Many That Once Glittered Aren't for Goldman By Adam Lashinsky Silicon Valley Columnist 6/13/01 10:48 AM ET

Everyone now knows that the investment banking-venture capital-entrepreneurial complex is chronically ill. The bankers jeopardized their reputations by sponsoring ill-prepared companies, the VCs goofed by making their investors believe the good times would last forever and the entrepreneurs betrayed their employees, who thought all their hard work would pay off in the end. But perhaps the best illustration of how badly the machine has broken down is that the key players aren't even keeping their promises anymore.

The prime example is the shabby way the investment banks are treating their clients, the VC-backed companies whose public stock offerings they underwrite. A typical response by the investment banks when asked about why they never recommend selling a stock is that banks only take on clients they believe in from the start. That's one of the big lies, of course. Bankers will back anything they think can attract a fee. The broken promise comes when the bank drops coverage of the client.

"It's taken for granted that the brokerage who underwrote a deal will never drop coverage," says a former analyst with a major San Francisco boutique banking firm. "Besides, it costs less and creates less hassle to just come out with the standard report each quarter."

The reality is that when banking clients become too much of an embarrassment -- and, more to the point, when their stocks have fallen so low that there's little hope for future banking fees -- they become expendable.

Take the six companies listed below (see chart). Goldman Sachs (GS:NYSE - news - commentary) dropped coverage of each Internet company -- including TheStreet.com (TSCM:Nasdaq - news - commentary) -- on April 23.

Goldman's Folly
Ticker	Name	Offer Date	Price (split-adjusted)	Amount Raised*	Total Fees	4/23/01 Price	Months to Drop
TSCM	TheStreet.com	5/11/99	$19	$104.5	$7.315	$1.92	23
ASKJ	AskJeeves	3/14/00	76	159.6	8.379	2.48	13
IVIL	iVillage	3/19/99	24	87.6	6.132	0.85	25
LOOK	LookSmart	8/20/99	12	92.4	6.468	1.20	20
NBCI	NBC Internet	2/4/00	81.375	374.325	19.467	2.12	14
SNOW	Snowball.com	3/21/00	33	68.75	4.813	0.80	13
Average			$40.90			$1.56	18
Total				$887.175	$52.574
*Notes: Amount Raised and Total Fees in millions.

Goldman did all sorts of ridiculous deals during the bubble era, like long-gone PlanetRx and still floundering E-Loan (EELN:Nasdaq - news - commentary) (the focus of a breathless Business Week cover story), Insweb (INSW:Nasdaq - news - commentary) and Webvan (WBVN:Nasdaq - news - commentary). But because the fame of lead new-media analyst Michael Parekh never approached that of Morgan Stanley's Mary Meeker, Goldman never seemed to get the spanking the media delivered to Morgan. In fact, Goldman did every bit as much -- or more -- as other investment banks to soil its good name with bad deals.

More to the point, it's not even living up to its end of the deal in regard to the companies from which it took fees. Goldman led deals that raised $887 million in six deals for the companies it dropped in April. Total fees on those offerings were $52.6 million, of which Goldman collected at least 40%, or about $21 million, based on standard fee structures for lead bankers. It's plain to see that this $21 million didn't buy much -- on average, 18 months of research coverage.

Two years ago, a piece here teased Goldman for dropping General Magic (GMGC:Nasdaq - news - commentary), a perennial Silicon Valley loser and Goldman client. The difference is that it took Goldman four years to abandon General Magic, a Net bubble stock before its time. Today, the abandonment happens much more quickly, showing either how efficient or how nefarious the game has become, depending on your perspective.

For its part, clients are philosophical about Goldman's treatment. "We're realists, given the dramatic change in the marketplace," says James Tolonen, CFO and chief operating officer of Snowball.com (SNOW:Nasdaq - news - commentary) in Brisbane, Calif. "We'd have preferred to have had coverage maintained," he says, noting that Goldman was reorganizing its research group and that "we were deemed to have fallen below the size that was appropriate." Snowball.com, which runs Web sites for young people, is worth about $6 million. Its shares closed Tuesday at 51 cents, down from a 52-week high of $15.28.

A Goldman spokeswoman explained simply that the firm dropped the six companies on April 23 because the two analysts covering them left Goldman Sachs. "The analysts left the firm. We didn't have the resources." That's a polite way of saying the companies didn't matter anymore. One assumes that if, heaven forfend, Rick Sherlund were to leave, Goldman Sachs would find the resources to cover Microsoft.

Another Goldman client, search engine supplier AskJeeves (ASKJ:Nasdaq - news - commentary), notes that the analyst who followed the company left Goldman Sachs and that AskJeeves hopes Goldman will resume coverage at some point. "We've been working with them in terms of long-term strategy," says Steven Sordello, chief financial officer of AskJeeves, which is worth about $81 million. Sordello says the company hopes Goldman will resume coverage eventually.

There are always extenuating circumstances. General Electric (GE:NYSE - news - commentary) announced on April 9 it would acquire the bits of NBCi (NBCI:Nasdaq - news - commentary) it doesn't own, so it's logical that Goldman would drop coverage. A spokeswoman for LookSmart (LOOK:Nasdaq - news - commentary) says Goldman intends to resume coverage of the company shortly and blames the disruption on the exit of the former analyst. And there's a practical reason to stop paying attention as well. Institutional investors typically aren't interested in very small companies, making the research irrelevant to the big funds that make up the bread and butter of the client base of a firm such as Goldman.

And, of course, Goldman isn't alone. Many banks are tossing former clients on the research trash heap. Another San Francisco investment banker notes that the subject of how long research coverage will continue comes up from time to time in pitch meetings. "Usually when we're asked, it's by a former banker on the other side of the table," the banker says. "Only the educated client thinks to ask."

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