Goldman Sachs Unravels in Brazil Amid Booming Markets, Economy
Feb. 21 (Bloomberg) -- In Brazil, there's something rotten at Goldman Sachs Group Inc.
Just when Goldman was reporting record earnings on record sales and benefiting from a record share price in 2005, all hell broke loose in Sao Paulo, Brazil's financial capital. That's where Goldman, the envy of the securities industry, has been the top merger adviser for the past three years and the odds-on- favorite to grab the biggest piece of South America's booming capital markets.
It all started in August, when country head Ricardo Lacerda, 38, bolted for Citigroup Inc. as Goldman's attempt to combine with Banco Pactual SA, Brazil's No. 2 stock underwriter, sputtered. By February, Lacerda lured five of his 14-person team. Electricite de France SA, among Goldman's biggest clients in Brazil, grew so nervous about doing business without its banker that it hired Citigroup to sell local units, work previously awarded only to Goldman.
``We were very concerned because the Goldman team that left had been working with us since 2003,'' said Paulo Roberto Ribeiro Pinto, 56, chief financial officer at Light Servicos de Eletricidade SA, one of two subsidiaries that Paris-based EDF put up for sale. ``This was a huge loss for Goldman. For Light and EDF, there wasn't a loss because we kept the whole team that was advising us on the process.''
Lacerda, Goldman's Brazilian head for four years, walked out because the firm was focused on trading and gave short shrift to investment banking, according to a person with direct knowledge of his decision. He hired Fabio Bicudo, 31, Joao Schmidt, 26, Flavio Aidar, 28, Matheus Villares, 34, and Cristiano Camargo, 26. All five declined to comment.
New York Oversight
The firm's Brazilian operations are now being overseen from New York by Goldman Latin America chief Corrado Varoli, who makes the nine-hour flight to Sao Paulo from New York as many as three times a month. Calls to Varoli were referred to Goldman spokesman Michael DuVally in New York, who said the firm has more investment bankers in Brazil now than it did a year ago. He declined to say how many bankers Goldman employs in Brazil or provide a comparison.
``The premise'' that Goldman is deteriorating in Brazil ``is absurd,'' DuVally said. ``We have a great team in place, great client relationships. We continue to win mandates and have a leading position in the market.''
Lacerda, who started at Citigroup on Nov. 30, declined to comment. Citigroup spokesman Joseph Christinat in New York said Brazil is an ``important market'' and declined to comment on Lacerda.
Brazil Stocks Surge
For Goldman, which reaped an estimated $50 million of fees from mergers in Brazil during the past three years, the timing couldn't be worse. Brazil's stock market is off to its best start in five years, with the 57-member Bovespa index up 27 percent in dollar terms since Jan. 1. Share sales are increasing. This year is shaping up to be the busiest for mergers since 1997, according to KPMG International.
Brazil may prove a rare embarrassment for Goldman, whose investments in developing nations stretch from China to Russia and India. Goldman has now tried and failed twice to absorb a big investment bank in Brazil since then-country head Eduardo Gentil set up its first office in Sao Paulo in 1995.
The second-biggest securities firm by market value said Dec. 15 that it earned $1.63 billion in the fiscal fourth quarter on revenue of $6.29 billion. The stock closed Feb. 17 at $145.54.
Goldman derived more than half of last year's $25 billion in revenue from the U.S. Just 1.1 percent came from regions outside the U.S., Europe and Asia. Last year's growth in so-called other regions jumped almost 10 times to $274 million. That outpaced 30 percent in Europe, 43 percent in Asia and 11 percent in the U.S. Goldman doesn't provide a country-by-country earnings breakdown.
`Somewhere Around India'
In Miami this month, Chief Financial Officer David Viniar placed Brazil alongside India, whose population is almost six times bigger, as a part of the world where Goldman wants to focus its international expansion.
``It's somewhere around India, not nearly as big an opportunity as China,'' he told analysts and investors at the Feb. 10 conference. ``It's a very big economy, and it's a place where we're very focused on growing.''
Viniar added a caveat: ``Brazil has a very long history of the economy doing great and then crashing, doing great and then crashing,'' he said. ``So we have to be very careful.''
Importance of Timing
Goldman itself has learned lessons in the importance of timing in Latin America. In June 2001, six months before Argentina defaulted on $95 billion of debt, Goldman foreign exchange head Peter Gerhard announced plans to make Sao Paulo the firm's fifth global trading hub, on par with similar centers in New York, London, Tokyo and Hong Kong. Goldman hired more staff and built a trading desk, complete with sleek flat-panel monitors and wall clocks set to time zones around the world, according to people who worked there at the time.
In December, Goldman pulled the plug, citing a slump in business. Stuck with technology it no longer needed, Goldman donated the equipment to charity, leaving employees with older tube monitor displays.
Like many banks, Goldman cut back in emerging markets to reduce risk in the wake of the Sept. 11 attacks.
Brazil's volatile history was in evidence in 2002, when the emergence of union activist Luiz Inacio Lula da Silva as a front- runner in the presidential election spooked financial markets. Investors fretted that Lula's Workers' Party would follow through on a threat to halt payments on international debt and lead the government to abandon fiscal restraint.
Exited Brazil
Some banks, including Munich-based HVB Group, exited Brazil altogether. Others trimmed staff or shut offices as the nation's benchmark bond due 2040 tumbled to as low as 42 cents on the dollar in July. The currency, the real, slid 35 percent in 2002.
Gentil decided to depart in January that year. His replacement: Lacerda. A graduate of Fundacao Getulio Vargas in Sao Paulo, Lacerda earned a business degree from Columbia University in New York. He worked for Bear Stearns Cos. before joining Goldman's investment banking division in New York in 1997.
