October 11, 2017 / 5:35 PM / a year ago

Breakingviews - Goldman necessity mothers M&A invention

LONDON (Reuters Breakingviews) - Goldman Sachs is trying to extricate itself from a box by thinking outside it. The Wall Street firm has set up a small team in what’s known internally as the Innovation Lab, to cook up supposedly clever ideas for big clients. The resulting acquisitions may end up destroying value for the shareholders of the companies involved, but Goldman’s own investors should be pleased the investment bank is trying new things.

A Goldman Sachs sign is seen above the floor of the New York Stock Exchange shortly after the opening bell in the Manhattan borough of New York January 24, 2014. REUTERS/Lucas Jackson

Giving advice is at the core of the $94 billion institution run by Lloyd Blankfein, which routinely ranks atop the closely watched league tables. Clients such as ride-hailing app Uber and e-commerce giant Amazon turn to Goldman for assistance. Competition is fierce, though, especially since smaller shops started gobbling more market share after the financial crisis. And fees are shrinking.

Dealmaking in the United States is equivalent to 6 percent of total company market value, according to data collated by Credit Suisse. That’s stubbornly below the historical 9 percent average. Adding to the sense of urgency perhaps is Goldman’s trading operation. It makes up a bigger share of the top line, and has been lackluster.

Revenue from buying and selling bonds, yen, oil and the like fell 40 percent in the second quarter from a year earlier. Earnings due next week are likely to be glum again amid low levels of volatility and a market that, most banks warn, is down around 15 percent.

Adding some luster to the M&A franchise therefore makes sense. The trouble is that for a big institution, small initiatives can take years to show results. Goldman is also growing its retail-bank offering, Marcus, which could generate returns on equity that surpass 15 percent, it says – but is still too small to require separate disclosure. That, and Goldman’s plans to freshen up its trading arm, will command far more attention than whatever may come out of the Innovation Lab. At this point, though, experimentation is to be encouraged.


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