Goldman Sachs Share Sale Faces More Bad Timing as Financial Stocks
Falter
Goldman Sachs Share Sale Faces More Bad Timing -- a Rally's End
New York, May 2 (Bloomberg) -- Goldman Sachs Group Inc.'s
initial public offering was the victim of bad timing once: Wall
Street's last major private investment bank had to cancel its
share sale in September when markets plunged.
On Monday, the firm may be out of synch again as the 130-
year-old partnership tries to raise as much as $3.8 billion. A
rally that's made financial shares the best performers this year
may be coming to an end. That means investors who buy Goldman may
not get the gains they've come to expect from financial shares.
''These stocks have defied gravity,'' said Tim Ghriskey, a
portfolio manager at Dreyfus Corp., which has $100 billion in
assets, including Merrill Lynch & Co. and Morgan Stanley Dean
Witter & Co. shares. ''If interest rates keep going up, I don't
think there is any way this group can perform the way it has.''
Financial stocks were the best industry group in the first
quarter, with the Standard & Poor's Index of brokerages and
investment banks up 47 percent. In the last five sessions, they
were the second-worst, falling 8.4 percent, wounded by reports of
a strong economy, inflation worries and higher bond yields.
''Financial stocks may be going south,'' said
Seiichi Kunugi, a vice president at Bear Stearns & Co. in charge
of selling U.S. equities to Japanese institutional investors such
as life insurance companies.
Premier Firm
That doesn't mean investors don't want to own Goldman Sachs,
whose sale of 14.8 percent of the firm may rank as the second-
biggest initial public offering ever if it gets its top price of
$55 a share. The firm consistently ranks highly among Wall Street
stock and bond underwriters and mergers advisory. In its first
quarter, it earned a record $1.2 billion.
''In insurance, you have American International Group; in
manufacturing, you have General Electric, and in this industry,
it's Goldman that's in that league,'' said John Criss, who helps
manage $2.5 billion at New York-based European Investors Inc.
Criss, who doesn't own any other financial stocks, said he
placed an order for Goldman Sachs shares. So have hundreds of
other investors. There's almost 10 times more demand for shares
than the maximum of 69 million the firm plans to sell, say people
with knowledge of the sale.
The brisk demand suggests the share price will come in at
the high end of the range the firm set. At $55, Goldman would be
asking investors to pay 19.7 times its 1998 earnings per share.
That compares with 17.6 for Morgan Stanley and 21.9 for Merrill
Lynch, Goldman's biggest rivals.
Beyond the Pack
The stock's initial trading will likely push it beyond
Merrill and Morgan on a relative-value basis, though it's not
expected to produce gains like the 40 percent Morgan and 30
percent Merrill attained in the first quarter, investors said.
Still, many anticipate it will find a place as a premium stock
for those who invest in financial shares.
''This is a great brand name, and it's going to attract the
long-term type of holder,'' said Griskey of Dreyfus.
Kunugi at Bear Stearns is telling clients to wait a few
weeks before buying Goldman. Others say they're ready to commit
to Goldman for years.
''Our time horizon is pretty long,'' said Ted Bridges, a
portfolio manager with Omaha, Nebraska-based Bridges Investment
Counsel Inc., which oversees $1.5 billion.
Goldman's partners first voted to go public last June, only
to pull the offering in September as markets plunged after Russia
defaulted and devalued its currency in August. Most brokerage
stocks fell more than 60 percent in less than three months,
ending Goldman's chance to get a top price for its shares.
The company lost millions in bond trading in the quarter
ended Nov. 30, pushing pretax profit down 81 percent to $107
million.
Unlikely Repeat
Such a scenario is less likely to repeat now, the firm says,
because as a public company it will reduce its dependence on
risky trading to 25 percent of revenue from 45 percent in the
first quarter. It also plans to build up its more-stable
investment banking and asset management businesses.
Goldman's strategy has many investors eager to buy, even if
the prospects for financial stocks aren't as rosy as they were at
the start of the year.
''This place has been, is now, and will be in the future, a
money machine,'' said Mark Dawson, a portfolio manager at Rainier
Investment Management in Seattle who owns shares in Morgan
Stanley and Lehman Brothers Holdings Inc. ''If you are going to
invest for the long term in financial stocks, no matter what
happens in the first few days, you will come out ahead buying
Goldman.''
-- Lisa Kassenaar
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