Lula took financial markets by surprise from the day he took office on Jan. 1, 2003. He pledged in his inaugural speech to undertake a ``crusade'' for economic growth, vowing an ``implacable'' fight against inflation.
He won. The inflation rate, which peaked in his first year at 17 percent, has fallen by more than half to about 6 percent in January.
Since 2003, the nation's benchmark bond more than doubled in price, the Bovespa more than quintupled in dollar terms, and the currency rose 67 percent to become the world's best performer.
Economic Rebound
These days, Brazil's economy is on an even keel, with interest rates at a 14-month low. Record exports of iron ore, soybeans and other commodities have swelled Brazil's trade surplus and spurred economic growth. Brazil's economy will expand by 4 percent in 2006 after growing an estimated 2.6 percent in 2005, according to Banco Central do Brasil.
The rebound caught the attention of Citigroup Latin American chief Manuel Medina-Mora, the Grupo Financiero Banamex SA chief executive officer who joined the U.S. bank when Citigroup bought Mexico City-based Banamex in 2001.
``In Brazil, we'll expand all of our activities,'' Medina- Mora said in a March 2004 interview. ``It's a country that's been well managed, it's making good progress, and we see the economy going well.''
Citigroup doubled its Brazil branches last year to 124, country head Gustavo Marin said in congressional testimony in the nation's capital, Brasilia, in October.
Top Merger Adviser
Under Lacerda, Goldman prospered. It rose to first as a merger adviser in Brazil in 2004 from fourth in 2003. Citigroup, which opened its first office in Brazil 90 years ago, was ninth last year, third in 2004 and sixth in 2003.
Lacerda was the reason Goldman wound up working for Aracruz Celulose SA, Latin America's largest pulp exporter, when Aracruz bought Klabin Riocell SA for $610.5 million in May 2003. Lacerda had worked for the pulp maker two years earlier, on a failed bid for Celulose Nipo-Brasileira SA.
``When we did the Riocell deal and hired Goldman, one of the prerequisites was that we would only hire Goldman if Ricardo personally worked on the transaction,'' said Maria Clara Assis, 43, Aracruz's Sao Paulo-based planning manager. ``The CEO of Aracruz was adamant about that because we know many times after the bank is hired it goes out and puts a team that has no relationship with the company.''
Senior Bankers
Goldman has lost senior bankers around the world in the past year, including Claudio Costamagna, chairman of European investment banking, Simon Robertson, president of the firm in Europe, Peter Weinberg, who ran its international division, and Mario Draghi, a vice chairman.
Lacerda's departure may not hurt Goldman's business in Brazil, said Luiz Chrysostomo, 42, who headed investment banking in the nation for JPMorgan Chase & Co. from 1999 until last year.
``For Goldman, it may mean sacrificing one or two deals in the short term,'' said Chrysostomo, now a partner at Neo Investimentos, a Rio de Janeiro-based money manager. ``But honestly, I have seen that film before many times. You lose one deal here, you win another up the road.''
Goldman set up its first office in Brazil in November 1995. Then-Chairman Jon Corzine said the firm was mainly interested in cross-border equity and debt financing, mergers, structured finance and project financing -- in other words, just about everything investment banks do to earn money.
Telebras Failure
Under Gentil, the first country head, Goldman's success was mixed. In 1996, Goldman won the mandate to sell a $1 billion stake in Rio-based Light Servicos that was then owned by the Brazilian government.
Two years later, it lost a bid to manage the government's $18 billion sale of Telecomunicacoes Brasileiras SA, the nation's largest disposal of state-owned assets. Telebras paid Salomon Smith Barney Inc. and Morgan Stanley $12.7 million to arrange the sale to investors including Brazilian pension funds and Telecom Italia SpA. Goldman ranked No. 15 in Brazilian mergers that year, mostly because it missed out on Telebras.
The same year, 1998, Goldman was among Wall Street banks that were in talks to buy or form a venture with Brazil's top investment bank, Banco de Investimentos Garantia SA. Credit Suisse Group agreed to purchase Garantia in June for $675 million.
Goldman and Citigroup each had a role in Interbrew SA's 2004 purchase of Cia. de Bebidas das Americas, or Ambev, for $11.2 billion. Goldman and Lazard Ltd. advised Interbrew, now known as InBev NV, while Citigroup and JPMorgan worked for Ambev.
Pactual
Seven years after the Garantia plan fell apart, Rio-based Pactual also blamed Goldman for the failure of its proposed combination. The U.S. firm insisted on owning a majority stake, a condition that Pactual bankers rejected, according to a person familiar with the talks. The scuttled Pactual talks may prove a more lasting setback, said Jose Guimaraes Monforte, who ran Merrill Lynch & Co.'s Brazil business for 11 years until 1988.
``Goldman's problem was they invested too much in the merger with Pactual,'' said Monforte, who now runs Janos Participacoes, a Sao Paulo-based investment firm. ``Everyone was in a mindset of how things were going to be implemented, and all of a sudden that didn't happen. They didn't have a Plan B.''
The combination was rooted in a simple proposition: Pactual was a leader in equity underwriting, while Goldman had long been the dominant merger adviser. Lacerda would head investment banking at the new entity, according to a person who participated in the negotiations.
As the talks dragged on, they began to focus ever more on creating a powerful trading firm, the person said. That helped revive negotiations between Lacerda and Citigroup that had begun after Jose Olympio Pereira, the bank's investment banking chief in Brazil, left for Credit Suisse about a year earlier.
Lacerda continues to call on clients from his time at Goldman, said Assis, the planning manager at Aracruz.
``We did two deals and both were with Goldman,'' she said. ``But one of the jokes he tells me is that now I will be able to hire Citi.'' |
