Virtual Capitol Hill Week for Small Businesses...Digital Banking for Corporates...M&A Outlook

[Goldman Sachs]( [BRIEFINGS] June 17, 2020 Virtual Capitol Hill Week for Small Business Owners Above (L to R, clockwise from top): Goldman Sachs Chairman and CEO David Solomon, Darden Restaurants President and CEO Gene Lee, Tapestry Chairman and CEO Jide Zeitlin and Kohl’s CEO Michelle Gass Last week, more than 2,100 small business owners met virtually with members of Congress and other policymakers as part of Goldman Sachs’ [10,000 Small Businesses Voices Virtual Capitol Hill Week](. During the three-day program, which included 434 virtual meetings with congressional offices, participants heard from US Senators, mayors, CEOs, and healthcare experts on topics such as adapting to a new operating environment, preparing for a phased re-opening and the disproportionate impact of COVID-19 on black communities. Small business owners also shared their perspectives and concerns about the impact of the economic shutdown. While pointing to the Paycheck Protection Program (PPP) as a lifeline for weathering the worst of the pandemic, they emphasized that more flexibility and support is needed. This sentiment was echoed in a recent Goldman Sachs 10,000 Small Businesses [national survey]( in which 44% of respondents said that even though they received PPP funding, they are “very concerned” they would not be able to maintain payroll for more than three months if no further relief is provided. As part of the program, Goldman Sachs Chairman and CEO David Solomon spoke with the [CEOs of Darden Restaurants, Kohl’s and Tapestry]( about managing their companies through the crisis, as well as their views on the conversation around racial inequality. Jide Zeitlin, CEO of Tapestry, which owns Kate Spade, Coach and Stuart Weitzman, discussed a letter he recently sent to employees about racial inequality and the Black Lives Matter movement. “I wanted to send a message that this was a time to have conversations that they otherwise might not feel comfortable having,” Zeitlin said. “Because it was very clear that everybody—at least the vast majority of people in our organization, I suspect across many organizations—were trying to process what was going on, and the best way to do that was to talk.” Goldman Sachs has pledged an additional $250 million to fund the federal aid program to help small businesses hurt by the COVID-19 pandemic. The addition will take the bank's total commitments to $775 million. [Read more](. [Learn more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=test&body=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3D5i15ho3t9ho) How Digital Banking Will Simplify Corporates’ Financial Needs Although easy-to-use digital banking platforms have long been available to consumers, the technology has been slower to reach corporations, says Hari Moorthy, head of Transaction Banking for Goldman Sachs, who has led the build-out of the first-ever digital-only transaction bank, launched by Goldman Sachs this week. “The difference between consumers and corporates is one of complexity,” Moorthy explains in the latest [Exchanges at Goldman Sachs]( podcast. “Imagine a corporate having tens of hundreds of entities and hundreds and thousands of bank accounts across multiple countries, receiving payments in some cases from their clients in tens of millions and sending out payments to hundreds of currencies across hundreds of countries…For this to be simple for corporates, the fintechs need to have a huge balance sheet and very good relationships with corporates. And historically, they lacked it. Therefore, you can see the lagging of using modern technology in this area compared to many other consumer areas.” But this is changing, Moorthy says, driven partially by the firm’s own efforts to disrupt the sector. “From an industry perspective, this is the right time because we leapfrogged a whole generation of technology,” he says. “Even if you think about five years ago, the technology had not evolved to the point where it is today. One hundred percent of what we did was completely on cloud and the amount of security that we have today wasn't available just about three to four years ago. And the availability of using the data to modernize, to provide insights to our clients, and make it easy for them to run their treasury—it's the right time, right place, and the right firm to do it.” Listen to the podcast on [Apple Podcasts]( or [YouTube](. SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=test&body=) The Daily Check-In With Goldman Sachs More than 90% of the global student population has had to adopt online and remote learning methods since the pandemic began, and while many elements of face-to-face learning are likely to return in the coming months, the equation around higher education has likely changed, according to [Katherine Tait]( media and education equity analyst for Goldman Sachs Research. “Institutions are going to really rethink what they want their offering to be going forward,” explained Tait in a recent episode of The Daily Check-In With Goldman Sachs. “Some institutions will look to focus on price and utilizing technology to scale…and offer a much more affordable price ticket. [While others] will look to specialize and really double down their investment in particular subjects or particular faculty areas where they really have an area of expertise or a niche.” In other episodes of The Daily Check-In, [Tammy Kiely]( of the Investment Banking Division discussed the evolution of the semiconductor industry, while [Jason Granet]( leader of Goldman Sachs’ London Inter-bank Offered Rate (LIBOR) transition efforts, explained the latest developments in the transition from LIBOR to alternative reference rates. [Alain Durré]( Senior European Economist