Goldman Sachs CEO David Solomon Predicts Strong M&A Activity and Economic Landing

Goldman Sachs CEO David Solomon is predicting the long-awaited return of M&A

The M&A drought that's kept investment bankers on the sidelines is on its last legs, according to Wall Street's top dealmaker. Goldman Sachs' CEO David Solomon offered an optimistic view on the dealmaking landscape during the bank's second-quarter earnings calls on Monday, writes Business Insider's Reed Alexander. Solomon said the bank is seeing a "backlog" of transactions, calling it the "early innings" of a turnaround for a sector that's been all but dead over the past few years. If anyone would know about M&A's return, it's Goldman Sachs. The bank traditionally sits atop league tables ranking advisors of deals. Reed previously spoke to a dozen insiders about how Goldman bankers are raring to go after a tumultuous few years for the firm. But even if Solomon's prediction is self-serving, that doesn't make it wrong. The bank's underwriting revenue rose 39% last quarter thanks to more leveraged finance. Translation: Private-equity firms, whose inactivity has been a big piece of the M&A slowdown, are borrowing cash in preparation to cut deals. An M&A return isn't just good for bankers. The lack of deals has been a massive dam to the flow of the broader economy. When dealmaking comes back, founders and early employees of startups can cash out and move on to fresh projects. Larger companies can make acquisitions that help them push into new areas. The return of deals is one thing. Getting them done is something else entirely. The last time M&A came back in a big way after a downturn was in the aftermath of the pandemic. By early 2021, junior bankers were burnt out from the onslaught of deals they were working on. Goldman sat at the center of it. Some of the bank's young employees made presentations -- How else do you expect a banker to communicate? -- outlining their complaints to senior management, which eventually leaked and went viral. A September rate cut and switch to a deal-friendly White House in November are near-term sparks that would set the industry off and running quickly again. But the untimely death of a Bank of America investment banker in early May put Wall Street's working conditions back in the spotlight. So this time around, banks might look to AI for help. Solomon said on Monday's call he sees AI helping "the factory of the business" by prepping info for clients. That's the type of work that often falls to junior bankers. Analysts are responsible for building out presentations ahead of client meetings, during which more senior bankers lead. While junior bankers might appreciate some help, it could ultimately spell trouble for them. The more work banks can farm out to generative AI, the less need they'll eventually have for them altogether. The Insider Today team: Dan DeFrancesco, deputy editor and anchor, in New York. Jordan Parker Erb, editor, in New York. Hallam Bullock, senior editor, in London. Annie Smith, associate producer, in London. Amanda Yen, fellow, in New York.

Why Goldman Sachs thinks the merger machine is revving up

This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Have an account? Log in. "From what we're seeing, we are in the early innings of the capital markets and M&A recovery," he said on the call. "While certain transaction volumes are still well below their 10-year averages, we remain very well positioned to benefit from a continued resurgence in activity." In its global banking and markets business line, the firm recorded more than $8 billion in net revenue for the second quarter of the year -- a 14% increase from the same quarter last year but a 16% drop from the first quarter of this year. Investment-banking net fees were $1.73 billion, Goldman said, up 21% from the second quarter of 2023, because of "significantly higher net revenues" from sources like leveraged financings and the underwriting of equity and debt. Solomon said debt underwriting revenues rose 39% to $622 million due to strong leveraged finance activity, which he said signals a return to private-equity dealmaking. "We are seeing a material increase in client demand for committed acquisition financing, which we expect to continue on the back of increasing M&A activity," he said. He also said he sees demand for generative artificial intelligence driving more dealmaking and client financing needs. Solomon's bullish outlook stands in contrast with recent comments from the CEO of another major Wall Street bank, Jamie Dimon of JPMorgan Chase. Though Dimon didn't participate in his bank's earnings call Friday, the CEO of America's biggest bank by assets lamented the state of the world and expressed concerns about threats to the economy in written remarks. "The geopolitical situation remains complex and potentially the most dangerous since World War II," Dimon wrote. He added that JPMorgan expects inflation and interest rates to "stay higher than the market expects" for some time," citing driving forces like fiscal deficits, infrastructure needs, and the "remilitarization of the world." And on the bank's earnings call, the bank's chief financial office pointed to several factors that could further cool mergers, as BI reported. Since Dimon's ominous commentary last week, the world has experienced another tremor: a shocking but failed assassination attempt on US President Donald Trump at a Pennsylvania rally over the weekend. Solomon addressed the event at the outset of Monday's call, calling it a "horrible act of violence." He turned later to how the results of this fall's presidential election could impact world markets. Whichever way the race swings, Solomon projected a sense that he's unfazed. "I can't see what the next 100 days leading up to our election will bring, but I think we're well positioned to serve our clients regardless of the environment," Solomon told an equity research analyst. "The clients are very active at the moment, and I'd think they are probably going to continue to be active." Financial sponsors -- an industry term for the funds that dispense private capital raised from investors rather than strategic corporate buyers -- have been in a holding pattern amid a series of interest-rate hikes by the Federal Reserve aimed at cooling runaway inflation. It's a big reason overall deal activity remains at levels that Solomon on Monday characterized as below historical 10-year averages. The firm's conversations with clients, however, prognosticate an about-face could be on the horizon, he added. "I think, especially given the environment that we're in, that you're going to see over the next few quarters in 2025 kind of a re-acceleration of that sponsor activity," Solomon continued, adding that he sees the next three to five years of M&A activity being flush with activity from these funds. Indeed, activity from financial sponsors is "starting to accelerate," he said. He expects to see more because investors -- known as limited partners, who contribute large pledges of capital to these investment vehicles -- are itching for their money to start generating returns. "We're seeing it in our dialogue with sponsors," Solomon said. "There's pressure from LPs to continue to turn over funds, especially longer-dated funds," he added. "I'm just not smart enough to tell you exactly which quarter and how quickly, but we are going to go back to more normalized levels." To be sure, some big deals have already been announced. On the strategic side, Goldman advised on the roughly $60 billion sale of the oil and gas company Pioneer to Exxon. In May, the firm also worked on a big take-private (in which a private-equity firm buys a publicly-traded company), helping the PE firm Permira buy website development company Squarespace for almost $7 billion. Solomon said Goldman also expects to benefit from the uptick in demand through its lending capabilities. "When there are more M&A transactions, whether it was financial sponsors or big corporates, there is more financing attached to that," he said. "People need to raise capital to finance those transactions. They need to reposition balance sheets. They need to manage risks, restructure transactions, and so there's a multiple effect as those activities increase." He concluded: "Our whole ecosystem gets more active as transaction volumes increase on the M&A side." Aside from private-equity appetites and a growing pipeline for lending, Solomon pointed to another force that will help boost business: The rise of generative AI. Goldman's board of directors just returned from a week in Silicon Valley, Solomon said, "where we spoke with the CEOs of many of the leading institutions at the cutting edge of technology and AI." His comments come as other top Goldman partners predict that the material impacts of AI could hit the bank's workforce as soon as 2025. "We all left with a sense of optimism about the application of AI tools and the accelerating innovation in technology more broadly," he said of the trip out west. "The proliferation of AI in the corporate world will bring with it significant demand-related infrastructure and financing needs which should fuel activity across our broad franchise."

