Goldman's Big Day and the Even Bigger Tobacco Merger

Smoke on this. The U.S. tobacco industry got shaken up like a tin of Skoal as Reynolds American (RAI) agreed to buy its smaller competitor Lorillard (LO.DL) for $27.4 billion. Shares of both companies suffered inflammation, falling more than 6% because investors think the cigarette industry is a dying one -- but Reynolds believes being big will help it stay relevant.

 

This is no simple "roll-it-up" acquisition, because a whole bunch of tobacco companies got in for a puff. Imperial Tobacco Group spent $7 billion as part of the deal to buy brands Kool, Salem, and Winston and a North Carolina manufacturing plant from Lorillard. Plus, British American Tobacco, which owns 42% of Reynolds, spent another $4.7 billion to maintain control of the company.

 

The big surprise is that Reynolds was willing to sell off blu e-cigarettes as part of the deal. Reynolds now owns major brand names Newport and Camel, but the e-cigarettes market has been on fire ever since convincing a whole new generation that water vapors coming out of your mouth look cool. 

 

The takeaway is that the deal has taken over a year to close, but it's the most significant event to happen to tobacco giants since Cosmo Kramer sued on Seinfeld. The new tobacco company is expected to give some competition to Altria Group (owner of Philip Morris), whose Marlboro brand makes up nearly half the cigarette sales in the United States.

Shares of Goldman Sachs (GS -1.20%) rose over 1% Tuesday after the company reported solid earnings -- clearly, the summer interns and associates at the New York-based investment bank have been doing a good job getting their bosses quality coffee.

 

What were the numbers? Solid (gold). Second-quarter revenue rose 6% to $9.13 billion, crushing the $7.97 billion Wall Street expected, with a hefty profit of just over $2 billion. Although trading revenue from fixed income, currencies, and commodities fell 10% from last year, that's less than the drop JPMorgan and Citibank experienced.

 

The takeaway is that in late May, Goldman President Gary Cohn warned that it might be a tough quarter. The big shiny positive for the bank came from a 15% jump in the investment banking division, with $1.78 billion generated from stock underwriting for IPOs.