Goldman Sachs gives the go-ahead for $25bn float

GOLDMAN SACHS, the Wall Street investment bank, said yesterday that it is to make a renewed attempt to float the business in May.

However, the changed market conditions and the more mixed outlook for investment firms, means the firm is likely to be valued at around $20- 25bn - roughly a third below the levels anticipated when the partners first voted to ditch their partnership status last June.

The decision to go ahead with the initial public offering (IPO) will be formally ratified by the firm's partners at a meeting on Monday with a view to completing the sale of 10-15 per cent of the business to investors.

Insiders say the partners are determined not to repeat the fiasco last autumn when the IPO was pulled at the last minute in the wake of the stock market collapse. They have structured the deal so that it can still go ahead even if share values fall.

The revival of Goldman's plan for an IPO follows a strong rebound in financial markets after the turmoil which led the firm to withdraw its original flotation plan last October.

The prospectus, which is expected to be filed with the US Securities and Exchanges Commission before the end of this month, will at least partially lift the veil of secrecy concerning the personal fortunes of the firm's 345 partners - the charmed circle of senior employees and ex-employees who own the majority of the 130-year-old firm.

In the UK, these include Gavyn Davies, the firm's chief international economist, a close personal friend and former adviser to the Chancellor Gordon Brown, the former head of the World Trade Organisation Peter Sutherland, and Simon Robertson, the former head of Kleinwort Benson.

The float will give the 220 working partners paper worth $45m on average, although for some of the more senior partners the effective values of their personal holdings will be more than $100m apiece.

In a statement following a meeting of the firm's management committee yesterday, the co-chairmen Jon Corzine and Henry "Hank" Paulson said: "We have recommended that the firm become a public company to secure permanent capital to grow, to share ownership among our employees and to permit us to use publicly traded securities to finance strategic acquisitions that we may elect to make in the future."

The most immediate beneficiaries of the IPO will be the firm's 16,500 staff who will be offered stock for the first time.

The last major Wall Street firm to go public was Morgan Stanley which came to the market in 1986.

The majority of the equity to be sold will be new shares. Both the partners and the employees will be locked in for three to five years. However, there are two outside shareholders Sumitomo, the Japanese bank, and the Kamehameha Activities Association, an educational trust founded by the Hawaiian royal family who between them own around 20 per cent of the firm and who have been asked to sell part of the shareholding.

The proceeds of around $2bn will be used mainly to recapitalise the firm. The 125 limited partners, mostly former employees, will receive both cash and shares while the 220 working partners will receive just shares.

Goldman's financial results for the first quarter of 1999, due out in a fortnight's time, are likely to confirm the strong rebound in the firm's fortunes since the end of last year.

Insiders say the firm will announce earnings before tax and partners' remuneration but before provisions have reached a new record of $1.16bn, topping the $1bn notched up in the second quarter last year.

The cancellation of the IPO was a huge embarrassment to the firm. It sparked months of internecine strife which resulted in Jon Corzine, the senior partner who was one of the strongest advocates of the need for the firm to go public, being sidelined in favour of his two most vociferous opponents John Thornton, previously head of the Asian business and John Thain, the firm's chief financial officer.

The two were formally made chief operating officers and have effectively taken over the running of the firm.

Insiders say that following the squabbling that marred the firm last year, the firm is now united behind the new leadership. "The trouble was that before that the IPO was seen within the firm as an end in itself," one insider said yesterday. "Now it is seen as an integral part of the future strategic plans for the firm."

The key difference in the way the IPO is structured this time is that limited partners will no longer be guaranteed a minimum value for their shareholdings. The fact the outside partners were given his guarantee and refused to have it revoked when share prices tumbled last autumn was one of the key reasons why the float had to be pulled.

Goldman partners say the purpose of coming to the market is not primarily to raise cash at this stage. The firm wants to be on an equal footing with publicly-quoted rivals such as Merrill Lynch and Morgan Stanley, which are able to readily access the equity markets for capital.

The firm also hopes that by offering all employees equity in the firm it will be able to break down the us and them barrier between employees and partners. However, many analysts believe that Goldman's partners are ill-prepared for what life as a publicly-quoted company will be like.

As well as losing some of the mystique that has given Goldman's a unique position in investment banking, the firm and its senior executives will find their affairs exposed publicly and subject to scrutiny by analysts and the financial press.

t 220 partners are each worth an average of $45 million

t 16,500 employees - including the tea ladies - will be given shares

t Shareholders will be locked in for up to five years

t Float will go ahead even if the stock market takes a tumble

How a Hawaiian trust saved the bank

THE LARGEST outside shareholder in Wall Street's most illustrious banking firm is an obscure trust set up by a descendant of the Hawaiian royal family to provide schooling for the islands' people.

The trust, named in Goldman's abortive filing last autumn as the Kamehameha Activities Association, acquired its 11 per cent Goldman's stake - now worth $2bn - after ploughing $500m into the firm when it ran into trouble in 1992.

It was founded in 1884 by Princess Bernice Pauahi Bishop, the last direct descendant of Haiwaii's royal Kamehameha line, as an educational trust.

In the 1980s with its assets now worth billions of dollars, the trust was diversifying madly. It sold its land holdings and started investing in other things.

It is now said to have more than $10bn of assets and investments in everything from golf clubs to savings-and-loans - the American equivalent of mortgage banks.

In 1992 when Goldman's hit disaster, the trust came to its aid. Goldmans, which was a big player on the bond markets, was badly caught when the US Federal Reserve, America's central bank, unexpectedly raised interest rates sending bond markets reeling.

The firm sustained heavy losses and had to raise fresh capital in a hurry. Unwilling to go to the capital markets which would have forced the firm to reveal to competitors precisely how bad things were, Goldman's cast around for a sympathetic partner from outside Wall Street whose discretion would be assured.

The trust willingly came to its rescue paying $250m for a stake, followed by another $250m two years later, emerging with an 11 per cent stake.

The experience was a deeply humiliating one for Goldmans' partners and was crucial in convincing Jon Corzine that the firm had to go public, and do so from a position of strength.

- Andrew Garfield

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