Goldman Sachs IPO

Case Analysis
Presented by:
Group-7
Rohit Saha IPMX07048
Varun Mittal IPMX07065
Varunesh Puri IPMX07066
Vikas Mehrotra IPMX07068
Vivek Bhatnagar IPMX07069
Submitted to: Prof. M. Akbar
Why Goldman Sachs has enjoyed the greatest
reputation among its peers?
Quality talent acquisition and retention: Personal sense of excellence, ownership and the urge
to go that extra mile
Refusal to pursue hostile deals
The firms ability to cultivate a first-rate client list, composed of the top corporations in the US
Living by the Fourteen Commandments. Goldmans Values: teamwork, long term client
relationships, integrity, honesty and reputation
Long term relationships are valued more than short term profits
Less tolerance for nonconformist behavior



Why it took so long to decide on the IPO issue?
Lack of consensus among partners and various committees that
were formed to oversee the companys operations
Agency problem Partners not willing to let go of annual profit
sharing on pretext of preserving organizational culture
Dilution of voting rights of partners
Increased regulatory scrutiny
Different risk preference of partners and public shareholders.
Doubt that going public will dilute the companys culture and
diminish the firms employee retention power
An irreversible process





Did Goldman Sachs had enough capital to grow?
Can it grow faster enough to retain its position?





Borrowing from Sumitomo Bank and Bernice Pauahi Bishop Estate every few years to sustain
their current growth rate which led to shrinking of Goldmans Equity.





Did Goldman Sachs had enough capital to grow?
Can it grow faster enough to retain its position?










Investment Banking business was moving towards Asset Management and it was the only
business where Goldman Sachs was not in top 3 and to expand it had to grow its capital for
geographic and customer base expansion.





Company
January 1, 1997
Capital ($ billion)
January 1, 1998
Capital ($ billion)
% Change in
Capital from
'97 to '98
Number of Location Costomer
Accounts
(000s) Domestic Foreign
Merrill Lynch & Co Inc 33 51.4 56% 695 50 9,000
Morgan Stanly Dean Witer & Co 21.9 39.7 81% 420 28 3,600
Salomo Smith Barney Hoding Inc 19 27.6 45% 442 41 5,000
Lehman Brothers Holdings Inc 19.8 24.8 25% 16 24 NA
Goldman Sachs Group L.P. 17.7 21.8 23% 15 33

267
Could they retain their capital base?





No they cannot.
Partners have 75% of capital (Figure A).
Low barrier to exit.
Unlimited liability provoked partners to withdraw their equity on losses
Effect on Ownership Structure and contract design aka Private Partnership.



Would M&A be a better route?





M & A might change the cultural character of the firm. Difference in ideology of two
companies
Issues in Structural Integration
High Search Cost to find a compatible firm might outweigh the benefits of M&A
M&A can grow only up to limited size. In case of IPO, company valuation may grow
multiple times



Would increased scurrility in going public damage
Goldman Sachs?





Short Term
Reduced aspirational value: dissolved hopes of partnership
Some loss of aura: as the companys unique partnership structure
would be dissolved

Long Term
The company can draw upon leadership to carry the culture along to
the public firm
Access to US equity markets for future capital requirements
Increased size of the company
Improved presence in Asset Management space





What will be impact IPO on senior partners, non partner
employees Sumitomoto & Bernice, Limited partners,
shareholders, customer, competitors?




Partners Wealth increase by $50 million +
Sr. Partners Wealth increase by $100 million +
Non-partner
Employees
50% of their 1997 and 1998 compensation plus bonus/year
They may get more attractive offers from competitors
The employees will feel more secure
Limited
Partners
Premium over the book value of their investment between 25%
and 55% depending on whether they choose cash or stock
Shareholders
They will be get a good return on equity which is expected to be
higher than the industry average. Will receive premiums and
dividends as declared by the company.
Customers
Increased transparency
More information about the firm available in public domain
Competitors
Increased competition as the firm expands and improves its
market position across segments, even in asset management
Competitors can gain because of customer attrition due to
dilution of aura/Company Image
Would the agency problems increase or decrease after
IPO? How moral hazard & selection (ESOPs) might
arise?





Agency problems will increase
Agents will be the Board of Directors appointed by investors after the IPO. With only 14% of
Equity Dilution given to shareholders, partner representation will be high on Board of
Directors, leading to Information Asymmetry between investors and Partners.
Conflicts in shareholders and partners objectives leads to delay in reaching consensus on
critical decision making. Shareholders will look towards short term gains whereas company
management will work towards long term growth and sustainability.
Moral hazards:
Lack of effort and motivation on the part of the agents as reward of partnership would not
exist post IPO
With extensive monitoring and regulations, the managing directors and employees may put in
their best efforts or their best foot forward as their compensation post IPO will be outcome
based
ESOPs Selection
To curb moral hazard, employees should be rewarded with ESOP options.







Would the contract monitoring be based on outcome or
behavior based (before and after the IPO)?





Pre-IPO
Principal: Company
Agent: Partners
Appropriate Contract : Behavior Based contract


Post IPO
Principal: Shareholders/Company (14% Equity dilution)
Agent: Managing Directors/Partners
Appropriate Contract : Outcome Based contract.
Stronger form of monitoring systems (capital market, regulatory bodies),
Degree of measurability was high.





Thank You