Goldman Sachs CEO David Solomon Expects a 'Strong Landing' of US Economy

The bank executive also signaled his eagerness to embrace innovations across A.I. to boost productivity. In an encouraging sign for the robustness of the U.S. economy, Goldman Sachs (GS) today (July 15) reported that its profit skyrocketed 150 percent to just over $3 billion during the April-June quarter from a year prior, driven by strong growths in its investment banking and wealth management divisions. On a call with analysts, CEO David Solomon said that while inflation has remained "stickier than many had anticipated," the nation's economic environment "remains relatively constructive." Sign Up For Our Daily Newsletter Sign Up Thank you for signing up! By clicking submit, you agree to our <a href="http://observermedia.com/terms">terms of service</a> and acknowledge we may use your information to send you emails, product samples, and promotions on this website and other properties. You can opt out anytime. See all of our newsletters The bank's quarterly revenue came at $12.7 billion, up 17 percent from a year ago. About 44 percent of the revenue came from investment banking fees and asset and wealth management revenue, which saw year-over-year increases of 21 percent and 27 percent, respectively. Goldman shares rose 2 percent today on the results. On July 12, the Dow Jones Industrial Average topped 40,000 for the second time this year. Solomon told analysts that "markets continue to forecast a strong landing as the expected economic growth trajectory improves and equity markets remain near all-time highs." What are bank CEOs predicting for the economy? Goldman Sachs joins a chorus of major banks reporting strong second-quarter earnings and positive yet wary outlooks for the economy. JPMorgan Chase (JPM), the largest bank in the U.S., last week reported a 20 percent jump in revenue ($51 billion) and 25 percent profit growth ($18.2 billion) in the June quarter. In a press release, JPMorgan CEO Jamie Dimon noted that, despite cooling inflation, inflationary forces like large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization mean that "inflation and interest rates may stay higher than the market expects." Wells Fargo CEO Charles Scharf pictured a similar outlook on interest rates but is more optimistic about the economy. "Looking ahead, overall, the U.S. remains strong, driven by a healthy labor market and solid growth," Scharf told analysts on an earnings call on July 12. "However, the economy is slowing, and there are continued headwinds from still-elevated inflation and elevated interest rates." The fourth largest bank in the nation last week reported a quarterly revenue of $20.7 billion and a profit of $4.9 billion, barely changing from the year prior. And at Citigroup (C), where quarterly revenue rose 4 percent to $20.1 billion, the bank's CEO Jane Fraser (the only female leader of a major Wall Street bank) said on a conference call that "after a break in progress, inflation now appears back on a downward trajectory." Amid cooling inflation, the Federal Reserve has indicated plans to begin lowering interest rates this year. In May, Solomon predicted no cuts in 2024 amid sticky inflation and a resilient economy in May. "I still don't see the data that's compelling to see we're going to cut rates here," he said while speaking at an event at Boston College. Average Goldman Sachs employee got a 17 percent raise in Q2 Goldman Sachs today also noted that compensation, which includes bonuses, for its more than 45,000 employees rose by 17 percent to a total of $4.2 billion in the second quarter. The rise reflects "improved operating performance," noted the bank, which additionally signaled its eagerness to embrace emerging technologies like A.I. to aid its productivity in coding and communicating information to clients. Goldman Sachs' board of directors recently spent a week in Silicon Valley speaking to leading A.I. CEOs, Goldman told analysts, adding that "we all left with a sense of optimism about the application of A.I. tools and the accelerating innovation in technology more broadly."