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I.P.Oh?

Sure, when Goldman, Sachs goes public, the firm's partners will get obscenely wealthy. But the real beauty part? They won't have to give up any control.

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For the past decade, the partners at Goldman, Sachs have wrestled with that age-old question -- I believe it was Shakespeare who first asked it -- "To go public or not to go public?" They've known, of course, that if they changed Goldman from a partnership into a publicly traded company, they'd score Scrooge McDuck-style piles of loot. But they've also feared that going public would wreck the firm's famously tight-knit culture and would require Goldman to submit to the kind of public scrutiny that it's actively repelled for the past 130 years.

Last year, of course, the partners succumbed and voted in favor of an IPO, which after innumerable delays will finally take place sometime in the next few weeks. But even though Goldman will now become a public company, offering 60 million shares to investors at a price expected to be somewhere between $40 and $50 apiece, it's done everything it could to make sure it's the most private public company in America. If the prospectus for Goldman's IPO had a headline, it would read: the more things change, the more they stay the same.

As the last major Wall Street firm organized as a partnership rather than a corporation, Goldman has spent the past decade in what you might call the white-shoe tower. Goldman's partners rarely speak to the press. They haven't had to sit in on conference calls with analysts or disclose the sources of the firm's revenues. There's no Goldman, Sachs thread on the Silicon Investor Website. And this, coupled with the firm's stellar performance in recent years -- Goldman's earnings have been growing at near-geometric rates since 1995 -- has given the firm an almost cultish aura in the eyes of the rest of the Street. When Goldman, in the prospectus for its IPO, refers to "the loyalty, the intimacy, and the esprit de corps" of its employees, it calls to mind some strange mix of Camp Lejeune and the Harvard Club.

If an important part of Goldman's reputation rests upon its distance from the madding crowd, though, the very act of going public would seem to threaten that reputation. But what's most striking about the Goldman IPO is how carefully the partners have devised a plan to invite outside shareholders in from a financial point of view while ensuring that they stay out in every other way. In a sense, Goldman is going public in name only. Taking money from individual and institutional investors usually means ceding some measure of control. (That's why "shareholder rights" has been the mantra of every takeover specialist of the past two decades.) But Goldman wanted the benefits of public financing without the drawbacks. And it appears that's what it's going to get.

The benefits are obvious enough. In one fell swoop, Goldman will raise almost $2 billion in capital that it can deploy however it wishes. (The prospectus, in typical sphinxlike fashion, says only that it will be used "for general corporate purposes.") In a partnership, each partner contributes capital to the firm and can just as easily remove it. A corporate structure removes that instability and should enhance Goldman's creditworthiness, which would lower its borrowing costs.

As for the costs, well, normally when you go public it means that you have to let the commoners come in and track dirt all over the carpets, or at the very least that you have to let them have a say in running the corporation of which they putatively own a part. It also means that you have to worry, at least distantly, about the possibility of an outside takeover. Goldman, though, will have none of these concerns. All of the power in the company will reside in the hands of a small group of managing directors, who will, according to the prospectus, be able to "elect the entire Board of Directors, control the management and policies of the Company and, in general, determine (without the consent of the Company's other shareholders) the outcome of any corporate transaction."

Now, as managing directors sell shares, that stranglehold should be lessened. But even so, there will never be a way for an outside shareholder to overturn the company's management. Goldman has instituted every anti-takeover provision in the book, including a poison pill and the staggered election of directors. More remarkably, directors can be removed only "for cause" (whatever that means), and even then it takes an 80 percent vote to remove them. And if directors are removed, the rest of the board has the sole right to fill vacancies.

Then there's the preferred-stock provision. At any time, and for any reason, the board of directors can issue preferred stock to whomever it wants and give each share of preferred as much voting power as it wants. (That means that each share of preferred stock could be worth 100 shares of common stock, in terms of voting.) In other words, the way things are is the way things are going to be.

There's something fitting about the partners' self-protectiveness, given Goldman's past record as an adviser to companies resisting hostile takeovers. And it is the partners' company right now, so it's understandable that they'd want to keep it as much theirs as possible. But there is something deeply ironic about one of the great avatars of globalization and restructuring -- processes often associated with the eradication of entrenched management by outside investors -- so carefully ensuring that there will be no corporate raiders in its future.

Public ownership is traditionally seen as one of the great innovations of American capitalism and one of the things that gives it its vibrancy and competitive edge. Since the eighties, CEOs have known that if they don't perform, they can get dumped. But Goldman, I suppose, wants to make sure that if its CEO gets dumped, it's Goldman's partners who are doing the dumping (as theydid earlier this year, when co-CEO Jon Corzine was told to start packing his bags).

Of course, there aren't too many people out there who are going to refrain from buying Goldman because of its anti-takeover provisions. What most investors are going to be more concerned with is whether Goldman is worth the $18 billion to $24 billion at which the current IPO will value it, especially after what happened last summer and fall, when the firm had $663 million in trading losses and saw profits tumble 81 percent.

The answer is that Goldman is worth it, precisely because it has scaled back the IPO and, in a sense, priced investors' doubts into the new offering. When you compare the new IPO with the one Goldman had planned last fall, the traces of last summer's market turmoil are visible. Where valuations of the company as high as $30 billion were routine last summer, the firm will be valued at $24 billion at most. Where the company was initially expected to sell just 10 percent of its shares, it may now sell as many as 14.7 percent. (Technically, Goldman itself will sell a little more than 10 percent, with other shareholders selling an additional 4 percent.) And Goldman will, at least at first, trade at a significant discount, on a price-to-earnings basis, to competitors like Merrill Lynch and J.P. Morgan. By almost any measure of performance, Goldman has been superior to most other financial institutions. But its performance is heavily driven by trading, which is by nature risky. And even in today's market, people demand a greater return for greater risk. That means Goldman's shares have to be cheaper than those of firms whose revenue streams -- from brokerage customers or from banking -- are more stable.

At the same time, though, the Goldman IPO is a testament to the really remarkable rebound of not just the U.S. equity market but global financial markets as a whole. I know we live in a world where speed is everything, but it really was just six months ago that everything appeared to be on the verge of collapse, and no sector appeared more shaky than the financial one. But the turnaround, which began in early October, was both sudden and fast-paced. Goldman, for example, went from barely breaking even in the fourth quarter of 1998 to earning $1.2 billion in the first quarter of 1999. Across the board, banks are reporting healthy revenue growth, brokerage stocks are booming, and global bond traders are making money again. And what makes this all the more surprising is that it's happening despite the fact that Brazil remains unstable (although improving) and much of Asia is still mired in crisis.

In retrospect, in fact, last summer's correction appears to have been exactly that: a much-needed step back that wrung some speculative excess out of the system without bringing the whole thing down. In that sense, Goldman's new IPO, with its lower valuation and its greater air of caution, suggests that the summer of 1998 was not without its chastening effects. Of course, with the Dow hovering around 10,000 and Net stocks on the fly again, it may be hard to accept that the market is any more thoughtful than it was just before everything fell apart.

But it is.


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