Goldman Sachs IPO case I.

Statement of the Problem

The offering, the second biggest in U.S. history, will give Goldman publicly traded stock to use for acquisitions and for rewarding its employees, something it has not had since its founding as a private firm in 1869.Goldman Sachs had, for 133 years, been owned and managed by its partners. In 1999 there were 190 managing partners.

One of the main advantages of a company going public is the additional capital the company can gain. With going public, Goldman, may raise substantially more capital than it would raise through other options. It serves also as a means of attracting and retaining quality personnel. A company with publicly traded stock has a powerful tool to attract and retain staff.. Goldman has said it is going public to give it stock to finance acquisitions, permanent capital to finance growth and a way of sharing ownership among employees. Goldman will now be able to use its stock as compensation, to attract and retain a greater number of employees. It will be easier for the investment bank to retain mid-level employees but it loses its edge in retaining partners.

Goldman's reasons for going public was to "match our capital structure to our mission." Just as there are benefits to going public, there are high costs associated with it as well. First off being that an IPO is expensive. The underwriters commission is typically around 7 percent of the total offering proceeds. In addition, there are substantial out-of-pocket expenses, including fees paid to lawyers, accountants, and investment banks who underwrite the IPO. However, a major advantage for Goldman is the fact that they are an investment bank and can write their

own IPO. Having experience in managing other public offerings, writing their own IPO would save the underwriting fees.

Faced with another challenge the company has to decide whether to issue debt or only equity. Goldman, in fact, has a smaller equity base than either Morgan Stanley or Merrill Lynch. Equity raised in a public offering at a multiple of book value would have been a cheaper way for Goldman to build its equity base.

II. Alternative Solutions 1. 2. 3. III. WACC Discount Cash Flow Model CAPM model Analysis of the Alternatives I wouldn't use the discount cash flow method because there are no future cash flows presented in the case. The CAPM model seems useless in this case due to the fact that there is mention of debt. IV. Final Recommendations I would suggest that Goldman Sachs goes ahead with the IPO in order to increase capital. With only issuing a small portion of the firm to the public, Goldman will still be able to keep the employees and current owners happy while raising the much needed money for acquisitions. Using the WACC I think the company should proceed with a $45-$50 stock price range in order to keep abreast with current market leaders. Also the company should do their own underwriting and issue debt as well as equity. V. Appendix Price/book ratio = WACC = (Wdebt)(re) + (Wequity)(rd) (1-tc) Wdebt = proportion of debt in a market- value capital structure rd = pretax cost of debt capital tc = marginal effective corporate tax rate Wequity = proportion of equity in a market- value capital structure re = cost of equity capital