Goldman Sachs Could Double Its Assets By Acquiring Deutsche Bank

For Goldman Sachs (NYSE:GS), it was a tough 2011 but they held their own. On the plus side, the firm took back its title as the world’s leading underwriter of initial public offerings and it led banks in arranging corporate mergers. They saw total IPO volume fall 40 percent and the number of mergers and acquisitions decline by 6 percent, according to Thomson Reuters.

Goldman also had suffered from investment banking fees dropping by 11 percent, which represented the greatest drop for the top-tier banks and a contributing factor from August’s 45 percent stock drop. Looking ahead to 2012, what can the firm do to improve numbers? It’s going to be a tough year with the euro zone debt crisis and tighter regulation on firms such as Goldman. One option is the wait and see approach which seems to be favored by Chief Executive Lloyd Blankfein who said in November,“The world will snap back, and it’ll be a surprise, and it’ll be fast–er than people think.”

That’s an optimistic view but management consulting firm McKinsey&Co. thinks more should be done. In a recent report, Why U.S. Banks Need a New Business Model, they wrote,“Investors want to see the management teams of banks propose credible, far-reaching plans” to boost returns above their cost of capital, according to Crain’s New York. Maybe it’s time for Goldman to follow the advice it gives companies: acquire a rival.

Purchasing a Bank

Big banks such as JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) grabbed big fees from making loans. Commercial banking hasn’t been part of Goldman’s focus but in 2008, its board discussed acquiring Wachovia, according to Crain’s, but managing a big retail branch network doesn’t seem like a Goldman thing to do.

But there is one interesting option out there that provides a banking opportunity without a retail aspect: buying CIT Group (NYSE:CIT), a bank that specializes in business lending and has $45 billion in assets. And there’s also that little Goldman connection: its CEO is former Goldman President John Thain.

Another option as cited by Sanford C. Bernstein analyst Brad Hintz is Goldman to look at asset management. This could be done by acquiring either for sale Deutsche Bank’s (NYSE:DB) asset management unit or Charles Schwab (NYSE:SCHW).

From this type of transaction, Goldman could double assets under management ($820 billion) by acquiring the Deutsche arm, which is currently reviewing offers. With a Schwab transaction, Goldman could see a $59 billion in balance-sheet assets along with a national brokerage network that brings customer accounts at $1.6 trillion. But Goldman could really benefit from Schwab’s stock and bond 8.5 million customer orders.

Before Goldman goes on a buying binge, they need to figure out how to pay for an acquisition. Its declining stock price could make financing difficult. There is a cash option but Schwab (NYSE:SCHW) could pose a challenges with its $15 billion market value.

Further Reading: Dow 30 Stocks: 2012 Quarterly Earnings Preview>>

To contact the reporter on this story: Debbie Baratz at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com