Why Goldman Sachs Matters
By Andy Serwer

(FORTUNE Magazine) – Jon Corzine, the co-CEO of Goldman Sachs, is an island of calm on Wednesday evening, June 10. You'd never know that the professorial banker is attempting to cut the deal of his career and the most important--and perhaps one of the most complex--in the history of Goldman Sachs.

The deal, of course, is the initial public offering of Goldman Sachs itself, and by the time you read this, the firm's 190 partners will have decided whether to do the deed and end the 129-year era of Goldman as a private partnership. As FORTUNE went to press Friday night, they were huddled at the IBM Palisades Center corporate retreat in Rockland County, N.Y. Going in, the stage seemed set for Goldman to do an IPO. Plans had been in the works for months. The firm's lawyers from Sullivan & Cromwell had been summoned (they were advising the normally tight-lipped Goldman execs to be even more reticent than usual). In the weeks leading up to the meeting, sources say, efforts had been made to settle outstanding litigation. Meanwhile, Goldman employees were calling their counterparts at other investment banks to ask them what it was like to work for a public firm.

It's obvious why Wall Street should be abuzz about Goldman, but why should the rest of us give a flying duck about Goldman Sachs? Simply because Goldman today is the most powerful investment bank in the world and as such is a very significant gear in the machinery of the global economy. You can start with the firm's blue-chip client list. Goldman is the investment banker to such companies as Microsoft, American Express, and Ford. Goldman's recent IPOs include Yahoo, Lucent, and Ralph Lauren. As for its M&A business, the firm has brokered eight of the ten largest recent megadeals, including Daimler-Benz-Chrysler, American Home Products-Monsanto, and NationsBank-BankAmerica. Its overseas clients include Siemens and Imperial Chemical. The firm has recently been called in to restructure the sovereign debts of Russia, Brazil, and Korea.

Goldman sits atop one of the most profitable pools of capital in the world. Says one senior banker at Morgan Stanley: "We are having a great year. But Goldman is unbelievable. They are just one step ahead." The proof is in the numbers: Goldman earned $1 billion in its first quarter on revenues of $2.5 billion. For the year the firm could earn $4 billion, up from $3 billion in 1997. Not too shabby!

How Wall Street might value those earnings would be a big question for a public Goldman Sachs. Vast as the firm's investment banking business is, its trading operations are even bigger, and trading can either produce huge windfalls when the breeze is blowing favorably--as it is now--or turn nasty overnight--as it did in 1994 when losses pushed the firm up against the wall. The question is, would the volatility of earnings from its trading operations give a public Goldman a lower P/E than its two peers, Merrill Lynch and Morgan Stanley? (That would be anathema to the old guard at Goldman.) Or would the magic of the Goldman name confer a high multiple? "Quality of earnings could be perceived as an issue," admits Hank Paulson, the other co-CEO, "but actually Goldman produces a diversity of earnings from many different businesses."

So what was the thinking behind the decision on whether to take Goldman public? "We want our capital structure to match our mission," says Corzine. And what is the mission? "To be the best full-service investment bank in the world." So is Corzine suggesting that Goldman had been capital constrained? No. Does he mean that Goldman would use public stock to make acquisitions? Maybe. Are the partners looking to cash out at a time Goldman Sachs is producing staggering results? "Not at all," says Corzine. Yes, says every other person on Wall Street.

One thing is certain: A public Goldman Sachs would mark the end of an era. The ultimate brass ring on Wall Street, a Goldman partnership, would be gone. Some say that being private has been Goldman's great competitive advantage. Maybe. But plenty of public companies--from Microsoft to Morgan Stanley--have done just fine giving employees incentives and competing in their businesses.

--Andy Serwer