Goldman Sachs Drops Idea
of Public Sale
Background: "The executive
Committee of Goldman Sachs & Co., faced with stiff
opposition from the firm's junior partners, has decided
to abandon pursuing a public sale of the 127-year-old
private partnership." (WSJ, 1/22/96,
p. A3)
INTRODUCTORY LEVEL ONLY
1. "...The debate was heightened after the
firm's see-sawing profit run, in which earnings topped
$2.7 billion in 1993 only to plummet to $508 million in
1994. Last year, profit rose to nearly $1.4 billion.
Those who favored the move said it would bolster
the firm's capital and insulate the firm's partners from
such reversals of fortune; after the 1994 reversal, some
34 partners left, weakening the firm and depleting its
capital. Also Goldman's older, more established partners
believed they would profit handsomely from a public sale,
partners say."
I would like to focus the discussion on issues related to
forms of organization, typically appearing in the first
chapter of a corporate finance text.
A textbook discussion points out that one of the main
disadvantages of partnerships, compared to corporations,
is the difficulty associated with raising capital. This
is also true for Goldman Sachs, an investment bank.
However, what is interesting in this article is that
fluctuations in earnings are the motivation for the
debate to change to corporation status and have shares
publicly traded. Since stock prices reflect expected
future cash-flows (and their risk), fluctuations in
wealth associated with stock prices would be smoother
than actual annual wealth. The article suggests that the
wide swings in revenue have resulted in some partners
going to other companies where changes in annual income
are not as dramatic as Goldman's.
2. "But Goldman's younger partners were
particularly opposed to a public sale because they
believe that if the firm went public today, they would
wind up with only a thin sliver of the stock in the new
publicly traded company, the same partners say."
Young partners are worried about ending up with a small
proportion of the offered stock. Moreover, one can argue
that young people, in general, are also young at heart
and are more tolerant of wide fluctuations in income
(i.e., less risk averse).
3. "Among the firm's alternatives to a public
offering are selling more stock to outside investors in
private sales, as the firm has done in the past. Hawaii's
Kamehameha Schools/Bishop Estate and Japan's Sumitomo
Bank already own slightly more than 20% of Goldman.
But people close to Goldman say that course is far
less likely than other options such as retooling the
firm's existing capital structure so that retiring
partners won't be able to withdraw their money as
quickly."
This indicates that even as a partnership, they do have
more options than only going public to raise new capital.
However, new sources of capital would not solve the wild
swings in annual revenue.
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