INVESTORS LICKING THEIR CHOPS OVER GOLDMAN SACHS IPO: CONFIDENT PARTNERSHIP VOTES TO SELL AT LEAST 10%; HAS NO FEAR OF ANOTHER OCTOBER DROP

Like teenagers waiting for rock concert tickets, mutual fund managers are lining up for Goldman Sachs Group LP’s initial public offering due this fall.

Sure, they’re worried about the potentially high price, but their fears are tempered by the timing. The biggest corrections in memory — 1929, 1987, 1997 — occurred in October, the month before the deal is scheduled to come to market.

Wall Street’s richest investment bank has drawn a ton of publicity in the weeks leading up to last week’s vote by its partners to sell off 10% to 15% of the firm to the public. The partners, who had rejected such proposals at least a half-dozen times in the firm’s 129-year history, hope to raise about $3 billion, in part to finance acquisitions. Mutual fund managers expect the stock to sell at 16 to 17 times 1999 earnings or 3.6 times book value. That’s a discount compared to top brokerage Merrill Lynch & Co., which trades at a price-earnings ratio around 17, about 3 times book value.

owning equity no sweat now

“For decades the only way to own equity in Goldman was to work and sweat for years to make partner,” says James Ellman, manager of Aim Global Financial Services Fund, “Now all you will have to do is call your trader or Internet broker.”

Mr. Ellman, who manages $110 million, and others say they’re excited about the stock, but acknowledge they’re a little wary of the likely offering price. Of course, market conditions could take care of that, or cause Goldman to postpone the deal.

One unavoidable problem is that as an investment bank, Goldman’s revenues naturally depend on how well the stock market is doing.

When the market declines, there are fewer IPOs, limiting underwriting revenues. Also, mergers-and-acquisition activity slows down, which means Goldman’s steady business of advising on deals could dry up.

Goldman was on top for the first six months of this year, advising on 176 transactions valued at $590.6 billion, according to Securities Data Corp. in Newark, N.J. Indeed, last week the firm announced it had been hired, along with Credit Suisse First Boston, to advise Metropolitan Life Insurance Co., the nation’s No. 2 life insurer, on exploring whether to issue stock.

In money management, the firm’s $125 billion managed places it behind Morgan Stanley Dean Witter Co., which oversees $144.6 billion and Merrill Lynch Asset Management, which manages $219.6 billion, according to InvestmentNews sister publication Pensions & Investments.

“If the markets go up for the next five years, Goldman will be the gem of the market,” Mr. Ellman says. “But if the market declines globally, you’re probably going to be very unhappy that you bought Goldman stock.”

Before taxes and partner pay, Goldman reported it earned more than $2 billion in the first half of its fiscal year from December to May.

Public documents on the proposed IPO for Goldman are expected to be filed in October. Managers expect to take particular notice of which partners are planning to stay on, and to what degree they are tied to the company. Partners are expected to be locked in for three to five years before they can cash out.

Despite these concerns, many managers are salivating. “It’s a quality firm,” says Patricia Ouimet, assistant portfolio manager of the $4 billion John Hancock Financial Industries fund. “If it’s selling at this rate (3.5 times book), we’d probably all be interested,” she says of herself and colleagues.

But value managers may think twice.

William H. Webber Jr., president and chief executive of Carret & Co. Inc. in New York, which manages $1.1 billion, owns many financial services stocks but never buys on the IPO. Still, he says “Goldman would certainly meet our quality test. I don’t know about the valuation test.”

Then again, given its plans to go public just after the often bloody month of October, he says “Maybe we can buy it.”

Contrarian money manager David Dreman is more skeptical than excited. “At this point in time I would not buy it for exactly the reason they are selling it. They need more capital and they’re afraid of a down market,” he says.

Mr. Dreman takes the Goldman IPO as a sign of a stock market top, a question that has been raised by many. Are Goldman’s partners hoping to sell off their shares in the company before the value of the firm, now estimated at $28 billion, travels south?

He says securities companies are overvalued in general. “I think they’re (Goldman) one of the best-run firms on Wall Street. Obviously we need more details, but in a choppy market I’d sit on the sidelines.”