Goldman Sachs Can Show SEC Clients Get Best Returns on Its IPOs

Goldman Sachs Group Inc., accused by the U.S. government of defrauding investors, is generating better returns for companies and buyers of initial public offerings than any other Wall Street firm.

American companies that used New York-based Goldman Sachs as the lead underwriter for initial sales got the highest prices for their shares in the first half of 2010, selling at an average 1.4 percent discount to their offering range, data compiled by Bloomberg show. Buyers were rewarded with an average first-day advance of 9.6 percent, the biggest this year.

The U.S. IPO market is proving why Goldman Sachs, the most profitable securities firm in Wall Street’s history, is still the bank of choice for companies looking to raise capital and buyers seeking the biggest returns, finance professors at the University of Chicago and the University of Notre Dame said. Offerings led by Credit Suisse Group AG and JPMorgan Chase & Co. were discounted the most and produced the smallest gains, Bloomberg data show.

“The issuer and investor care about the opposite things, and the investment bank is in the middle,” said Steven Kaplan, professor of finance at the University of Chicago’s Booth School of Business. “There’s conflict. Goldman appears to have done very well.”

SEC Charges

Chief Executive Officer Lloyd Blankfein’s firm is beating competitors in an area that generates some of Wall Street’s biggest fees. Bankers charged 6.4 percent for underwriting U.S. IPOs this year, more than 10 times that for mergers and acquisitions and corporate bonds, Bloomberg data show.

Goldman Sachs won the largest share of the $580 million in fees from initial offerings in the first half, even after the Securities and Exchange Commission sued the firm in April for allegedly selling mortgage-related securities that were designed to fail. The bank has called the SEC’s lawsuit “completely unfounded.”

SEC spokesman John Nester declined to comment.

Goldman Sachs was the so-called lead-left underwriter for 11 U.S. IPOs in the first half, data compiled by Bloomberg show. More than half of those were priced above the middle of the offering range, while Goldman Sachs-led deals accounted for four of this year’s five biggest premiums, the data indicate.

Companies that didn’t hire the 141-year old firm to lead their IPOs took an average discount of 14 percent for their shares.

First-Day Gains

Buying initial sales from Goldman Sachs has produced first- day gains that are more than double the average 3.6 percent for offerings arranged by other banks, data compiled by Bloomberg show. In the first month of trading, IPOs led by Morgan Stanley produced the largest returns, rising 7.8 percent on average.

Andrea Rachman, a spokeswoman at Goldman Sachs, declined to comment.

Financial Engines Inc., the investment adviser co-founded by Nobel laureate William Sharpe, garnered the largest premium of any U.S. IPO this year in a March deal led by Goldman Sachs.

The provider of portfolio-management services to people with employer-sponsored retirement plans jumped 44 percent in its first day, the biggest surge this year, after selling shares at $12 each. The price was 20 percent higher than the Palo Alto, California-based company had originally asked buyers to pay.

“Goldman is clearly the king investment banker,” said Tim Loughran, a finance professor at the University of Notre Dame’s Mendoza College of Business in Notre Dame, Indiana. “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.”

Tesla Motors

While the first-day performance of initial sales led by Goldman Sachs helped buyers reap immediate profits, investors that held onto the shares have seen the gains diminish. The advance for the 11 IPOs shrank to 2.5 percent on average over the first month of trading, data compiled by Bloomberg show.

Tesla Motors Inc., the Palo Alto-based maker of the electric Roadster, erased almost all its 41 percent first-day surge in the next nine days after the first IPO by an American car company since 1956.

The automaker run by Elon Musk raised $260 million selling shares for $17 each, 13 percent higher than the midpoint of its forecast price range and the third-largest premium for a U.S. company this year. Tesla’s stock ended at $18.14 yesterday, 24 percent below its first-day close of $23.89.

‘The Credibility’

“For the underwriter, first-day success is a very important measure in terms of certifying the power and the credibility of the franchise,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees $3 billion. “A good first-day pop certifies the quality job the underwriter has done with investors and the company in order to further deals.”

