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Goldman sachs ipo dilemma - case study
Goldman Sachs considered going public through an IPO but ultimately decided against it due to concerns about how it would impact the firm's culture and business model. While an IPO would provide access to greater capital that was needed to keep up with competitors, the partners were worried it could dilute Goldman Sachs' culture of prioritizing long-term relationships over short-term profits. Going public also risked increased agency problems as employees and managers may prioritize boosting stock prices over serving clients. After much deliberation, Goldman Sachs chose to remain a private partnership to retain control over its destiny and unique way of doing business.
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Goldman sachs ipo dilemma - case study
- 1. TO IPO ORNOT TO IPO? GOLDMANSACHS Presented by Arun Jose, IIMLucknow Ayush Gutgutia, IIMLucknow
- 2. Why has GoldmanSachsenjoyedthe greatest reputation among its peers? Question #1
- 3. THE NUMBERS…. speakfor themselves #1M&AAdvisory #2Debt &Equity Underwriting #1IPO Underwriting #1Debt &Equity Underwriting But how didthey achieve this?But how did they achieve this ?
- 4. FIRST RATE CLIENTLIST Historical IPO’s and M&A’s AmbassadorCulture SidneyWeinbergsatonboardof30+ companiesattending250+ meetings per year Workedin secret with HenryFordII totake FMC public LargestIPOto date
- 5. HOLDING FIRM TOITS VALUES Shorttermprofitsshouldnever be earnedattheexpenseoflongterm relationships.Recklessrisk takingshould bereplacedbycautiousbusiness development -TheTwo Johns
- 6. HOLDING FIRM TOITS VALUES • Avoidedrecklessrisktaking • 1st WSFirmtoinstitutionalizeethics • Did notrepresenthostilebidders • Whiteknightstrategy • Intenselytrainedcustomer-centricworkforce …..led to Goldman being viewed as a trustworthy partner
- 7. BUILDING QUALITY TALENTPOOL Althoughouractivitiesare measuredinbillionsofdollars,weselectour peopleonebyone.In aservicebusinessweknowthatwithoutthebest peoplewe cannotbethebestfirm. -HankPaulson, Ex-CEO, Goldman Sachs
- 8. BUILDING QUALITY TALENTPOOL • Hiredthebesttalent • Strong focus onretention • Promotedtalentfromwithin it’sown ranks • Interestingdealslowturnover • Promotedteameffort(8th commandment) • Compensationlinkedtosenioritynot performance …..led to employees remaining loyal and working hard to climb the ladder
- 9. Why did ittake so longto decide onthe IPO issue? Question #2
- 10. Thefirm doesnothavetofollowtherestofWall Street.Thechallengeis keepingourculture,ourprofitabilityandourgrowth.Itishumannature nottotinkerwitha goodthing -JohnWeinberg, ManagingPartner, Goldman Sachs
- 11. IPO would bringmany challenges • Currently operating at a good level • Capitalbase growing compared to competitors • IPO could dilute culture and work ethics • Increased regulatory scrutiny • Dissolution of partnership model • High compensations and voting rights
- 12. Capital base growingcomparably to publicly traded competitors • HighestROE • 5th largestcapitalbase
- 13. • Basesalary: $45,000 •Bonus:$15,000to $25,000Analyst • Basesalary: $75,000 • SigningBonus:$25,000 • End of year bonus: $40,000-$50,000 Associate • Salary&Bonus:$4,00,000-$7,00,000Vice President • BaseSalary: $2,00,000 • Stake incompany • Returns$3 to$6millionannually Partners Goldman Sachs pays deeply for retention
- 14. Did Goldman Sachshave enough capital to grow? Can it grow fast enough to retain its position? Question #3
- 15. Gradually shifting philosophy •Rubin’sphilosophyof“NoriskNoprofit”ledGoldmantobecomeinvolved inprincipaltransactionsriskingit’sowncapitalinexchangeforhigher returns • Revenuesof$886MM(1990),$1150MM(1991)& $1460MM(1992) • Openedofficesglobally–Frankfurt, Milan,Seoul,Beijing,MexicoCityand Shanghai New philosophy required larger capital expenditures
- 16. The Disaster of1994 • Sufferedsubstantiallosseswith annualexpensesrising to$3.6B(twice thatof1990) • 30% partners(whosignedin 1992) departed • Assetsfellfrom$115B(1993) to$95B(1994) • Capitaltoassetsdropped50% There was a rapid flight of capital in 1994
- 17. Youcannotruna multinationalglobalbusinessonpartnershipcapital…a riskybusiness ontopofariskycapitalstructure -UnnamedFormerPartner, Goldman Sachs
