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May 22, 2006

The future of investment banking according to Goldman Sachs

Bloomberg columnist Mark Gilbert quotes Goldman Sachs's annual report to provide a glimpse into "the future of investment banking". The key messages are that investment banks need to take more risks, commit more capital to their business, and start investing in the deals they recommend to their clients.
Why spend all those hours hunting for underleveraged balance sheets, mastering cunning tax wrinkles or crafting sale-and-leaseback deals just to give away all the gravy to corporate customers in return for a handful of fees? The Goldman imprint, though, is becoming ubiquitous in the M&A deals flooding the market this year. That suggests Chief Executive Officer Henry Paulson has been quicker off the mark than his competitors in putting Goldman's money where the firm's mouth previously was.

So far this year, Goldman has had a thick finger in buyout pies, including a $3.8 billion bid for Associated British Ports Holdings Plc, a $9 billion offer for U.K. broadcaster ITV Plc, $4.5 billion to buy real estate from German retailer KarstadtQuelle AG, $8.8 billion for a stake in General Motors Corp.'s commercial- mortgage unit, and the $3.4 billion purchase of Education Management Corp., which sells education courses.

The days when a bank could earn a crust by mediating between buyers and sellers are ending. Electronic trading makes it easier to find out what the other guy is willing to pay for the thing you would like to sell, or vice versa. There's no low-hanging profit left in the price-discovery process.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.