The New York Times, June 6, 1998
Setting The Value Of Wall Street
If Goldman, Sachs Goes Public, How Will It Divide
by Peter Truell
Goldman, Sachs & Company has taken so many companies to market,
putting its prized imprint on the value of thousands of public offerings
So what value would it put on itself?
The answer, as might be expected with a franchise as envied as Goldman,
Wall Street's last big private partnership, is not clear-cut. The investment
banking firm releases limited financial information about itself, and
competitors seem reluctant to hazard too precise a guess lest it cost
them a chance to help underwrite a juicy public offering.
Their off-the-cuff, not-for-attribution estimates for what Goldman might
be worth, range as low as $15 billion and as high as $35 billion, depending
on what multiple is used for its book valuewhich equals the amount
of capital invested over the years by partners and outside limited investors,
plus its retained earnings.
So, if Goldman were to sell a 20 percent piece of itself in an offering
this fallthe earliest such a sale could occur because the summer
months are too fickle to float an offering of this sortthat could
result in a multibillion-dollar sale, possibly one of the biggest in
And if Goldman does turn itself into a public company, all of Wall Street
will be watching to see how the partnership divides up the cream: all
the excess profits realized after settling debts and allowing for invested
capital owned by Goldman's general and limited partners. The betting
is that Goldman's 190 partners would keep most of the surplus for themselves,
while using some to placate Goldman's 211 junior partners and key employees,
and perhaps throwing a bone to the firm's retired partners and outside
At a meeting next Friday in Rye Brook, N.Y., partners will have a chance
to discuss a public offering, either as a stand-alone deal or as a prelude
to a possible merger or acquisition.
Two factors insure that the idea, which has been debated for years within
the firm, will be taken seriously this time. Jon S. Corzine and Henry
M. Paulson Jr., the firm's co-chairmen, lean toward going public and
have been laboring behind the scenes to build a consensus. Even more
helpful, the runaway bull market of the last few years means there finally
may be enough money to satisfy the many factions.
That does not mean the deal is anything close to a sure thing. But if
it went forward, here is how the numbers might work.
Merrill Lynch and Morgan Stanley, two of Goldman's closest rivals, trade
between 3.5 and 4 times book value. Goldman will certainly argue that
it deserves to do at least as well. After all, Moody's, the ratings
agency that tracks some of the firm's debt issues, estimated back in
April that Goldman's 48.1 percent net return on common equity in 1997
far outstripped Merrill Lynch's 27.6 percent and Morgan Stanley's 21.9
If that flies, the firm might then fetch upward of $22 billion, roughly
3.5 times the $6.3 billion book value it reported at the close of the
quarter ended Feb. 28. One Goldman insider thought $25 billion, or 4
times book, was a more reasonable guess. (At that figure, an offering
of 20 percent in the form of newly issued shares would generate about
$5 billion in cash, while valuing the shares owned by insiders at about
The current equity of roughly $6.3 billion, which represents the retained
value of all current owners' interest, would be replaced by new shares:
at least $2.5 billion to the 190 general partners, $1.4 billion to limited
partners, mostly retired partners, and about $2.4 billion to some large
outside investors, according to figures as of Jan. 1.
Those with big shares in Goldmanlike Mr. Corzine, Mr. Paulson
and Roy J. Zuckerberg, its longest serving partnermight each rake
in at least $200 million, with the average partner taking in a mere
$100 million or so.
Most of this largess, howeverboth for replacing existing capital
and sharing in the premiumwould be handed out in the form of shares
in the newly created corporation. Since the firm might want to conserve
cash raised in the offering for possible acquisitions, current owners
who wanted cash would probably have to take a discount, Goldman executives
said. Such a strategy would also help tie the talent to the firm at
least for the near term.
Those figures may yet shift, depending on how Goldman did in the second
fiscal quarter ended May 31. It earned pretax profits of just over $1
billion in the first quarter ended Feb. 28, and more than $3 billion
in the fiscal year ended Nov. 30. Goldman executives say they have enjoyed
a lush second quarter, too, suggesting that book value may yet swell
by a few hundred million dollars before a deal is done and a multiple-to-book
is applied. Hence, the even higher estimates approaching $30 billion.
Sheer vanity may push the number higher still. Given Goldman's plum
client roster, its depth of talent and its common desire to be seen
as the crown jewel of Wall Street, the number might have to be as high
as $35 billion for a deal to be done. That would be so even without
the huge asset management businesses that make rivals' earnings more
think the Goldman franchise is the more valuable franchise because of
its focus and reputation," said Samuel Hayes, professor of finance
at the Harvard Business School, discussing Goldman's value relative
to its major competitors.
Certainly, it hasn't hurt that Goldman has done its bit to stoke the
raging bull market that has tempted the firm into even considering going
public. Abby Joseph Cohen, its market seer, has been among the most
bullishand the most prescientforecasters of the stock market.
Likewise, Richard K. Strauss, Goldman's highly rated brokerage analyst,
has been a leader among the bulls on brokerage firms, cheering the stock
price of Merrill Lynch to new highs earlier this year.
But even some Goldman insiders are careful about the very rosy estimates
floating around for their own firm. "At a multiple of two times
book, I would think everyone would be very happy," said one limited
partner who declined to be identified. "At three times book, I
think everyone would be positively delirious."
outside Wall Street executives also sound a note of caution. "Goldman's
earnings have grown more dependent than most people think on proprietary
trading, where the firm puts its own capital at risk," said
Susan Webber, a consultant at Jaquish Advisors who worked at Goldman
more than 10 years ago. "If so, Goldman's earnings may be less
stable and therefore less valuable than some analysts realize."
There are other unknowns as well. "When you look at Goldman and
you look at it as a multiple of earnings, Wall Street is going to adjust
that for a tax rate that would be proper for a corporation and for compensation
expense that would be higher for a corporation." said Haig J. Nargesian,
a senior vice president of Moody's.
Needless to say, partners with the biggest shares in the firm would
make the most money, one reason perhaps why many of them seem to favor
going public Mr. Zuckerberg, Mr. Corzine, Mr. Paulson and Robert J.
Hurst, the head of investment banking, are among the biggest shareholders
in the firm, and are now believed to support the idea.