News: Analysis & Commentary: WALL STREET
A GOLDEN MOMENT FOR GOLDMAN SACHS?
Should it go public, the partners would divvy up billions
Yet again, the Goldman Sachs-is-going-public rumor is sweeping Wall Street. Never mind that Goldman Sachs & Co. is thriving as a privately owned partnership, posting eye-popping pretax profits of $1 billion on revenues of $2.5 billion in its fiscal first quarter.
A Goldman Sachs spokesman insists that the firm "has no plans to go public." Last December, Goldman Chief Executive Jon S. Corzine told BUSINESS WEEK that going public wasn't even on the agenda for 1998. Yet a strategy committee headed by Goldman President Henry M. Paulson Jr. is evaluating the firm's structure, possibly to make recommendations at the June 12 annual meeting. Some partners acknowledge that with the stock market at record highs, this could be a good time to float a public offering. Says one Goldman source: "There is a debate going on in the firm about whether to go public."SPREAD THE WEALTH? If Goldman decides to take that step, it would be a massive IPO. It's a "huge payday," says one investment banker. "The value unleashed is phenomenal." One good way to estimate the size of the deal is to use book value. Competitors Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. trade at 3.5 times book value. Thus Goldman, which has $6.3 billion in equity capital, the equivalent of book value, might be worth about $22 billion.
Such a deal would represent one of the biggest bonanzas any Wall Street firm has ever seen. More amazing still is that most of these riches would go to just 190 Goldman general partners. Say Goldman Sachs sold for $22 billion. The firm would first have to repay $2.2 billion to general partners and about $3.8 billion to various limited partners and a grab bag of firms and individuals with capital in the firm: Japan's Sumitomo Bank Ltd., Hawaii's Bishops Estate, and insurance companies, as well as retired general partners and nonpartner employees. But after paying back that $6 billion, Goldman partners would have $16 billion left to divide.
The division would be based on partners' ownership percentages, which range from about 0.25% to 1%. That would mean a cool $160 million for top brass such as Corzine. Junior partners would have to settle for something like $40 million.
However, that's only theoretical--and pretax. It does not take into account how the company would approach its post-IPO future. The 190 Goldman partners would want to spread the wealth to keep their fellow employees at the firm.
Goldman's general partners hold all the cards: Though they own only 36% of the firm's capital, they have 100% of the voting power. But they will probably compensate the firm's best nonpartners, from about 200 new nonequity-owning managing directors to senior vice-presidents. This could be done with stock or stock options. For example, when Robertson Stephens & Co. was sold to BankAmerica Corp. last June, its 60-odd partners set aside $70 million of their $433 million take for employees who were just below partner level to retain them.GENERATION GAP. Goldman partners may also want to placate the firm's limited partners, especially retired general partners. Dividing up the pie is sure to be painful. Says one banker: "The new guys always think the old guys don't deserve anything. The old guys say, `You just want to get rich quick, we built this firm."'
Goldman would probably do an IPO of about 15% of the firm, raising roughly $3.3 billion. The remaining 85% would stay in the hands of the general partners and others. Their partnership interests would be converted into stock.
The pain should be a lot less severe than it would have been in early 1996, when the firm last considered going public. That's because Goldman's demographics have changed dramatically. At the time, there were many new partners who owned very narrow slices of equity and who were vehemently opposed to going public. After three very good years, these partners have fattened their stakes. Just one more reason why the perennial Goldman-is-going-public rumor is coming around again.By Leah Nathans Spiro in New YorkReturn to top