Goldman Sachs Undercuts Rivals in GM IPO as It Loses Top Role

Goldman Sachs Group Inc President Gary Cohn
The government imposed the fee pitched by Goldman Sachs President Gary Cohn and his five-person team on all underwriters, angering the banks. Photographer: Andrew Harrer/Bloomberg

Wall Street banks led by JPMorgan Chase & Co. and Morgan Stanley stand to make a combined $120 million on General Motors Co.’s initial public offering. If it weren’t for Goldman Sachs Group Inc., they could have made four times as much.

In a pitch to the U.S. Treasury in May, Goldman Sachs offered to accept a fee of 0.75 percent, according to people with direct knowledge of the matter. That’s a fraction of the 3 percent banks typically charge on the largest IPOs and well below the 2 percent offered by Bank of America Corp. and other banks that presented to Treasury, said the people, speaking anonymously because the matter is private.

Goldman Sachs, which had just been sued for fraud by federal regulators and has ties to GM competitor Ford Motor Co., didn’t get a top role in the IPO. The government imposed the fee pitched by Goldman Sachs President Gary Cohn and his five-person team on all underwriters, angering the banks, the people said.

“The fact the other banks are furious at Goldman is not surprising,” said Samuel Hayes, a professor emeritus of investment banking at Harvard Business School in Boston. “They feel it gave the government a real lever to force down fees on the underwriters. But the deal still has a lot of marquee value.”

Subsidized Car Purchases

Banks involved in the deal include lead managers JPMorgan and Morgan Stanley, as well as Bank of America and Citigroup Inc., among others. Some banks made different concessions in their pitches to the Treasury. Charlotte, North Carolina-based Bank of America and Zurich-based Credit Suisse Group AG offered to use some of their fees to buy GM vehicles or to subsidize employee purchases of GM cars and trucks, according to the people with knowledge of the matter.

Goldman Sachs spokeswoman Andrea Rachman and spokespeople for the other banks declined to comment. Treasury spokesman Mark Paustenbach also declined to comment.

Goldman Sachs will have a role in the offering, as will Credit Suisse, said the people. Five U.S. banks pitched GM and the Treasury on May 19 in Washington, and non-U.S. lenders made presentations in early June. All sent top executives, such as JPMorgan Chief Executive Officer Jamie Dimon and John Mack, chairman of Morgan Stanley.

Treasury officials including Ronald Bloom, chief of the auto task force, and GM executives were concerned that if it became public the government hadn’t picked Goldman Sachs’s low bid, they would face criticism for wasting taxpayer money because of a bias against the firm, the people said. The officials and executives decided, in conjunction with Lazard Ltd., which is advising Treasury, to use the Goldman Sachs bid and impose it on other banks.

‘Probably Serious’

Goldman Sachs signaled that it was willing to make a bid for pretty much any amount, according to two people who saw the bank’s presentation. Rivals grumbled that Goldman Sachs knew it couldn’t win the lead on the GM offering, so it submitted a low bid knowing that would force Treasury to squeeze whichever banks did win the job, these people said.

“The investment banks have always been cutthroat in their competition,” Hayes said. “I don’t think they did it just to squeeze their competitors. They were probably serious.”

All the U.S. banks, apart from Bank of America and Bermuda-based Lazard, have their headquarters in New York.

4-Cent Fee

In India, Goldman Sachs this year tied for the lowest bid among 17 banks vying to manage a $1.8 billion offer by state-owned Power Grid Corporation of India Ltd., three people with knowledge of the matter said. Goldman Sachs and SBI Capital Markets Ltd. said they’d do the work for a fee equal to 0.00000001 percent of the sale proceeds -- equivalent to about 2 rupees (4 cents) each on the deal.

At the time of the pitch, Goldman Sachs and the Securities and Exchange Commission were at odds over allegations Goldman Sachs had sold mortgage-related securities designed to fail. The firm settled the suit last month for $550 million and acknowledged it made a “mistake.” A June poll showed that the firm suffered the worst reputational decline among its largest competitors, according to a global quarterly poll of 1,001 investors and analysts who are Bloomberg subscribers.

GM, 61 percent owned by the government after a $50 billion taxpayer bailout, aims to raise $12 billion to $16 billion in the IPO and plans to file the registration statement as early as today, according to people familiar with the situation. At that size, the IPO would be the second-largest in the U.S. after San Francisco-based Visa Inc.’s $19.7 billion offering in March 2008.

Goldman Trails

While the IPO is paying a quarter of the usual rate for the largest initial offerings in the U.S., fees would equal about 16 percent of the total $728.4 million of revenue generated from all U.S. IPOs this year, data compiled by Bloomberg show.

Goldman Sachs, which won the biggest share of fees from underwriting U.S. IPOs in 2009, has slipped to third this year behind Morgan Stanley and JPMorgan, the data show. The firm’s first-half revenue from underwriting equity sales also trailed JPMorgan and Bank of America, according to company reports.

Goldman Sachs, the most profitable firm in Wall Street history, has been credited with 12.6 percent of the $11.3 billion in initial sales this year. Last year, it had 21.3 percent, according to Bloomberg data.

Still, American companies that used Goldman Sachs as the lead underwriter got the highest prices for their shares in the first half, selling at an average 1.4 percent discount to their offering range, the data show. Companies that didn’t hire the 141-year-old firm to lead their IPOs took an average discount of 14 percent for their shares.

Ford Backs Goldman

Goldman Sachs bankers have advised Ford since 1953 and the firm managed Ford’s IPO in January 1956, the biggest ever at the time. Sidney Weinberg, the Goldman Sachs chairman who managed the sale and was later named to Ford’s board, used Ford “to leapfrog his firm’s standing on Wall Street into the top tier of underwriters,” according to Charles Ellis’s book “The Partnership: The Making of Goldman Sachs.”

Ford publicly backed Goldman Sachs after the firm was sued for fraud by the SEC. “We have a long relationship with Goldman Sachs and expect it to continue,” Ford spokesman Mark Truby said on April 20, four days after the SEC sued Goldman Sachs.

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