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Goldman Sachs Acquires Morgan Stanley

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I. Company Introduction

 Goldman Sachs

The Goldman Sachs Group, Inc.(NYSE:GS) is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals.

Goldman Sachs was founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world. It has four business segments:investment banking, institutional client services, investing and lending, and investment management.

Goldman Sachs' former employees are also a glance, including Robert Rubin and Henry Paulson who served as US Secretary of the Treasury, respectively, as well as Mark Carney, the governor of the Bank of Canada since 2008, Mario Draghi, governor of the European Central Bank and Mario Monti, the Prime Minister of Italy.

 Morgan Stanley

Morgan Stanley is a global financial services firm that, through its subsidiaries and affiliates, provides its products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. Morgan Stanley was originally incorporated under the laws of the State of Delaware in 1981, and its predecessor companies date back to 1924. The Company is a financial holding company regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. The Company conducts its business from its headquarters in and around New York City, its regional offices and branches throughout the U.S. and its principal offices in London, Tokyo, Hong Kong and other world financial centers. At December 31, 2011, the Company had 61,899 employees worldwide.

Morgan Stanley provides securities products and services to customers, including corporations, governments, financial institutions and individuals. The company operates in three business segments: Institutional Securities, Global Wealth Management Group, and Asset Management.

II. Goldman Sachs motivation for the acquisition

 The Issues for Goldman Sachs

Goldman Sachs is the most famous investment bank not only in Wall Street, but also in all over the world. Every financial graduation students wish to work here and a large number of famous bankers came from them, which makes Goldman Sachs likes the Mecca of investment banking industry. However, after financial crisis in 2008, all of the investment bank are in trouble and during the European debt crisis, world economy is going worse. It is indicated by Thomson Reuters that most of investment banks income decreased comparing with the first three quarters with the same time in last year. And so is Goldman Sachs.

From the chart below we can find that although Goldman Sachs is one of the best investment bank, it does not as obvious advantage as we thought. So if I were the Goldman Sachs' CEO, I definitely find a M&A opportunity and try my best to persuade board members approving the proposal.

And from the chart showing that JP Morgan and BofA Merrill Lynch is ahead of Goldman Sachs and Morgan Stanley. This is because JP Morgan and Merrill Lynch are mixed financial companies, including both commercial banks and investment banks. But if Goldman Sachs and Morgan Stanley combine together, it will be the largest investment bank to enhance its ability for survival.

Data from Jan 1 2012 - Sep 26 2012 and Jan 1 2011 - Sep 26 2011

Data as of Sep 26 2012

 Morgan Stanley's Trouble

From the view of Morgan Stanley, it barely broke up during the financial crisis while it grew fast in the last few years. However, they were trapped into Facebook's IPO recently and there is a rumor that Morgan Stanley may lose a few billions in this case. Even this is not true, it also alerts its investor and management team that how fragile Morgan Stanley it is during the bad economic condition. The best way is getting together for heating. However, if corporate with commercial banks, the only ending is to be purchased like Merrill Lynch as commercial banks enterprise value and cash flow are much higher than investment bank. So this is not best strategy for both Goldman Sachs and Morgan Stanley. In the end, the last choice is these two huge banks marrying together.

III. Comparable Company Analysis

For valuing Morgan Stanley, I will use two ways, first is comparable company analysis (CCA) and the second is discount cash flow model (DCF).

In the CCA model, I selected top ten investment banks which is listed on the overhead charts and the financial ratios are all from Google Finance for consistent. There are three ratios for comparing, EV/Revenues, EV/ EBITDA and Price/EPS. However, I will use the P/E ratio for comparing as most companies' enterprise value (EV) are negative. And the results are listed as follows:

Name Symbol Stock price Mkt cap EPS P/E Beta

Goldman Sachs Group GS 117.7 55.31B 10.39 11.32 1.38

Morgan Stanley MS 16.25 32.08B -0.46 - 1.59

JPMorgan Chase & Co JPM 40.73 154.83B 4.71 8.65 1.32

Bank of America Corp BAC 9.77 105.30B 0.36 27.32 2.32

Citigroup Inc. C 35.77 104.90B 2.38 15.03 2.6

Credit Suisse Group CS 22.65 29.28B 0.08 273.22 1.4

Deutsche Bank AG DB 42.3 39.17B 3.9 10.85 2.21

Barclays PLC BARC 249.1 30.49B - - -

UBS AG (USA) UBS 15.38 57.61B -0.18 - 1.71

Wells Fargo WFC 32.59 171.56B 3.19 10.23 1.32

As Morgan Stanley's EPS are negative, it is hard to calculate its P/E ratio. But analyzing its market capitalization of 32.08 billion, it is not as high as we thought. And its 1.59 beta which is higher than Goldman Sachs's 1.38 and JP Morgan's 1.32, which means its risk is also a little higher than its main competitor.

And the following chart is the accomplished deal on investment bank industry's M&A, it indicates that during different time, its dealing price changed huge. In good economy situation in 2000 and 2004, the price is much higher than 2008 in financial crisis, except for Bank of America mergered



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