Goldman Sachs Posts Record First Quarter Profit

Goldman Sachs & Co posted a record quarterly profit amid a new round of speculation about whether the partnership will become a public company.

As partners met for a regularly scheduled meeting, the firm said its profit in the three months ended February 28 climbed to a record $1.022 billion, 80 per cent higher than the prior three months and 13 per cent above the year-earlier period. The latest period is the first quarter of the firms 1998 fiscal year.

Although a Goldman Sachs spokesman insisted that there are no plans to go public, sources in London who are familiar with the firm said a business strategy committee was once again reviewing the matter and would make a report in a couple of months.

Analysts noted that a series of Wall Street mergers have created giant new players such as Morgan Stanley Dean Witter Discover & Co and Travelers Group Inc which acquired Salomon Brothers and combined it with its Smith Barney unit. Merrill Lynch & Co Inc has also been expanding through overseas acquisitions.

A factor is the question of capital adequacy as it relates to the current capital environment, said analyst Michael Flanagan of Financial Service Analytics in Philadelphia. The competitors are now so much bigger than they were even a year ago, and Goldman does not have the paper currency to (make acquisitions).

The sources in London said there is a new debate raging within the firm over whether Goldman needs to go public. They said the business strategy committee is chaired by president and chief operating officer Henry Paulson.

Goldman has rejected the idea of going public in the past, most recently in 1996.

Roy Smith, a limited partner in Goldman and professor of finance at New York Universitys Stern School of Business, said he would be very surprised if Goldman goes public. Smith served as president of Goldman Sachs International in London in the 1980s.

Smith said the firm seriously considered going public at least three times in the 1970s and 1980s. He outlined five reasons against making the move.

Going public would saddle Goldman with a huge tax bill, as the firm would have to pay taxes on its accumulated capital, Smith said. The move presumably would also make it easier for partners to leave the firm.

Part of the strength of the partnership is that everybody is tied into it, Smith said. I would want the partners to be owners and not reducing partnership interests. Partners who now leave the firm take a certain percentage of their capital out and can withdraw the rest in portions annually, Smith said.

Smith also said non-partner employees would oppose going public because it would rob them of the chance of making partner. In addition, the limited partnership structure shields Goldman from the liabilities other firms face, Smith said.

Lastly, Smith said Goldman has a relaxed attitude toward raising capital, which it can easily do through other partnerships. All the same, firms like Merrill have the capital to make acquisitions that Goldman cannot now consider. Merrill recently bought Britains Mercury Asset Management for some $5.3 billion cash, which is just $1 billion less than Goldmans entire $6.3 billion capital base.

In addition, securities firms have seen their own share prices balloon as the stock market hits new highs and merger and acquisitions are at record levels. Some industry experts say that the timing for an offering would be right.

Goldman does review this question regularly, but there may be more immediacy to the issue given the superb valuations (of competing public firms), Flanagan commented.

The firm earned a pretax record profit of $3.0 billion in the year ended November 28, 16 per cent more than in 1996, when it earned $2.6 billion. Net revenues rose 21.5 percent to $7.4 billion from $6.1 billion over the same period.

Goldman last year managed $138.3 billion in US debt and equity underwriting, giving it the No 4 spot, according to Securities Data Co. The firm ranked No 2, behind Merrill, in mergers and acquisitions with $240.1 billion in announced deals.

Goldman traces its beginning back to Philadelphia retailer Marcus Goldman, who moved to New York in 1869 and started buying customers promissory notes to resell to commercial banks.

Goldmans son-in-law, Samuel Sachs, joined the business in 1882, and the firm became Goldman, Sachs & Co in 1885.

Goldman started to offer its clients UK-US foreign exchange services two years later, and became a member of the New York stock Exchange in 1896. It co-managed its first public offering, United Cigar Manufacturers in 1906, and arranged for companies such as Sears Roebuck and Merck to go public in the 1920s.

Goldman started as a securities dealer in the 1930s and became a leader in investment banking after WW II. The firm became a mergers and acquisitions specialist in the 1970s and 1980s.

Goldman sought capital in the late 1980s and early 1990s, raising some $500 million from Sumitomo and two $250 million tranches from Hawaiian educational trust Kamehameha Schools/Bishop Estate.

The firm now employs some 11,000 in 35 offices in 18 countries.