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ePrepared: With Online Move, Goldman Readies Itself for Changing of the Guard

The firm's shift toward the electronic side of Wall Street will irreversibly link it with the ever-evolving Internet.

Goldman Sachs'

(GS:NYSE) blockbuster IPO isn't the only sign that the firm is leaving behind part of its past. Goldman also is becoming one of the most aggressive major Wall Street firms to tackle the challenges of the Internet.

While other firms -- most notably

Merrill Lynch


-- struggle with strategic and technical obstacles, Goldman has pushed ahead by buying into an online brokerage firm,

Wit Capital

, and an electronic communications network,


. (ECNs are trading systems that match buyers and sellers.) In addition, Goldman has said it's creating a new online service to reach institutional clients.

"People shouldn't be surprised. It is a firm that leaves no stone unturned," says Michael Flanagan, who runs research boutique

Financial Services Analytics

. "And Goldman has the least to lose because it has no retail brokerage to speak of." By comparison,

Morgan Stanley Dean Witter


, Merrill Lynch and


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each have more than 10,000 retail brokers whose livelihoods could be threatened if their firms ratchet up Internet business. (Of the three, Morgan Stanley has been the most aggressive with its

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By placing bets in different areas of the emerging electronic side of Wall Street, Goldman is covering itself for a changing of the guard.

"No one will be able to tell you where this business will be in five years," Flanagan says. "At this point, the cost of not doing something could be much greater than the cost of doing something."

Sandy Robertson, who helped found

Robertson Stephens

and now is involved with online investment bank


, agrees. "What Goldman is doing is getting its feet wet," Robertson says. "It wants to see where the industry is going, and it will make a decision then."

There is good reason. Goldman, whose IPO began trading Tuesday at 76, about 43% above its pricing Monday night, is trying to stabilize its revenue stream, moving away from the volatile proprietary trading. So it could use the technology pipeline to distribute funds and other products that pay recurring fees.

In addition to nailing down the distribution part of the Net equation, the firm also is courting plenty of Internet underwriting deals, which means it's dealing with companies with less-established track records than its typical clientele. There even has been some concern that Goldman's aggressive pursuit of smallish, immature Net underwriting deals has led the firm to do transactions that are more risky than its typical blue-chip, blue-blood offering. But many of its underwriting efforts in this arena have been big successes, such as


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, among others.

A Goldman spokesman said he couldn't make anyone available to comment for this story.

Goldman's initiatives toward distributing more stock over the Internet fit with its new banking expertise. "As the retail component becomes more important to winning banking business, it needs to align itself" with e-brokers such as Wit and



, which has access to some Goldman IPOs, says Julio Gomez, who heads

Gomez Advisors

. (Gomez declined to say whether his firm has worked with Goldman.) "It's a fact that issuers are demanding online distribution. They are aware that online investors are an increasingly important factor in the success of an IPO."

As an extension of its underwriting franchise, Goldman established


as a new Internet underwriting system, according to a three-paragraph disclosure in its amended prospectus filed April 12.

The system could help it compete with the next wave of Internet investment banks such as

W.R. Hambrecht

and E*Offering.

GS-Online will work as an electronic syndication process, allowing online brokerages such as E*Trade or Wit to get access to Goldman's deals electronically. "This will allow Goldman to connect with the online community," says one Goldman insider.

Online brokerages will be able to make expressions of interest quickly in Goldman deals, likely giving them a better chance to secure pieces of deals for their online clients. In fact, the online system may give e-brokers an edge over the smaller retail shops that currently populate the bottom tiers of Wall Street underwriting syndicates. "This is a technological change in the syndication process," the insider says.

Competitors aren't especially thrilled with the prospect of such a change. Goldman may eventually use the system to allow large institutional clients to access deals directly and bypass salespeople, predicts Richard Smith, head of the equity syndicate at

NationsBanc Montgomery Securities

, a


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unit. "It's a pretty clever way to annex the power of the Internet and create a communication system that doesn't have much overhead," Smith adds.

However, the changes that Wall Street might see because of GS-Online are more evolutionary than revolutionary, says Scott Sipprelle, who heads research boutique

Midtown Research

and once led Morgan Stanley's syndication desk. "It's a book-building system that allows Goldman the means of controlling the syndication process once it moves online," he says.

Currently, syndicate "books" are built by soliciting expressions of interest from large institutional buyers and other investment banks, which offer the deal to their retail customer base. The process can resemble trench warfare, in which the head of the lead underwriter's equity desk often has to move from institution to institution and bank to bank until he or she fills the subscription or the deal.

In almost any case, the lead underwriters are forced to butt heads with their clients, their counterparts at other firms, as well as the issuer, which has final say on who gets in the syndicate. "With this new Goldman online system, it really takes the human element out of the process," says Sipprelle.

One thing is clear: The move online will irreversibly link Goldman, a name that has become shorthand for Wall Street reverence, with the rapidly changing Internet.

Associate Editor

Dan Colarusso contributed to this report.