- 18. CHANGING INDUSTRY DYNAMICS •Industry consolidation(1995-97) Morgan Stanley– Dean Witter Travelers – Salamon Brothers UBS-Swiss Bank Corp Travelers – Citicorp • Transition towards asset management Low fees & high volatilityin traditional business Greater understanding of asset management
- 19. HOW THE INDUSTRYLOOKED LIKE Company Debt Equity Capital MerrilLynch 43.1 8.3 51.4 Morgan Stanley 25.8 14 39.7 Salamon Smith 19.1 8.5 17.6 LehmanBrothers 20.3 4.5 24.8 Goldman Sachs 15.7 6.1 21.8 Bear Stearns 10.9 3.9 14.8 Paine Webber 4 1.9 5.9 Donaldson Lufkin 2.3 2.3 4.5 Credit Suisse 2.6 1.2 3.7 BT AlexBrown 1.2 1.2 2.4 Goldman Sachs was losing ground on the competition
- 20. Although Goldman Sachswas against having a larger organization for fear of culturedilution it was in need of capital infusion so thatit could stay in competitionwith theother players in themarket
- 21. Could they retaintheircapitalbase? Question #4
- 22. Disaster year –1994 •Annual expenses - $3.6 billion (twice of 1990) • Poorrisk management • Friedman’s retirement in Aug ‘94, lost $42MM in Q4 Outcomes: • Decline in partnerconfidence • Departure of more than 40 partners • Devastated employee morale • Weakenedpartnership capital Improving Bottom Line: • Reduced operations cost by large scale lay offs • Salarystructure was reformed
- 23. • Capital-to-assets ratiohalved since 1990 • Halvedpartners sharefrom 80% to 40% Sumitomo Bankand Bernice Pauahi Bishops Estate: Received 20%of annual earnings/losses as it raised $1344MM
- 24. Would M&A bea better route? Question #5
- 25. M&A opens severaldoors… • Accesstonewmarketsegments • Newinnovation opportunities • Newrevenue streamsand new capabilities • Stronger positioningatmerger time,therebymaximizingROI
- 26. … But alsocloses quite a few • Compatibilityissues • Legal costs • Short term opportunity cost • Cost of takeover • Potentialdevaluation of equity • Intangiblecosts M&A presents several bottlenecks that might not be cleared and cannot be an ideal solution
- 27. Would increased scurrilityin going public damage Goldman Sachs? Question #6
- 28. What could anIPO bring about? • Uncertainaboutimpactonculture • Largesize mighterodeexcellence • Employeesmightlosemotivation • Mightdiluteprestigeand uniqueness • Harder to retainemployeesin apublic firm • Morgan Stanleylostitscharm afterIPO Partners were extremely concerned that going public might negatively affect image
- 29. What willbe impactIPOonsenior partners, nonpartner employees Sumitomoto &Bernice, Limited partners, shareholders, customer, competitors? Question #7
- 31. Stakeholder Impact Partners Wealthincreaseby$50millionplus Seniorpartners Potentiallyrealization+$100billion Non-partneremployees 50%of 1997/98compensationin additiontoa bonusforeach year ofservice Sumitomo& BishopsEstates Votetheir sharesofcommon stock Limitedpartners Premium over thebookvalueofinvestment- 25%to 55%depending onchoice ofcash/stock Customers Newavenues Competitors Competitiveenvironment
- 32. Would theagency problemsincrease or decrease after IPO? How mightmoral hazard & selection (ESOPs) might arise? Question #8
- 33.
- 34. Increasing Agency Problems •Only14%equityisdilutedtothepublic • Employeeswillbemoreconcernedwithincreasingtransactionalprofitsto meet earningsexpectationsoverlong-termshareholderwealth • Thelossoflucrativepaypackagesat partnerlevelwillleadtogreater employeeturnover • Lackofaccountabilityofcapitalwillleadtorecklessspending ….Hence Goldman incorporated ESOP’s with lock-in period to reduce agency problems
- 35. But ESOP’s wontsolve everything! • Employeeswilltakedecisions ina bid toincrease short termshare prices • Moreriskier decisionswouldbetakentoimproveannual profitabilitymetrics • Valuesmightbecompromisedtoattainannual targets ….Hence ESOP’s could be a source of tremendous moral hazard
- 36. Would thecontract monitoringbe based on outcome or behavior based (before and afterthe merger)? Question #9
- 37. Behavioral changes tobe expected Before Merger: Behavior Based • Monitoringmechanisms • Equity of agentsat stake • Partners are principals Post Merger: Outcome Based • Effectivein curbing agentopportunism
- 38.