Outlook: Getting it right second time around

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The Independent Online
IF AT FIRST you don't succeed ... Goldman Sachs is returning for a second stab at stock market flotation less than five months after its first attempt went belly-up. The speed with which the American investment bank has been able to dust off its plans in part reflects the remarkable recovery in equity markets which has occurred since then - not to mention the bank's own profits, which are said to have soared to a record $1.16bn in the first quarter.

But as those who are involved in the IPO are keen to stress, this is not about trying to hit the top of the market. If there's a stock market correction similar to the one that sank the float last time round, so be it. The float will still go ahead anyway. Only Armageddon will derail it this time round.

So what's changed? Most Goldman Sachs partners have become united in their belief that the way forward for the firm is through a public flotation - that if they remain a partnership they'll eventually become uncompetitive. Never mind the way it will enrich working and retired partners, flotation brings four basic advantages.

The first is that it solidifies the capital structure and makes it immune to the process of erosion that occurs in a partnership. Second, it allows the firm to cascade ownership rights through all employees, rather than confining them to a narrow group of partners. This brings a third, related advantage. It allows Goldman to pay its staff in shares.

Most American and European investment banks pay some proportion of staff remuneration in shares. If this path is blocked, as it is at Goldman Sachs, then the money has to be made up in other ways - mainly cash. In a high- earning people business like investment banking, this in turn can make the cost base uncompetitive. Fourth, and possibly most important, Goldman reckons it needs a currency with which to compete in the acquisition market.

All these rationales were true first time round, of course, but many partners appeared less convinced of them then. As a consequence they needed to be assured of the value of the float with the promise of real money - that their shareholdings would be worth a certain minimum amount as a result of the IPO. As the market plunged, it became impossible to deliver on those promises.

Goldman does not intend to repeat these mistakes. This time round, there will be no such guarantees. Partners are being asked to accept that the shares will be worth whatever the market values them at. This may seem a somewhat arcane difference, but it is none the less an important one, because it indicates that the firm is much more wholeheartedly behind the idea of a float than it was when the first attempt was made.

Even so, this is a big leap for Goldman Sachs, as indeed it is for equity markets. It's been a boom year for deals, so fee income accounts for a big chunk of earnings right now. None the less, profit from proprietary trading still dominates. It will be interesting to see what ordinary investors make of the flotation of what is, in effect, the world's largest hedge fund.