How well is Goldman serving its IPO clients?

By Felix Salmon
July 14, 2010
story about the performance of Goldman's IPOs: "Goldman Can Show SEC Clients Get Best Returns on Its IPOs".

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Bloomberg has placed an interesting headline on Michael Tsang’s story about the performance of Goldman’s IPOs: “Goldman Can Show SEC Clients Get Best Returns on Its IPOs”.

Let’s ignore the silly SEC angle: it’s utterly irrelevant. The interesting thing is the idea that Goldman’s clients, when it comes to IPOs, are not the paying customers who are forking over 7% of the proceeds in order to get the best execution, but rather the friends-of-Goldman getting in at the IPO price. Do we, or does the SEC, really care about people like Josef Schuster?

“For the underwriter, first-day success is a very important measure in terms of certifying the power and the credibility of the franchise,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees $3 billion. “A good first-day pop certifies the quality job the underwriter has done with investors and the company in order to further deals.”

Schuster, who purchased Tesla shares for his Direxion Long/Short Global IPO Fund, sold 30 percent of his stake on the second day of trading.

The answer, of course, is no. And the story that Tsang didn’t write — but could have written just as easily, given exactly the same data — is the story of Goldman systematically lowballing IPO price ranges, and cheating its corporate clients out of millions of dollars in IPO proceeds, giving them instead to flippers like Schuster.

Instead, Tsang’s lead is positively misleading on that front:

Goldman Sachs Group Inc., accused by the U.S. government of defrauding investors, is generating better returns for companies and buyers of initial public offerings than any other Wall Street firm.

Tsang never specifies what he means by “returns for companies”, but it seems to me that companies going through an IPO ultimately care about three things: the quality of their investors, the amount of money that they raise, and the ultimate market capitalization of their company. None of these things can be measured by looking at the amount by which the stock rises or falls in the first day or 20 days, as Bloomberg does here. But if one underwriter in particular gets known for generating a lot of first-day pops, then speculative hedge funds are liable to pile in to those IPOs. And no company particularly wants its shareholders to be speculative hedge funds looking to sell their stock in a matter of hours or days.

So if the SEC cares about Goldman’s clients, it should care mostly about the clients who paid Goldman Sachs $580 million in fees in the first half of 2010 alone — and not the clients who made money by flipping their IPO allocations at a profit. It’s entirely possible that the companies were well served by Goldman. But Bloomberg’s numbers don’t come close to demonstrating that.


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Posted by MishGEA | Report as abusive

IPO underpricing is a universal phenomenon – there’s nothing about it that’s specific to GS. Your analysis of whose interests are served by this is dismally incomplete.

As it happens, the Psy-Fi blog recently posted a good summary of the issue: -bitter-lemons.html; you would profit by reading it.

If that seems too onerous, here is a quote that identifies one weakness in your position:

“… potentially, it’s actually in the interests of the company owners to see the stock price roar away on the first day, especially if they’ve retained significant amounts of stock. So the people most likely to complain about the process may also have the most to gain from it.”

There is also a link to a table of “excess” IPO return since 1990 in the article that you may find interesting. Here it is again for your convenience: Os2009Sorts.pdf.

Posted by Greycap | Report as abusive

As long as you’re following the money, recall who pays Michael Tsang’s salary. Every thousand terminals at Goldman Sachs equals about $20 million a year in revenue for Bloomberg. It adds up.

Posted by Setty | Report as abusive

Ah the gratitious anti-GS spin. Am guessing hits for the week must be down.

I have absolutely no doubt that had the IPOs been tanking instead then you’d be bitching about how clients are getting screwed by GS in favour of their corportate clients. I am guessing the only way GS has truly win your favour is if every IPO they do stays absolutely flat.

Also it is generally considered by the companies too that “a pop” in the price is a “good thing”. You are also confusing companies desires with the desires of the people who are selling their stock in the IPO.

Posted by Danny_Black | Report as abusive

Every now and then there’s data from BBG, thomson reuters or dealogic which shows the “best” and “worst” underwriters of IPOs based on 1st day pop, 1 month or things like the difference between the announced pricing range and the eventual IPO price.
It’s very easy to draw conclusions out those figures but anything more than tentitative insight is pointless. These figures will ignore whether the company is tech or utilities for example – and even in non-dotcom times has an impact because most companies in “tangible” sectors are fairly easy to value, whereas in tech it’s much more a guessing game.
Then of course, the size of the company matters greatly and so the % put for sale. If you were to sell, say only 5 or 10% of GM and AIA, 2 huge Cos, then assuming an average price, you’ll likely engineer a significant pop. Yet, the gov will want cash back, so you prob have to sell 30% or 40 or maybe even more of those companies – which means you pretty much have to stuf all your accounts with that paper. So the nbs of investors not long and keen to buy when it trades will be a lot smaller.

I could go on – the point is that they are so many variables that it a ridiculous thing to do to write such articles based on that kind of data. But equally, banks are pitching using that very same kind of data – and that is just equally ridiculous. The sad thing is that CEO and company owners tend to buy that sort of BS…

Posted by fxtrader14 | Report as abusive

So more cash in the bank is worth less than the pleasure of watching your stock price go up?

That’s ridiculous.

Posted by davew | Report as abusive

I think GS priced it just right; It’s been above the IPO price four days (five included today Jul15) and below six days. Maybe it was a touch underpriced – maybe – but the dangers of overpricing are far more perilous, re Athabasca Oil Sands IPO a couple months back. Investors don’t really even wanna touch it anymore even though it’s a solid corp b/c it’s off 35% from the IPO. I have to agree this articles reeks of an attempt to jab at GS; they’re not doing God’s work but they’re not the devil either.

Posted by CDNrebel | Report as abusive

If you’ve got the time and money it takes to cleanse the stench of corruption out of doing a deal with Goldman Sachs, you definitely have the wherewithal to think twice about doing business with them in the first place.

Posted by HBC | Report as abusive