Goldman's Corzine Steps Down, Others Step Up

Jon Corzine's decision to step down as Goldman Sachs' co-CEO may say more about how the firm makes money than about its much-discussed IPO.
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Jon Corzine's

decision to step down as

Goldman Sachs'

co-CEO may say more about how the firm makes money than about its much-discussed IPO.

Goldman Sachs said today that Corzine, who had run the firm since 1994, quit his co-CEO post, which he had shared with Hank Paulson for the past year. Paulson becomes the firm's sole CEO. Corzine keeps the co-chairmanship with Paulson and plans to focus exclusively on taking the firm public.

Corzine has been a strong proponent of the IPO, which the firm filed last June but then canceled in September amid turmoil in the global markets.

Goldman also elevated John Thain and John Thornton to the posts of co-chief operating officers and put the pair in charge of a new and likely influential partnership committee.

Hal Schroeder, senior research analyst at

Keefe Bruyette & Woods

, says the moves demonstrate significant shifts taking place at Goldman. First, it's dealing with the difficulties that a firm encounters when it goes public.

"In the end, I think Goldman is seeking a more balanced revenue stream that will serve them better as a public company," says Schroeder.

Investors like companies with predictable earnings. Yet Goldman traditionally has been more dependent on trading revenue than other Wall Street rivals. In 1998's first half, more than 40% of Goldman's revenue came from trading, compared with less than 30% for rivals

Merrill Lynch

(MER)

and

Morgan Stanley Dean Witter

(MWD)

. That dependency can eat into Goldman's earnings. For the fiscal fourth quarter ended Nov. 27, Goldman's pretax profits dropped to $107 million compared with $567 million a year earlier. Revenue fell to $915 million, compared with $1.6 billion.

That's why several observers suggested that before giving more thought to its own IPO, Goldman must address its profitability issues, such as possibly decreasing its reliance on trading.

"For Goldman Sachs, or any company for that matter, you wouldn't go public after reporting a down quarter," says a Wall Street underwriting pro, requesting anonymity. Now, he adds, Goldman is waiting to see how its Wall Street rivals' quarterly numbers stack up, and it is especially keen on seeing how Merrill Lynch finished the year. "If

Goldman wants to get a good valuation, they have to show good numbers compared to the rest of Wall Street," he says.

Another issue concerns Goldman's reputation, which suffered after the cancellation of the IPO. "How can Goldman offer advice to clients on corporate finance when it can't get its own deal done?" asks one equity specialist with a rival Wall Street firm. "The firm has to approach the IPO in a 'Can't fail' mode."

Goldman also announced the creation of a new 15-member management committee, which will replace its previous executive committee. Paulson will chair the new group. Corzine is not a member of the new management committee.

The ascent of Thain and Thornton illustrates how Corzine's power has shifted in a less than gracious manner. One investment banker at a rival firm, who requested anonymity, says it was common knowledge on the Street that Thain and Thornton were locked in a power struggle with Corzine -- a struggle that was aggravated by the IPO. "

Thain and Thornton never wanted to do an IPO," he says. Corzine and Paulson may have struck an agreement to be allowed to go ahead with the deal, he adds. "The feeling was that Corzine would get to do the deal but would lose some power."

Thornton has been mentioned as an heir apparent. Neither Thornton, based in London, nor Thain returned phone calls. A Goldman spokesman says the firm is not commenting beyond the press release.

Thornton is in charge of the firm's foreign operations and carries a background in mergers and acquisitions. In addition to his duties at Goldman, Thornton also is a director at

Ford Motors

(F) - Get Report

and chairman of

Laura Ashley

. Thain is Goldman's chief financial officer with a background in banking and fixed income. Both Thornton and Thain are 20-year veterans of the firm and members of the previous executive committee and the new membership committee. Both, along with Corzine, Paulson and Goldman vice-chairman Robert Hurst, make up Goldman's board of directors.

In fact, the pair's position as head of the partnership committee also points to the power they will control in overcoming a major obstacle Goldman faces in going public: Retaining key employees amid market turmoil and after the IPO cash starts to flow. "Goldman has a lot of internal issues to deal with as far as compensation

goes before going public," says the investment banker. "They were paying so poorly in fixed income that employees were walking out the door after being paid -- just walking out the door." One executive placement professional echoes that, saying he's seen resumes coming out of Goldman Sachs at a level he hasn't seen in years.

Now whether the IPO gets done this summer, or at all, seems to be largely up to Corzine. "It certainly is in Corzine's political interests to get this deal done," says one former Goldman exec who is now a hedge fund manager. "The firm has built in the expectations that the IPO will be completed." The money manager says his old firm is keeping a keen eye on the market environment and the possible valuations it could receive if it went public. "But be sure, if the market valuations are there, Goldman will go public."