Wall Street dealmakers say Goldman Sachs Group, Inc., may be looking to expand even further into the retail banking business with a major acquisition or merger in the next year that would catapult the white-shoe firm into the business of bringing investment advice to Main Street, FOX Business has learned.
Investment bankers say that senior executives at Goldman have privately discussed the possibility of two major deals: One involves the acquisition of retail brokerage E-Trade Financial Corporation, and the other involves a tie-up with retail banking powerhouse U.S. Bancorp.
Both deals may be a long shot. People say there are no formal discussions inside Goldman to mount merger talks with either party, even if the notion that Goldman would enter into a deal with E-Trade and U.S. Bancorp has been discussed at senior levels. One person close to the matter says E-Trade had shopped itself but Goldman at least once passed on any acquisition, though it’s unclear if the firm would be a buyer at the right price at a later date.
Either move would be significant for Goldman, which built a legacy of serving the investment needs of big companies, the super-wealthy and by trading securities by leveraging its own balance sheet. This business model made Goldman one of the most profitable firms on Wall Street.
But now, Goldman’s business model is under assault and its profitability and size have been shrinking. So-called proprietary trading, once the lifeblood of Goldman’s profit engine, has been curtailed by post-financial crisis regulations. Meanwhile, the profit margins on advising companies on financings have been shrinking, putting pressure on CEO David Solomon.
With that, Goldman has been making a slow but concerted effort to serve small investors where profit margins can be bigger because of the scale of the customer base. In 2016, Goldman launched its online consumer bank Marcus.
Some investment banking sources say Goldman’s next move will have to be a more dramatic play to branch out into the retail business. E-trade has $346 billion under management and more than 3.5 million accounts, while an acquisition of U.S. Bancorp would provide Goldman with 18.7 million customers and 3,000 branch locations. Goldman’s consumer banking play, Marcus, has over 1.5 million customers but has failed to turn a profit — losing $1.3 billion since its 2016 launch.
In fact, people inside Goldman have long contemplated a merger with U.S. Bancorp, but its market capitalization of $92 billion is roughly the same as Goldman’s $77.2 billion, meaning Goldman may have to give up significant management power in any merger, bankers say. The E-Trade deal would clearly put Goldman into the lead management role since the online brokerage has a market value $9.4 billion, but Goldman isn’t sold on the notion of expanding into discount trading of stocks and bonds by consumers as its future, people with direct knowledge of the matter say.
A Goldman spokesman had no comment; spokesmen for E-Trade and U.S. Bancorp didn’t respond to requests for comment.
“It would make sense for E-Trade to marry a company who can sell many more products to their customers… there is a good deal of logic to this merger,” Dick Bove of Rafferty Capital Markets tells FOX Business. In terms of a tie-up with U.S. Bancorp, Bove said: “The economics say the two companies have to merge.”
Financiers believe Goldman needs a significant deal to gain size and scale to compete against other megabanks like JPMorgan Chase, which has a market value of $400 billion. Acquiring E-Trade or merging with U.S. Bancorp would be one of the quickest ways for Goldman to scale its consumer lending arm by providing Marcus with a wealth of new customers.
Likewise, retail brokerage companies are in the process of adjusting to their own issues — and consolidating. As investors have moved away from trading stocks and bonds and instead are increasingly buying index funds and exchange-traded funds, discount brokerage profits have been squeezed. Making the profit environment even tougher: Firms such as E-Trade, TD Ameritrade and Charles Schwab Corporation have struggled to stay competitive with the advent of no-fee brokerage apps like Robinhood.
As FOX Business reported Thursday, the profit squeeze has prompted merger talks between Schwab and TD Ameritrade in a deal potentially valued at $26 billion.