Goldman to float up to 15% in autumn

News Analysis: Why the world's most successful investment bank is giving up 129 years of partnership
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IT'S OFFICIAL - Goldman Sachs, one of the oldest and most successful partnerships on Wall Street, is going public. Between 10 and 15 per cent of the bank is likely to be sold in the autumn, a development which could see the bank's 190 partners net a paper windfall of $80m each.

The bank plans to ensure all its employees gain from the initial public offering in some way or another, a move designed to try to preserve at least some of its unique partnership culture, a factor which some industry observers believe has been key to the bank's success.

In an announcement to staff, that in typical investment banking style was made in London over the bank's loudspeakers, Henry ("Hank") Paulson, said: "This action will meet a fundamental objective of the partners - to share ownership benefits and responsibilities more broadly among all of the firm's employees."

In a statement yesterday the bank said its six-strong ruling executive committee had "unanimously decided to propose an initial public offering". The executive committee decision followed a two-day meeting of the bank's partners, who expressed "overwhelming support" for a flotation.

Mr Paulson said the partners reached a consensus "after a lengthy, open and intensive dialogue in the best tradition of Goldman Sachs". Other sources labelled the two-day meeting "extremely emotional" - the partnership ethic is highly valued at the bank, and was until very recently staunchly defended by some of Goldman's most senior partners.

Why has the bank, which has resisted the temptation to float on at least six occasions, most recently in 1996, decided to plump for a share issue this time round? Greed, if you listen to the cynics. The heady ratings that banks are attracting mean a public offering would make even the most junior Goldman Sachs partner worth $50m, according to some estimates, and put a price tag on the firm of as much as $35bn.

The official line, however, is that the bank's ability to raise capital needs to be substantially and rapidly increased if it is to keep up with "bulge bracket" rivals such as Morgan Stanley Dean Witter, Merrill Lynch, Salomon Smith Barney and the newly merged UBS/SBC.

Mr Paulson told staff: "As a public company, Goldman Sachs will have the financial strength and strategic flexibility to continue to serve our clients effectively and to respond thoughtfully to the business and competitive environment over the long term."

Put simply, Goldman wants to raise the cash to make acquisitions, analysts say. "They had to do something because of the other bank acquisitions and mergers," said David Menlow, of IPO Financial Network, a Wall Street newsletter.

"Today you need much larger capital to be competitive," remarked Robert Denham, former chairman and chief executive of Salomon Brothers, when his firm was bought by Travelers, the US financial services giant, at the end of last year. According to Mr Denham, "$10bn is the minimum bar".

Goldman Sachs' capital currently stands at $6.6bn.

Among recent transactions that may have spurred partners to vote in favour of ending the partnership, several stand out. These include the creation last year of Morgan Stanley Dean Witter, which now has a capital base of $14bn, and the recentmerger of Citicorp and Travelers.

The purchase last year of London's Mercury Asset Management by Merrill Lynch for $5.1bn may also have weighed on the Goldman partners, according to industry sources. Michael Sears of Lehman Brothers is among those analysts who believe Goldman could use the money raised from its share issue to snap up a money manager.

Goldman's recent track record is another reason why the partners have chosen to move now. As Jon Corzine, Goldman's other co-chairman and co- chief executive, put it in a broadcast to staff prior to the weekend's meeting: "This issue [flotation] has been revisited often over 25 years under vastly disparate circumstances. It has been periodically considered in periods of relative weakness ... This is a period of great strength. Most of us in the leadership prefer having this discussion without the backdrop of anxieties of business or leadership stress."

The bank's recent successes were underscored yesterday by the release of second-quarter pre-tax earnings, up 70 per cent to $1.037bn.

Although Goldman's six-strong ruling executive committee have been sufficiently attracted by the virtues of a public offering to "unanimously" endorse it, there are some within the industry - including within the bank itself - who believe Goldman is putting the long-term future of the company at stake. They say the share sale could encourage partners to sell up and retire, and that the remaining staff are likely to be more motivated by short-term self-interest than the long-term health of the firm.

Top Goldman executives have tried to counter these concerns by stressing that all staff will receive shares in the company. Previous moves towards flotation have been scuppered by concerns that the inordinately large windfalls payable to the senior partners would generate resentment among the more junior employees.

Bulge bracket: top US debt managers

Proceeds ($bn) Mrkt share %

Merrill Lynch 118 17.4

Morgan Stanley Dean Witter 96 14.1

Goldman Sachs 89 13.1

Salomon Smith Barney 86 12.7

Credit Suisse First Boston 51 7.5

JP Morgan 44 6.5

Lehman Bros 39 5.8

Chase Manhattan 30 4.4

Bear, Stearns 21 3.1

Donaldson, Lufkin & Jenrette 15.6 2.3

Top 10 totals 591 87.0

Source: Reuters