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Friday, September 29, 2006

Goldman Sachs (GS) On Fire

By Yaser Anwar, CSC of Equity Investment Ideas

Goldman Sachs, Wall Street's Gold Standard, is on fire. Not only did it report stellar results, the stock has crossed crucial resistance at 169.5 by closing one point up today at 170. I'd like to quote some excerpts from two good WSJ articles:

In "Goldman Sachs Leads Pack Of Investment Banks in Asia"

Wall Street titan Goldman Sachs Group Inc. was the top-earning investment bank in Asia excluding Japan in the first nine months of the year, with estimated revenue topping $224 million, according to capital-markets data provider Dealogic PLC.

China-related fees jumped to $681 million from $416 million a year earlier because of huge initial public offerings and M&A deals. UBS earned $108 million in China, followed by Goldman Sachs with $98 million and Bank of China International with $72 million.

Goldman Sachs was also the top earner of equity revenue for the region, earning $170 million and advising on $20 billion of deals. It was followed by UBS with $145 million, after the bank worked on deals valued at $19 billion. Equity-related income is up 31% over a year earlier, Dealogic said.

In "Goldman to Reap Handsome Profit On Chinese IPO"

When China's biggest bank completes one of the world's largest stock offerings ever, one Wall Street firm stands to make buckets of money -- and not because it is managing the deal.

It is because in May, Goldman Sachs Group Inc. invested $2.58 billion for a 5.75% stake in Industrial & Commercial Bank of China, the broker's single-largest investment of all time. When ICBC, as the bank is known, lists its shares on the Hong Kong and Shanghai stock markets next month, the value of Goldman's stake could double based on current demand for the offering.

Goldman's profits in ICBC are all on paper because under its agreement the firm can't sell the shares for three years. And its investment made it lose out on a substantial underwriting opportunity. Based on the 2.5% underwriting fee charged on China's other jumbo bank IPOs, the five investment banks managing the international portion of the transaction could divvy up as much as $350 million in fees.

With ICBC, Goldman is looking to forge a closer relationship with the country's biggest bank by assets, which claims 2.5 million corporate customers and 150 million personal customers across 18,000 branches.

In 1994, Goldman and Morgan Stanley each invested $35 million in Ping An Insurance (Group) Co. Last year, the two rivals sold their combined 9.91% stake for $1 billion.

"For a U.S.-based investment bank to align itself strategically with one of the major players in China, that's a great relationship," says Glenn Schorr, an analyst at UBS AG in New York. "In the worst case, they make a boatload of money on it."

In the worst case? Wow, that is one worst case scenario I like! I can only imagine the best case then.

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