The New York Times, June 6, 1998

Setting The Value Of Wall Street History
If Goldman, Sachs Goes Public, How Will It Divide the Spoils?

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 of shares.

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 value—which 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 fall—the earliest such a sale could occur because the summer months are too fickle to float an offering of this sort—that could result in a multibillion-dollar sale, possibly one of the biggest in recent years.

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 investors.

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 percent.

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 $20 billion.)

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 Goldman—like Mr. Corzine, Mr. Paulson and Roy J. Zuckerberg, its longest serving partner—might each rake in at least $200 million, with the average partner taking in a mere $100 million or so.

Most of this largess, however—both for replacing existing capital and sharing in the premium—would 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 stable.

"I 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 bullish—and the most prescient—forecasters 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."

Some 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.