How well is Goldman serving its IPO clients?

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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