Goldman Sachs LP

1
Goldman Sachs LP

• IPO Discussions
• Source Lisa Endlich, Goldman Sachs The
  Culture of Success, Touchstone Publishing

2
1994 Troubles

• Goldman Sachs had barely scraped by with 500
  million of profits in 1994 in the fourth quarter
  the firm had actually lost 42 million.
• In fact, with a number of limited partners who
  would need to be paid a fixed rate on their
  capital out of the firms pretax profits, the
  profit picture threatened to be even bleaker.

3
Get Into the Boat or Get Out

• In 1994, Corzine and Paulson had focused almost
  exclusively on holding the partnership together.
  As partners decided whether to sign the new
  partnership agreement they were told it was
  decision time Get into the boat or get out.

4
Got Out

• The large number of partnership defections in
  1994 had made clear to management committee
  members just how few partners understood the
  breadth of the firms business and its inner
  workings. Many partners had left because of
  their discomfort with the activity of the firms
  trading business and questions about how it fits
  into the whole picture.

5
1996 IPO Decision

• In a replay of events a decade earlier the
  Goldman Sachs partnership met in 1996 again to
  consider a public offering.
• The reason for the discussion was to secure the
  capital structure of the firm.
• Too many people with the ability to walk away
  with their capital caused a threat to the firm.

6
Stability of Capital

• The weakness of the partnership structure was
  that partners and capital could easily depart. A
  corporate structure would provide a more
  permanent capital structure and less personal
  exposure.

7
Financially - Bad Timing

• Morgan Stanley sold for 3X BV in a good market on
  the 1980s.
• Valuation projected that Goldman would sell in
  current market conditions at less than 2X BV.
• 92 on 172 partners had less than 3 years tenure.
  With little capital in the firm, they would not
  receive a substantial portion of the equity in a p

8
No in 1996

• Low valuations
• Differentiation from other investment banks is a
  positive.
• It was a question of balancing risks and rewards,
  one partner noted, The premium that came from a
  public offering wasnt worth the threat to the
  culture.

9
1996 Structure Reform

• Unlimited liability partnership was abolished.
• Private limited liability corporation was
  created.
• The only assets now at risk were those invested
  with the firm.
• Private assets such as homes and bank accounts
  were shielded from liability.

10
Psychological Comfort

• Corzine estimated that most partners had 90 of
  their net worth invested with the company, so the
  change to an LLC structure made little material
  difference.
• The financial risk to the partners was primarily
  because the firm was private, not because it was
  a partnership.

11
Strengthen Capital Structure

• Partners capital, once a source of instability,
  was shored up on 1996 and the roles governing
  withdrawals were substantially altered.
• For example, the payout period, which begins
  after retirement, was lengthened.
• In years when the firm did very well the partners
  would put some portion of their earnings into a
  longer term capital account, with an 8-year
  commitment and a three year payout period.

12
Lost Opportunities

• Merrill Lynch bought Mercury Asset Management and
  Yamaichi Securities.
• Salomon Brothers bought Nikko Securities
• Goldman Sachs probably did not have the option to
  do such purchases.
• As a private company with no stock it would have
  been extremely difficult to spend major sums for
  acquisitions.

13
Structure follows Strategy

• Co-CEO Paulson led a group of eight department
  heads in a total review of the firms strategy
• The committees motto meant that the firm would
  make no decisions on its structure (IPO or
  Partnership) until it had determined the strategy.

14
Imagine Goldman Sachs of 2008

• What are the major drivers of profitability and
  what can be done to expand them?
• What does it mean to be global?
• Who are our clients?
• How much emphasis should be placed on proprietary
  activities?
• Is the firm capital-constrained, and would it
  have more capital with public shareholders?
• Is it necessary to have an acquisition currency
  in order to expand sufficiently?
• How great a disadvantage is the impermanence of
  the firms capital?
• Does it need downside protection?
• What would be the impact of technology on the
  firms business?

15
1998 Biggest Question

• How fast to grow??
• What is the best long-term interest of the firm?

16
Committee Conclusions

• Rejected the notion that Goldman Sachs should be
  a supermarket of financial services
• Not rush to join or combine with Chase Manhattan
  or JP Morgan
• Goldman Sachs should differentiate from
  competitors by remaining a wholesaler of
  investment banking services.
• Continue on same path, HOWEVER, at a much faster
  pace.
• Over the next couple of years the goal was to
  double the firm size in people and revenues
• Asset Management growth through acquisitions in
  Europe and Japan

17
IPO Discussion Revisted

• Economic and Strategic hurdles non-issue
• The Valuations were extremely high
• Strategically
• Possibility of making major acquisitions
• Defraying partners risk
• Facilitating rapid expansion
• Economically and Strategically a sale made sense

18
Reasons for Going Public

• Employees can be locked in or motivated through
  ownership
• Capital is not permanent in a private format
• There is downside protection
• Market for IPO in 1998 was incredibly strong
• A partnership is an outdated and no longer
  effective form of ownership.

19
Reasons for Partnership

• The partnership has allowed the firm to recruit
  and keep the best talent in the industry.
• The firms culture rests on the foundation of its
  partnership, which has allowed the firm to
  differentiate.
• Public owners have a different agenda from
  partners
• GS as a public company might no longer be a fun
  place to work.

20
Partners Debate

• The debate focused on four main areas
• Equity
• Risk
• Strategy
• Acquisition

21
Mission and Strategy

• After the decision was taken to go public, Co-CEO
  Jon Corzine stated the following
• I am not without my own sadness about changing
  the structure and I am not without my own
  concerns. However, in order to achieve the
  mission of this organization to serve our
  clients and to sustain and strengthen the
  prominence of this firm I believe, on balance,
  this is the right decision.