Chief operating officer Gary Cohn says Goldman Sachs remains ‘very committed to our Canadian footprint.’Fred Lum/The Globe and Mail
Companies may not be interested just yet in wading into the mess that is Europe, but the chief operating officer of Goldman Sachs Group Inc. says that the continent may be the next target for North American companies as they look to expand abroad.
At the moment, the merger business is driven by companies looking to buy one another and cut costs, Gary Cohn said this week in an exclusive interview in Toronto. While companies are not keen on Europe, Goldman is encouraging clients to look beyond the current economic malaise there.
"Right now people are saying 'Europe's in a tough spot, don't invest in Europe,'" Mr. Cohn said. "But we're saying you've got to be in Europe for the long term. There are still great companies and it's [Europe is] still the size of the U.S. and you have got to look at those opportunities."
One driver of North American money flowing to buy European companies may be a falling euro. If the currency continues to weaken against the U.S. and Canadian dollars "there will probably be North American companies looking to invest in European companies because the cycle in Europe will turn."
Goldman has a priveleged view into the future of mergers and acquisitions activity. The New York-based securities firm is atop the rankings of busiest merger advisers globally. Goldman has worked on announced transactions valued at almost $750-billion (U.S.), about $100-billion more than its nearest competitor Morgan Stanley.
For the moment, not as much of that global merger activity is in Canada as in previous years. Much of that is cyclical, as mining and metals deal-making activity is quiet because of falling commodities prices.
While Canada is not as busy for bankers as it has been in the past, Goldman is doing well here. Mr. Cohn said the firm has no plans to shrink its emphasis on Canada. Historically, the view on American firms in Canada is they came when it was hot in Canada, and retreated when it is not. Goldman is anxious to counter that perception.
"We are very committed to our Canadian footprint," he said.
One key for Goldman's Canadian business will be the outlook for the oil price. The firm has worked to increase its presence in Calgary and ensure it gets its share of work on oil-patch deals. But with crude sliding, the outlook for transactions in energy is muted until the market finds its footing.
Mr. Cohn, whose background lies in commodity trading, has a very simple view on the oil market and the hard and fast slump in the price of crude. His explanation has nothing to do with speculators or hot money.
The crude price is simply a view on the global economy, and that economy is slowing, he says.
"Too much supply, not enough demand," he says. "In the oil market there's no place to hide."
For Goldman, in addition to mergers, what drove its global profits in the most recent quarter was a rebound in its trading business in the areas of fixed income, currencies and commodities (FICC). Goldman made a decision to stick it out in bond trading, an area in which some competitors scaled back because of higher costs imposed by regulatory rules and doubts about the future of the business.
Last quarter, that decision paid off as market volatility boosted the business. The question now is whether investors and analysts will place a value on earnings that come from FICC, which is sometimes derided as an unpredictable business.
"I don't know what the analysts per se want," Mr. Cohn said. "There were many quarters when they [analysts] said FICC was missing, so we are not going to give them a higher multiple. Now FICC comes back and they say it's just FICC. What we are is a diversified set of businesses."
Mr. Cohn's position has been that even though Goldman may no longer be able to earn the same returns as before the crisis, when firms could use more leverage, today's lower risk returns ought to be worth more to investors. But that involves convincing investors that earnings from areas such as FICC are sustainable, and that Goldman as a whole is built to perform no matter how markets are doing.
Mr. Cohn acknowledged that it's a long process to educate investors about what the new, postcrisis Goldman Sachs looks like.
"We would like people to accept us for what we are, and we think we have got a competitive advantage in the businesses we're in and we are going to try to dominate those businesses."