It's outperforming its rivals for investors and clients alike—a difficult balance
Goldman Sachs (GS), the Wall Street firm accused by the U.S. government of defrauding investors in mortgage-backed bonds, is doing well by companies it helps take public—and the people who invest in them.
The 11 American companies that used Goldman as their primary underwriter for initial public offerings in the U.S. got the highest prices for their shares in the first half of 2010, selling them at an average 1.4 percent discount to their target price, data compiled by Bloomberg show. Companies that hired other banks to lead their IPOs took an average discount of 14 percent for their shares.
Buyers of IPOs managed by Goldman were rewarded with an average first-day advance of 9.6 percent, more than double the average 3.6 percent advance for initial offerings arranged by other banks. IPOs led by Credit Suisse (CS) and JPMorgan Chase (JPM) were discounted by an average of 21 percent and had the smallest first-day gains, Bloomberg data show. "The issuer and investor care about the opposite things, and the investment bank is in the middle," says Steven Kaplan, professor of finance at the University of Chicago's Booth School of Business. "Goldman appears to have done very well" balancing the interests of both groups.
Goldman is outperforming its competitors in a field that is one of Wall Street's most lucrative. Bankers charged 6.4 percent of the money raised for underwriting U.S. IPOs in the first half of this year, earning $580 million on 53 offerings, data compiled by Bloomberg show. While most IPOs are arranged by two or more banks, the primary underwriter typically commands the biggest share of the fees, according to Roni Michaely, a finance professor at Cornell's Johnson Graduate School of Management.
Goldman helped Financial Engines, the investment advisory firm co-founded by economics Nobel laureate William Sharpe, become the first U.S. company in 2010 to price its shares above the target range, raising $146 million. The provider of portfolio management services to people with employer-sponsored retirement plans leaped 44 percent on its first day, the biggest jump of any U.S. company this year, after selling shares at $12 each in March.
The bank enjoyed its IPO success even after the Securities & Exchange Commission sued the bank for allegedly selling mortgage-related securities that were designed to fail. Goldman Sachs calls the SEC's lawsuit "completely unfounded."
"Goldman is clearly the king investment banker," says Timothy Loughran, a finance professor at the University of Notre Dame's Mendoza College of Business in Indiana, who has studied IPOs for 20 years. "They've come under fire, but it doesn't matter. If you're an issuing firm, that's the first firm you would go to."
The bottom line: Despite being sued by the SEC, Goldman Sachs held a dominant position in one of Wall Street's most lucrative client businesses.