Goldman Sachs' IPO Paves a Green Path Into the Future

After much anticipation, the whopper of a deal doesn't disappoint.
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The IPO of

Goldman Sachs

(GS:NYSE) not only tears asunder the partnership structure that helped the firm become the most powerful and profitable firm on the Street. Without a doubt it also will change the way Goldman operates almost every part of its business.

"More than any one factor, it gives top management more options to survive. With compensation, it can be creative for employees and it can expand the franchise with acquisitions," says Michael Holland of

Holland Asset Management

.

Goldman's hefty IPO, which weathered internal dissension and market volatility, priced at 53 per share after trading Monday. That price gave the venerable firm a market capitalization of $24.7 billion, the fourth largest among its Wall Street brokerage brethren.

Its publicly traded future will likely mold Goldman into a firm that seeks more recurring revenue streams from businesses such as asset management and structured products than the hard-charging trading and banking profits that left it vulnerable to market fluctuations. It has models in

Merrill Lynch

(MER)

and

Morgan Stanley Dean Witter

(MWD)

, which both have strong investment banks and asset management franchises.

And while Goldman's 130-year history makes it the last of the mighty partnerships, Holland, for one, isn't nostalgic. He says Goldman may have needs in its asset management and brokerage areas but sees the firm approaching them in a nontraditional way via investments in

Wit Capital

, an online investment bank, and

Archipelago

, an electronic communications network or trading platform.

"Do they now have to go out and buy a traditional brokerage firm or asset management company? No, they can think about what the paradigm will be in 2025," Holland says.

The IPO, underwritten by Goldman and a fleet of co-managers that includes nearly every firm on Wall Street, is the second largest U.S. IPO in history, coming behind only the $4.4 billion blockbuster for

Conoco

(COC)

last fall.

In terms of price-to-earnings ratio -- financial firms, unlike Internet companies, can still use such measurements -- Goldman's IPO price puts the stock at 19.6 times its 1998 earnings. That places the company between Merrill's 30 times trailing 12-month earnings and Morgan Stanley's 16 times. Schwab, of course, outpaces them all, trading at 107.5 times its trailing earnings.

"Fifty-three is a full price, but I think it's going to get fuller," Holland says, adding that he isn't buying at the IPO price but will take a look at Goldman shares in the after-market.

By any measurement, the deal is a whopper. It's selling 69 million shares, giving the company about 466 million shares outstanding, a number greater than even Merrill's, at 360 million, and Schwab's, at 406 million. In addition, Goldman has set aside an additional 103 million shares for stock option awards for its 221 partners and more than 12,000 general employees.

Anticipation for the deal was huge. It was reportedly 10 times oversubscribed, even though Goldman had

taken a hard line with its co-managers in how shares would be placed, especially with the retail customers. The enthusiasm for the deal allowed Goldman to up its pricing range by 11%, to between 45 and 55, from 40 to 50; also, Goldman was able to sell 9 million more shares than it originally planned. Two large inside holders,

Sumitomo Bank

of Japan and the

Kamehameha Trust

of Hawaii, sold a total of 18 million shares.

The IPO plopped about $750 million in the combined laps of the top four Goldman officers: Chairman and CEO Hank Paulson, Vice Chairman Robert Hurst and Co-Presidents and Co-Chief Operating Officers John Thain and John Thornton. It also ended a divisive split that had wracked the firm since it first filed its IPO last year and led to the fall of one of Goldman's top dogs, Jon Corzine. The Goldman prospectus didn't mention how much stock Corzine would get in the deal. Corzine is expected to leave the firm once the deal is done.

"What does the Goldman IPO change? It makes a select group of individuals very wealthy," cracks one Wall Street wag. Goldman's success, the trader says, has come from "Goldman always operating for Goldman," he says. "Now it will operate for its shareholders."