for Goldman Sachs Research, weighed in on the impact of the European Central Bank’s recent decision to expand its bond-buying program and [Michael Crinieri]( global head of Exchange Traded Funds within Goldman Sachs Asset Management, discussed the sectors of the ETF market that are seeing the strongest inflows and outflows during the economic shutdown. [Learn more]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=test&body=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DPUuP_6vgQsM) Briefly…on How COVID-19 Is Shaping the Global M&A Outlook After a decade-long bull run, mergers and acquisition activity slowed sharply earlier this year as global economies came to a halt. But there are signs of life in the M&A market as countries start to reopen, according to Michael Carr, Dusty Philip and Gilberto Pozzi, global co-heads of Goldman Sachs’ Mergers & Acquisitions business in the Investment Banking Division. They recently shared their outlooks on the year ahead. Michael, your team recently completed an analysis of M&A cycles over the past 30 years. How does the current downturn compare with past historical cycles? Michael Carr: Our analysis shows that there have been three significant M&A down cycles over the last three decades—in 1990 and 1991; in 2001 and 2002; and in 2008 and 2009. During each of those downturns, M&A volumes declined by about 50 percent over a two-year period followed by another three to six years before volumes recovered to their prior peaks. Of course, all M&A cycles are unique and this pullback is different than the most recent downturns. For one, event-driven downturns like the current one typically recover more quickly than ones caused by cyclical or secular forces. In addition, companies across sectors as well as financial services firms were generally in strong shape before this shock and, as a result, are well-positioned to act quickly as the economy recovers. To be sure, the uniqueness of this pandemic has far-reaching implications for industry profitability, valuations and deal structuring, among other things. Where are we in the current down cycle, and are you seeing any signs of a pickup? Michael Carr: While every cycle is unique, recoveries after severe downturns tend to follow three types of “waves.” The first wave is characterized by involuntary M&A deals, such as bankruptcy sales or forced asset sales to generate liquidity. These are largely board-instituted transactions that are done when companies have limited options and are just trying to survive. We believe we’ve entered the second wave of M&A, known as “near-in M&A,” where management teams are looking close to home for potential combinations or joint ventures as a way to reduce transaction risks. In April, for example, we advised Prudential Financial on the sale of its life insurance business in Korea to Korean financial services provider KB Financial Group. Mergers between similar companies or close competitors tend to create situations where realized synergies represent a larger percentage of earnings. The third M&A wave is when you see transactions geared to creating growth, such as acquisitions of non-core businesses and cross-border transactions. What could be different about the current down cycle and recovery? Dusty Philip: As Michael noted, we believe this current down cycle is likely to be relatively short-lived and, based on our conversations with clients, we expect a meaningful pickup in the second half of this year. Private equity—which is sitting on an estimated $1.5 trillion of dry powder—is taking a larger, more active role in this environment, especially private investments in public equity. In previous downturns we have seen significant pent up demand for M&A transactions drive a higher level of strategic activity during the recovery. We expect all-stock transactions to predominate as this structure allows both parties in a transaction to benefit in the upside as the economy recovers. How will the pandemic shape the types of deals that we’re likely to see? Dusty Philip: We continue to see a high level of strategic ambition from clients, although we anticipate that strategic priorities will shift as a result of the pandemic. Several trends that have been in place for years have accelerated over the last few months. In particular, clients are likely to prioritize technology investments in response to accelerated digitalization in many industry sectors. Also, we have seen an increased emphasis by clients on ESG issues during this downturn with particular emphasis on employees, diversity and the environment. How has the pandemic affected global M&A trends? Gilberto Pozzi: Prior to COVID-19, we had already seen a slowdown in cross-border transactions, a pickup in domestic consolidation and a move toward protectionist strategies. COVID-19 accelerated those trends. Today, we’re seeing more governments across the world tighten the rules on foreign investments in prized firms and sectors in their countries. And in China, where concerns over tariffs and trade had been rising last year, we expect to see a rise in domestic consolidation and a more challenging backdrop for outbound M&A. What’s your outlook going forward? Gilberto Pozzi: With the equity and debt markets stabilizing, and based on our dialogue with clients, we expect to see more M&A in the second half of this year and in 2021 with volumes returning to pre-COVID levels. Many transactions have been put on hold rather than cancelled, and therefore we expect those deals to come back once the conditions are right. Large companies, for their part, are weathering the crisis better than smaller ones, while in Europe—which still needs to deal with Brexit—we expect to see more efforts to create national and European leaders. 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