were booming, Goldman Sachs’ stock price was up 48% and JPMorgan Chase’s was up 27%. When deals surged in the second half of 2020, Goldman Sachs’ stock price rose 17.5%, while JPMorgan Chase fell 5%.

That’s not to say this year will be like 2020 or 2021, but as activity begins to increase in the M&A market, established market leader Goldman Sachs is likely to move in line.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.