Tech IPO Success Has Goldman Topping Underwriting Charts

If Goldman Sachs (GS) CEO Hank Paulson is sporting a ponytail come bonus time to pay homage to Silicon Valley, it's because he knows where his proverbial bread is buttered.

Far from Goldman's Broad Street headquarters, about 40 of its bankers are using an office on Sand Hill Road in Menlo Park, Calif., for a continuing assault on the tech-savvy boutique banks that once dominated the West Coast. The bankers' success has solidified Goldman's perch atop 1999's underwriting rolls, where it shares increasingly rarefied air with Morgan Stanley Dean Witter (MWD) and Merrill Lynch (MER).

This year those three firms have combined to underwrite more equity deals than all their top 10 rivals together. And their dominance has only increased in the last year: Goldman, Morgan and Merrill held a combined equity underwriting-market share of 46% through Labor Day, up from 39% a year ago.

Battle of the Bulge Bracket Goldman, Morgan and Merrill accounted for about half of 1999's equity underwriting
Source: Thomson Financial Securities Data

Goldman, which counts its own IPO among deals it has completed this year, continues to lead the way. It has doubled the money it has raised for clients as it has boosted its market share among Wall Street underwriters to 21% from 13% a year ago, according to Thomson Financial/Securities Data figures taken through Labor Day.

And while it's not unusual for Goldman to be atop the underwriting tables, its growing reliance on tech deals may surprise those who think Goldman bleeds only blue. Only eight of the firm's 32 IPOs this year have come from outside the technology and Internet sectors. Last year, about half of its deals were in the tech sector. (In May Goldman served as lead underwriter for the IPO of TheStreet.com Inc. (TSCM), publisher of this Web site.)

"There's no question Goldman jumped to an early lead and it currently has the first-mover advantage," says David Weir, co-head of technology banking at J.P. Morgan (JPM). "But we're in the second inning of a game where the players and rules change constantly."

Maybe so, but Goldman has a Steinbrenner-esque mentality when it comes to paying for talent and resources. In February, Goldman opened a 48,000-square-foot office in Menlo Park, an expansion of its San Francisco operation. Now, half of Goldman's 80 technology bankers are based in Menlo Park, says Bradford Koenig, head of Goldman's technology banking operation.

Despite this, Koenig shies away from crediting the new digs for the underwriting surge. "It's very difficult to assign significance to any one factor," says. "It just reflects the firm's overall commitment to the Internet and technology as a significant and strategic area."

Indeed, Goldman, Merrill and Morgan have become so dominant that Wall Street has dubbed the seemingly self-perpetuating nature of their success the virtuous circle.

Using this model, Goldman, Merrill and Morgan continue to get an increasingly larger portion of the underwriting business on Wall Street, because each firm uses its trading and research prowess to get more underwriting deals. The fees from underwriting allow the firms to further attract top research analysts and bankers.

And while it's not impossible to wrestle business away from the Big Three, bankers have to be apt in hand-to-hand combat, says Barry Newman, head of technology banking at the Banc of America Securities unit of Bank of America (BAC). "You have to be in early, build a relationship with a client and execute perfectly," Newman says. Anything less, Newman adds, and you shouldn't even bother.

Some critics offer an alternative explanation for Goldman's success, especially in the tech arena. Namely, that as the overheated market of early summer churned out more IPOs, including ones that would not have gotten done in a more level-headed market, Goldman was in the trenches getting its share of the lower-quality offerings.

One investment-banking rival who requested anonymity says that where he used to see only a handful of firms, such as BancBoston Robertson Stephens (now in the process of becoming part of Fleet Financial (FLT)) and Hambrecht & Quist (HQ) chasing most tech and Net deals, recently he's been seeing other, seemingly more dignified faces. "Goldman and the bigger firms never went after the IPOs between $50 million and $100 million," the banker says. "Now I see them a lot."

Koenig dismisses the idea that Goldman is stuffing its pipeline with low-rent deals. "We attempt to be disciplined in our approach to Internet IPOs," he says, adding that Goldman evaluates several factors with every potential client, including size of market, the company's leadership position and its management team.

Indeed, Goldman's evaluation criteria is so strict, Wall Street has taken to calling it "the gold standard," says Banc of America's Newman. Over the last two years, Goldman is second among underwriters in terms of the aftermarket performance of its IPOs, according to IPO Monitor. Since 1998, an average Goldman-led IPO is up 108% from its initial offering price, second only to the 150% average gain posted by Morgan Stanley-led deals.

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