#Goldman Sachs CEO David Solomon playing it ‘cool’ with mergers

Goldman Sachs has been looking to do a big deal, or what investment bankers call “transformative,” for years now. So what are they waiting for? People there keep telling me they need asset prices of merger partners to “normalize,” aka fall enough so Goldman remains in control of the combined company. 

Well, we’re starting to see some “normal.” 

A look at the asset prices of potential partners — PNC Bank, US Bancorp, State Street, BNY Mellon, some mid-sized asset managers and even potentially brokerage firm Charles Schwab & Co. — are starting to come back to earth as the Fed begins raising interest rates. 

Another factor that might force CEO David Solomon’s hand are the obvious holes in Goldman’s business model. Goldman has a long and storied rep, killing it in M&A and trading. 

Tough competition

But it’s tough having only two horses in the race competing against banking behemoths like JPMorgan. Sure, Goldman wasn’t the only bank to experience a hiccup because of trading volatility and higher expenses (the vaunted JPM did as well). But JPM has a big balance sheet, far larger than the size of Goldman’s, and JPM CEO Jamie Dimon can paper over surprises such as rapid and unexpected increases in compensation costs, which bedeviled Solomon in the fourth quarter of 2021 and possibly into 2022.

That’s why Goldman’s earnings miss last week has the Wall Street rumor mill spinning again. 

Solomon also knows that if you’re Goldman, the merger has got to be the right one, or else the CEO will go down in infamy as having evaporated one of the world’s greatest corporate brands. 

And this is where it gets tricky. As for potential partners, Schwab — the world’s most prestigious discount broker — would be an obvious choice. Schwab’s business involves registered investment advisers selling high-end financial products to rich people, which complements Goldman’s own very high-end wealth-management business.

But Schwab’s price, in Goldmanese, hasn’t been normalized enough. The San Francisco-based Schwab has a market value of $168 billion compared to Goldman’s $115 billion. Charles Schwab’s ego — and yes, the company’s 84-year-old founder, namesake and chairman is still around — won’t let him sell out a bunch of traders in New York if he doesn’t have to. 

Both PNC and US Bancorp have lower market caps than Goldman and they would be attractive, particularly in a high-interest-rate environment the Fed has signaled; banks make a lot of money when rates rise.

But, like Schwab, neither has to do a deal. The monetary-policy environment favors their business model over Goldman’s. 

Asset managers that might be available — think T. Rowe Price — would get Solly around $1.5 trillion in assets and entry into the lucrative mutual-fund business.

Ask yourself, though: Why ­haven’t there been more marriages between fund companies and Wall Street? Answer: Combining those cultures is a little like trying to get Hillary Clinton to play nice with Donald Trump.

With all these variables to weigh, the conventional wisdom among bankers is that Goldman isn’t rushing to do anything. Solomon is doing a great job; he’s beat earnings expectations seven times before the recent fourth-quarter 2021 miss. Some analysts say his stock looks cheap compared to competitors like Morgan Stanley, but Goldman has the edge in market prowess. 

That’s one way to look at it; another way is the reason why Morgan Stanley beat fourth-quarter expectations: It has a huge wealth-management business that stabilized and papered over a trading slowdown. 

Again, Solomon and his people are smart. They know they have to do a deal and the right one at the right time.

Sensible ‘Fink think’

Larry Fink’s annual letter to CEOs is always must-read material, this year even more so because he added a fair amount of common sense to the relentless push by the Biden administration and corporate America to adopt green-energy policies.

Fink, the CEO of BlackRock, is no stranger to this effort. He’s used his clout as chief of the world’s largest money-management firm ($9 trillion in assets) to prod companies to adopt policies that he believes will transition the country and the world to what’s known as “net zero” carbon admissions.

With that came criticism from conservatives, and this column, since BlackRock alumni fill the Biden White House. Yes, green energy sounds good in practice, and Teslas are very popular in Beverly Hills, but working-class Americans can’t afford electric cars. Higher oil and gas prices are tax increases on Middle America.

Fink didn’t back off his embrace of green energy. But in the letter, he also pointed out how this movement is being hijacked by environmental zealots.

He advocated for a transition that takes into account that “any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices for those who can least afford it, resulting in greater polarization around climate change and eroding progress.”

Let’s hope his friends in the Biden administration are listening.