The Street's Big Holdout May Have To Go PublicLarry Light and Leah Nathans Spiro
The money machine called Goldman, Sachs & Co. grinds on relentlessly. At yearend, it should post record earnings and may even be Wall Street's pretax profit leader for 1991, outstripping longtime rival Salomon Brothers Inc., which is mired in the Treasury-auction scandal. Only Merrill Lynch & Co., more than twice Goldman's size, could eclipse it for the No. 1 spot. Goldman plans to boost earnings even more by expanding its foreign-trading and derivative-securities business and pursuing other alluring opportunities.
Still, in the eyes of many Wall Street players, Goldman has a major weakness that could hobble such grand ambitions: The venerable 122-year-old firm is the last major securities house not publicly traded. Unlike its rivals, Goldman can't call on U. S. capital markets for the money to keep growing. It was recently disclosed that Goldman is seeking to raise at least $275 million in private capital from a group of insurance companies. Even so, many observers believe that Goldman, now owned by its 146 general partners, will have no choice but to go public sooner or later.
As long ago as 1969, Goldman began considering the possibility of selling stock publicly. In 1986, then-Chairman John L. Weinberg held a partnership meeting to discuss the matter. The firm's capital needs have been growing steadily (chart). The idea, though, was overwhelmingly rejected. Most Goldman partners argued that public ownership would require detailed financial disclosures. That would subject them to carping from stockholders and analysts and would inhibit long-term planning. Goldman has been selling debt issues in Luxembourg, where disclosure is minimal.
A Goldman spokesman dismisses recent talk about an initial public offering as "unfounded speculation" and insists the firm can meet the capital-raising challenges of the 1990s. There is no evidence that the firm's new co-chairmen, Stephen Friedman and Robert E. Rubin, have an IPO timetable. But the idea is apparently being bruited about. A Goldman partner recently quizzed an executive of a firm that has gone public on the mechanics of the process.
Since 1970, when Donaldson, Lufkin & Jenrette Securities Corp. did Wall Street's first IPO, every other major securities firm has decided either to issue stock or become a subsidiary of a larger financial institution. "Hell, everybody wanted to stay private," says an officer of a firm that made the switch. But "we just couldn't."
The case for public ownership is strong. Right now, Goldman's assets-to-equity ratio is about 25 to 1, which is in line with Wall Street competitors. Yet because stock offerings are not an option, Goldman must increasingly boost capital by taking on debt -- a no-no in these leverage-leery times. Goldman debt currently carries a lofty A-1 rating. But ratings agencies and potential clients could well be put off by significantly greater leverage.
YOUTH BRIGADE. True, Goldman can attract more equity by enlisting outside partners. Japan's Sumitomo Bank Ltd. is the largest holder, with a 12.5% stake. Nonetheless, this approach has limits. Outside partners' stakes are structured rather like private placements of preferred stock. Trouble is, some rating agencies treat these preferred-like stakes as close to debt, and Goldman may be amassing too much of that to keep raters happy for long. Raters get nervous when preferred exceeds 15% of equity. Counting the Sumitomo stake as preferred, which some raters do, the level will be 32% by yearend. An official of one agency said that would give him "some concern." Even excepting the Sumitomo interest, which Goldman considers similar to common stock, the level would be above the threshold, at 16%.
The youth of Goldman's general partners is another factor for change. Half of them have made partner since 1988. Unfortunately, "they can't get cash for their equity for years," notes Perrin Long, a First of Michigan Corp. analyst. There are reports that some younger partners have been lobbying for an IPO. And every time older Goldman partners retire, the firm must dip into capital to cash them out -- albeit on a gradual basis. In a public company, inside shareholders can sell stock with ease.
Goldman's ability to remain private for this long is a tribute to its financial agility. In 1990, which was the securities industry's worst year in recent history, Goldman posted record pretax earnings, largely because of its savvy trading of foreign currencies and metals. But the firm's ambitions to push into exotic trading and other frontiers of finance may require much more capital than it can round up the old-fashioned way.