Schuster, who purchased Tesla shares for his Direxion Long/Short Global IPO Fund, sold 30 percent of his stake on the second day of trading as the stock rose as much as 79 percent from its offering price.

Some deals arranged by Goldman Sachs have helped private equity sellers while leaving IPO buyers with losses.

The initial offering of Metals USA Holdings Corp., a Fort Lauderdale, Florida-based metals processor, almost quadrupled the value for Leon Black’s New York-based leveraged-buyout firm Apollo Global Management LLC’s investment. The shares lost 8.6 percent on the first day and 28 percent after one month.

Besides Financial Engines and Tesla, four other IPOs led by Goldman Sachs -- Calix Inc. of Petaluma, California, Chicago- based Accretive Health Inc. and CBOE Holdings Inc., and Higher One Holdings Inc. in New Haven, Connecticut -- climbed at least 12 percent in their first day of trading.

Morgan Stanley

Morgan Stanley, which led IPOs that had an average 7.5 percent first-day gain, completed every deal that it participated in after marketing began, according to Paul Donahue, the firm’s co-head of U.S. equity capital markets.

Every other bank had at least one deal that was scuttled, data compiled by Bloomberg show. Americold Realty Trust, the Atlanta-based warehouse operator owned by Ron Burkle’s Yucaipa Cos., postponed what would have been the largest IPO of 2010 in May after cutting its midpoint price by 33 percent. Goldman Sachs was hired to lead the IPO.

“It’s fair to say that everyone entered 2010 with great expectations and the market has proven to be trickier than people would have thought entering the year,” said Morgan Stanley’s Donahue. “It’s exactly these types of markets where we think Morgan Stanley as a franchise has differentiated itself.”

Credit Suisse, JPMorgan

All five U.S. companies that listed Credit Suisse as the first underwriter took price cuts. The average 21 percent discount from the original midpoint offer price was the biggest for any firm’s deals.

Sales arranged by Zurich-based Credit Suisse, Switzerland’s second-biggest bank, also left investors with the smallest first-day returns as four of the five companies rose less than 1 percent. The gains then turned into declines that averaged 7.8 percent in the first month, making it the only bank whose deals lost money for IPO buyers in the period, Bloomberg data show.

Alimera Sciences Inc., the Alpharetta, Georgia-based developer of treatments for diseases of the retina, sold its shares for $11 each after cutting the range from $15 to $17 in an offering led by Credit Suisse. The stock closed unchanged in its first day of trading before falling 27 percent in the next month, according to data compiled by Bloomberg.

Duncan King, a Credit Suisse spokesman, declined to comment.

Winning Deals

“Pricing above or below the range generally reflects strong or weak demand relative to what was originally expected,” said Jay Ritter, a finance professor at the University of Florida in Gainesville who has studied IPOs for three decades. “If an underwriter is consistently pricing below the range, however, it might mean that it had been aggressive in suggesting a high valuation in order to win deals.”

Six of the eight companies that hired New York-based JPMorgan, the second-largest U.S. bank, to lead their IPOs sold shares at a discount. The average price reduction equaled 20.9 percent, the data show.

AVEO Pharmaceuticals Inc., which is developing a kidney- cancer treatment, took the biggest cut, reducing its price by 36 percent. The Cambridge, Massachusetts-based company sold shares at $9 each after offering them at $13 to $15.

The initial sales by JPMorgan produced first-day gains of 3.5 percent, less than every bank except for Credit Suisse. JPMorgan spokeswoman Tasha Pelio declined to comment.

“It’s a balancing act,” said Lisa Jacobs, a New York- based partner in the capital markets group at law firm Shearman & Sterling LLP. “Lead underwriters are looking for that price at which both the companies and investors get the benefit of the bargain and feel they’ve gotten a good deal. It’s a fair amount of science but it’s also a little bit of art.”

To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.

To contact the editor responsible for this story: Daniel Hauck at dhauck1@bloomberg.net.

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