Goldman's Dealmakers Pack Suitcases to Chase Down Smaller GameBy
Investment bankers call on neglected ‘middle market’ companies
Strategy is similar to 1970s initiative that helped grow firm
Goldman Sachs Group Inc. investment bankers may be coming to an airport near you.
Dealmakers at Wall Street’s top-ranked merger firm are fanning out across the U.S. and Western Europe as part of a new plan to drum up additional business. They’re targeting smaller companies, many in America’s hinterlands, ingratiating themselves to a tier of clients often neglected by Wall Street’s white-shoe advisers.
It’s an unlikely growth strategy for a firm that’s long dominated mergers and acquisitions banking, often by advising Fortune 500 companies such as Amazon.com Inc. on its purchase of Whole Foods Market Inc. Chief Executive Officer Lloyd Blankfein has asked the investment bank to kick in 10 percent of a $5 billion growth plan despite its leading market share.
Led by 48-year-old John Waldron, who runs the division with Gregg Lemkau and Marc Nachmann, managers embarked on their most comprehensive review of clientele since the financial crisis. What they found was a lot of white space, neglected industry areas and customers worthy of renewed attention.
The executives are now hiring senior bankers in industries where the firm lacks a top-tier presence or building out regional offices closer to local businesses. And they’ve simply found a lot of companies that they haven’t worked with before.
“It gives us more opportunities to be Goldman Sachs in more places,” Waldron said. “It’s clearly core to the whole plan.”
Waldron declined to give a number, other than to say he has lists with about 10 percent to 15 percent more companies on them than those currently on the bank’s roster. In other cases, clients who have been languishing at the bottom of a banker’s coverage list may get reassigned and receive more attention, he said.
Goldman Sachs plans to offer “middle market” companies a full suite of services, from providing advice or arranging financing, all the way to investing its own money. It’s also asked senior bankers to search for smaller companies in need of growth capital.
“Investing helps us to be smarter and more knowledgeable about those industries, trends and themes, and it puts our bankers more in the flow of where the disruption is happening and where the formation of ideas, capital and companies is happening,” he said.
The initiative is reminiscent of a strategy led decades ago by legendary Goldman leader John Whitehead. While well known for encouraging the firm’s overseas expansion, he also oversaw a pioneering project in the early 1970s that used computers to track thousands of up-and-coming U.S. companies with at least $1 million in earnings. The idea was to assign a banker to every one of them and win their business, he told the New York Times in 1971.
Years later, Waldron rose up through those operations.
This new push also reflects tectonic shifts emanating from Goldman Sachs’s 41st-floor executive office. As revenue from trading declined after the financial crisis, the bank known for catering to big clients decided the best direction for growth on several fronts was down. It has since built an online bank for consumers. The focus on overlooked companies is another example.
It’s also loosening up a bit on costs. In recent years, bosses have rejected dealmakers’ spending on airfare, hotels and entertainment -- even reining in data plans for mobile phones. The initiative helped profitability, shaving $900 million of annual expenses, but irked employees and starved many departments of resources to win more business.
That’s changing. Goldman Sachs surprised investors in September by unveiling the growth plan, its first as a public company. Co-President Harvey Schwartz said the work on costs means it should be able to drive “marginal returns” of more than 30 percent.
“We cover what we think is most important given finite resources but by definition you cannot cover everything,” Waldron said. “We’ve concluded that we probably have had too finite a resource base given these opportunities.”
Bankers are now focusing on adding clients in three categories:
- Companies owned by private equity firms. While Goldman Sachs runs one of Wall Street’s biggest franchises serving so-called financial sponsors, it ignored some smaller private-equity shops and hundreds of holdings, Waldron said. The bank can help them raise financing, sell stock to the public or sell themselves to a larger competitor.
- Publicly traded companies worth $1 billion to $5 billion. That’s on the fringe of what Goldman bankers usually pursued. In some cases, small firms have tripled in size since the last review and in the process worked their way above that threshold, he said.
- Closely held, often family-owned, companies.
Goldman Sachs hasn’t always chased those clients because they tend to do smaller deals with correspondingly lower fees, and they often don’t engage in related derivative transactions that can make the relationship more rewarding for the bank. This time, the firm is betting it can find derivatives or other transactions that appeal to them.
To be sure, that presents reputational risks. Wall Street’s biggest banks have a spotted history of selling complex financial products to less sophisticated clients -- such as school boards, pensions and municipalities -- who get stung and complain in court or to the public. A buyer-beware mentality might work when the counterparty is a hedge fund -- but not so well when it’s a small town’s largest employer.
Yet that’s where the action is. Small companies have been making up a growing share of takeover targets -- and Goldman has no doubt noticed. It’s helped facilitate 187 deals this year for which a value was assigned, and about 47 percent of them were worth $1 billion or less, according to data compiled by Bloomberg. Last year, that figure was 39 percent.
Such mergers have whittled the number public companies in the U.S. for years -- cutting it by roughly half over the past two decades, according to World Bank data. That means there are fewer clients for certain types of transactions. By sidling up to private enterprises early, Goldman Sachs gains an informational advantage and positions itself to help them someday access public markets.
The bank already is plunking down money for select senior hires, bringing on a duo from Credit Suisse Group AG to cover business-services firms, such as consultants and staffing agencies, and a Citigroup Inc. banker to serve clients in the midstream energy space.
And it’s spreading rainmakers around. Last year, a handful of senior bankers were assigned to Atlanta, Dallas, Seattle and Toronto to make it easier to call on companies and map out local markets. It’s now filling out those offices with lower-ranking bankers including vice presidents and associates.
Elsewhere, it’s adding people to help with the mechanics of executing deals, to ensure the bank can handle an uptick.
“It does require some resource investment,” Waldron said. “But we think the returns are quite healthy if we execute properly.”