Renewed M&A Activity Boosts Profits of Some Financials, But Goldman Still Lags Morgan

When market conditions steam ahead after a period of declines, it is common for activity in mergers and acquisitions (M&A) to soar. And so it is this time round, too.

There’s somewhat of a cash bubble going on right now: cash flow at U.S. corporations rose to around $1.5 trillion in June, according to data provided by the U.S. Commerce Department. In fact, American firms are about to become the most cash-rich they have ever been versus the interest they pay on corporate bonds, if you listen to some analysts.

That scenario is setting the scene for a whole bunch of M&A activity, which could provide some much-needed revenue to financial firms’ investment banking units. With the recent management changeover at Morgan Stanley (MS), and the bank’s consequently increasing focus on investment banking activities, some of that process is already at work.

“The heart, the DNA — the fabric of this place — has always been the institutional securities [investment banking] business and, frankly, should always be … That’s our roots,” Morgan Stanley’s incumbent chief executive James Gorman told employees recently, according to Time.

This year, Morgan Stanley has advised on 90 deals totaling $270 billion, while Goldman Sachs (GS) has advised 80 deals totaling $239 billion, according to trade rag The Deal. Both banks have jointly worked on the acquisition of Perot Systems (PER) by Dell (DELL), a Procter & Gamble (PG) subsidiary by Warner Chilcott (WCRX), and the Adobe Systems (ADBE) merger.

If M&A continues to be a theme going into 2010, it’s likely that Morgan Stanley will be able to maintain its edge over Goldman Sachs, which has sort of tied itself into a dependency on its trading profits. One surprise success story in this field is likely to be Citigroup (C), which has a super-strong, wide global investment banking team now, much of which was purged from other banks at the start of the year.

Comments

[rlwinvestor:]

The best way to play the investment banking boom is with Rodman and Renshaw Capital Group (RODM). The amount of money in deals Morgan and Goldman have done is a bit misleading because they usually have to split there commission with 4 or 5 other firms. RODM has done just as many deals (albeit for less overall money), but for 90% of them they are the sole firm involved. At around 6% a pop, the earnings add up quickly. In RODM you get a stock that had an eps of $0.42 last quarter and this quarter they are on pace for $0.50 or better. All that for a stock at $5 a share.

Sep 24 09:26 AM

[HA65MPH:]

ANY OPINIONS...re: e* trade being bought out ? ...tia

Sep 24 10:45 AM

[bsharvy:]

GDL is another way to bet on an increase in mergers/acquistions.

Sep 24 02:44 PM