William Cohan Gets HIs Financial History Very Wrong

William Cohan, the author of the popular and award-winning book The Last Tycoons: The Secret History of Lazard Frères & Co gives a badly flawed account the past in his comment, “Mixed portents for Wall Street’s rescuers,” in today’s Financial Times, and therefore makes a misleading comparison.

Cohen goes through the recent foreign investments in troubled Wall Street firms, dwelling particularly on the fall from grace of the once-mighty Citibank. However, he argues:

Not so fast. Like so much else in the financial world these days, it pays to look to the mighty Goldman Sachs for an instructive precedent. In November 1986 – amid the last wave of scary, headline-grabbing foreign investment into the US – Japan’s Sumitomo Bank acquired a 12.5 per cent equity stake in Goldman Sachs for $500m. At the time, Goldman – still a private partnership – had been debating how to increase and stabilise its capital base. “The reality of life is that banking and investment banking always gravitate to where the capital is, and the capital is in Japan,” Felix Rohatyn, the banker who put the Sumitomo-Goldman deal together, said at that time.

By taking the Japanese money, which valued the Goldman Sachs partnership at all of $4bn, Goldman was able to preserve its privacy for another 13 years and still have enough capital to make principal bets and to buy out older partners as they retired.

This recap could not be more wrong in the impression it gives, namely, that Goldman was out looking for capital and Sumitomo invested at a bargain price. McKinsey had advised Sumitomo to approach Goldman, then the virgin queen of Wall Street, valued Goldman, structured the deal, and helped Sumitomo select an investment banker (all parties were relieved that Rohatyn, then Wall Street’s premier M&A banker, wanted to take the assignment, since it turned out Goldman had never been approached by a prospective investor before).

The price was three times book value, a level at the high end of the prevailing range for control of an investment bank, and rich for a an illiquid, minority stake lacking either board representation or veto rights. Even though it turned out to be an extremely successful investment for Sumitomo, the bank was in no way, shape or form by getting in on the cheap.

Yes, Goldman was interested in more capital. The fixed income business was particularly important in those days and Goldman did not have as large an equity base as some of its key competitors, which put it at a disadvantage. That’s why the Sumitomo side thought it was worth the risk of approaching Goldman; there was good reason, based on industry developments, to think the firm would be receptive.

And since Goldman was sought out, rather than shopping for funds, was highly profitable at the time of the sale and received at a hefty valuation, this example is completely irrelevant to the latest wave of equity sales by Wall Street firms to foreign owners. But Cohan has made this deal the centerpiece of his article.

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