Goldman Stingy With Retail Shares in Its IPO

The co-managing firms are expected to be out of luck on getting shares for retail investors.
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Goldman Sachs'

decision to name 12 investment banks as co-managers on its long-awaited IPO may have made many investment bankers' mouths water over the expected fees on the anticipated $3.45 billion offering.

But perhaps those bankers need to wipe their chins and read the fine print. Goldman, while being generously inclusive with its co-management mandates, is being miserly about how and to whom the shares of the deal are going to be sold, especially when it comes to retail customers, according to two bankers whose firms are involved in the transaction. All the bankers involved spoke on condition of anonymity.

Goldman has already warned some of the banks involved not to expect any shares to sell their retail clients, the bankers say. Instead, Goldman itself plans to place all the shares that will be designated for retail customers. One banker, whose firm is involved in the IPO, called the move "bizarre." Goldman declined to comment on the allocation of shares.

In the past, the name of Goldman, an IPO underwriting powerhouse, has had more than enough luster to attract top-flight institutional interest in the new offerings it has brought to market. It largely looked down its nose at the riff-raff retail investors.

But individual investors, thanks to the Internet and online trading, carry more clout today. In many cases, these investors have been responsible for the huge gains of Internet IPOs.

"It doesn't surprise me that Goldman would be hogging all the retail shares," says Sandy Robertson, former head of

Robertson Stephens

investment bank, now part of

BankBoston

(BKB)

. "You couldn't expect them to share much in this deal."

The retail distribution is just one example of the control Goldman is exerting over the issue.

The 12 co-managing investment banks, led by Goldman, which will be named in a preliminary prospectus expected to be released Tuesday, include just about every top firm on Wall Street. The list, according to several bankers, is being viewed as a "who matters most on Wall Street" designation. Despite all that investment banking brainpower, it is unlikely that any bank other than Goldman will make key decisions, says a rival banker involved in the deal. "Don't kid yourself," he chides. "No one is going to be pricing this deal or having any power over it other than Goldman."

Still, the lack of any retail shares to sell to their own clients has nettled some co-managing bankers. "It is extremely odd that the co-managers on this deal will not have any shares to sell its retail customers," says another banker who was surprised by Goldman's decision to hoard the retail shares.

Co-managers view retail shares as the meat in the sandwich because of simple economics. Institutional clients most often, though not always, direct the actual purchase of the IPO shares, called the execution, through the lead bank, giving it the sales commission. However, when an investment bank secures shares for its own retail customers, it can be pretty sure those customers will execute through the bank. "Getting shares for retail customers takes out all the uncertainty," one of the bankers says. "You know you are going to get paid."

In Goldman's IPO, co-managers left out of this more lucrative fee source may not see anything more than crumbs of the total fee pie.

Goldman's IPO is expected to be split 80/20, says a rival banker. That means that 80% of the IPO shares, about 55 million of the planned 69 million shares to be sold, will be sold to institutional clients through Goldman and its co-managing banks. The remaining 20%, or about 14 million shares, will be sold to Goldman's retail clients. That retail class is expected to be offered in some combination to the firm's high-net-worth customers and the unwashed masses that can tap in through

Wit Capital

, the online investment bank that Goldman agreed to purchase 22% of last month.

Although it has not been determined what role, if any, Wit would play in the distribution of Goldman shares, several bankers involved with the deal expect some of Goldman's shares to be sold online.

"Well, if you figure Goldman covers the high end with its own retail customers and Wit Capital represents the low end, then maybe they do have all the bases covered," says another banker who will be involved on the deal. A Wit spokeswoman declined to comment.

Goldman is playing this strong hand for several reasons, the bankers suggest. First, the firm wants ultimate control over who will own its shares, ensuring that the offering will be free from "flipping," the quick sale of IPO shares that can play havoc with the price once it starts trading. "Basically, Goldman wants to know where the stock is at all times," says the rival banker, adding that if Goldman farmed out its stock to 12 separate banks, Goldman would lose that control.

Another reason may be slightly more image conscious, he suggests. Goldman, despite the cachet of its brand name, doesn't have the same distribution capabilities or as wide a retail customer base as rival firms. Indeed, with only about 420 high-net-worth brokers, Goldman's retail abilities badly trail such firms as

Merrill Lynch

(MER)

,

Salomon Smith Barney

and

Morgan Stanley Dean Witter

(MWD)

. By hogging the retail end of the deal and successfully placing it all by itself, Goldman could use its own issue to prove to potential banking clients that it can leverage the Wit relationship to help distribute a new issue.

"If the deal goes well, I could see them strutting around, saying, 'Who's not retail now, eh?' " jokes one banker.

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