BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE
FINANCE

Goldman Sachs: How Public Is This IPO?
The deal is a smash--that ensures tight control

On May 4, Wall Street could talk of little else. The long-awaited Goldman Sachs Group initial public offering raised $3.6 billion, making it the second-largest IPO ever. The deal put the market capitalization of the 130-year-old investment bank at a healthy $33 billion. On the first trade, Goldman's freshly minted 69 million shares zoomed from 53 to 76 per share, before closing the day at 70 3/8. ''Without any doubt, it was absolutely a stellar success,'' says one non-Goldman banker who was close to the deal. ''To have priced this much paper--and as a nontechnology IPO--is incredible.''

But don't be fooled. While Goldman is now public, it is still very much the same intensely private partnership that it has always been. To be sure, Goldman has a new GS stock symbol and the acquisition currency to execute its global ambitions. In fact, Goldman is set to launch a major corporate-image advertising campaign in the near future. But despite a new board of directors, Goldman will continue to be managed by its employees, for its employees--with a few public shareholders allowed to climb aboard for the ride. Says one insider: ''We're going to let you in. Now shut up and sit back and we'll let you know how much you made.''

''INNER CIRCLE.'' Goldman is hardly behaving like a public company that accepts the normal give-and-take of shareholders, competitors, and the press. It maintained unprecedented control over the placement of its stock. It even tightly controlled the ceremony at the New York Stock Exchange, where Goldman Chief Executive Henry M. Paulson Jr. rang the opening bell to celebrate the first day of trading. Instead of the usual publicity fest, no media were invited. Only Goldman cameras taped the event for a live feed to Goldman employees.

Some argue that Goldman is now even more tightly controlled. Its 17-person management committee is in charge, while the broader group of 221 partners who voted on major decisions are now less powerful. ''The only ones who will count is the inner circle,'' says the same insider. ''For the rest of the managing directors, it will be the same as if they worked for Chase.''

By far the biggest chunk of Goldman--some 48.3%--is still owned by the 221 former partners (table). The largest single owner is former CEO Jon S. Corzine, who owns 0.9%, now worth $305 million. Paulson owns a 0.8% interest. The next biggest chunk, some 21.2%, is owned by Goldman nonpartner employees. Some 17.9% is owned by retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Hawaii's Kamehameha Activities Assn.

That leaves 12.6% of the stock for the public. But on closer inspection, few of the public shareholders were folks who happened to be lucky enough to snare a few shares. First of all, in a stunning break from decades of underwriting tradition, Goldman dissed its entire syndicate of 12 co-managers, from Morgan Stanley Dean Witter to Merrill Lynch & Co., by paying them millions to do nothing. Usually, co-managers get paid to sell a set allocation of the total stock to their customers. Instead, Goldman allocated no stock to any of its traditional competitors, placing almost every share in the hands of its own customers.

FRIENDLY INVESTORS. Of the 25% of the stock that went to retail customers, some 20% went to the clients of Goldman's elite rank of 420 brokers, who serve only the wealthiest of the wealthy, competitors estimate. The remaining 5% went to Wit Capital, of which Goldman owns 20%, and GS-Online, which Goldman just launched in April to act as an underwriter of IPOs via the Internet.

Goldman's purpose in controlling the process so tightly? Some rivals say that its main motive was to price the stock low enough to ensure that it would appreciate greatly and thus trade at a premium to its two competitors, Morgan Stanley Dean Witter and Merrill Lynch, at least initially. Sources close to Goldman say that the goal was to place stock with long-term investors and friends. Says one: ''This is our company and our stock.''

By Leah Nathans Spiro in New York

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