Who Got Rich When Goldman Sachs Went Public, and What Investors Can Learn From It Today

In the world of financial media, there are few things as irresponsible as hyping an initial public offering to the general public. If you come across an article or television segment doing so, move on to more productive activities like, say, relacing your tennis shoes.

"An elementary requirement for the intelligent investor is an ability to resist the blandishments of salesmen offering new common-stock issues during bull markets," wrote Benjamin Graham in The Intelligent Investor. "Even if one or two can be found that can pass severe tests of quality and value, it is probably bad policy to get mixed up in this sort of business."

The problem, according to Graham, is that most of the stock is usually sold "for the account of the controlling interests to enable them to cash in on a favorable market and to diversify their own finances."

I bring this up now for two reasons. First, thanks to the record level of the stock market, the number of companies going public is soaring. Thirty-one companies filed IPOs last month alone, making it the busiest September since at least 2003 -- I say "at least" because that's as far back as Renaissance Capital's public data goes.

And by the end of the third quarter, 152 of such offerings had priced thus far this year -- actually gone public, that is. This figure is also the highest it's been in at least a decade.

The second reason I bring this up now is because of a new book written about Goldman Sachs (NYSE: GS  ) by former partner Steven Mandis. The point of the book, What Happened to Goldman Sachs, is to explain why and how it abandoned the principles on which its reputation was built -- most notably, "our clients' interests always come first."

A critical inflection point -- if not the most important juncture, according to Mandis -- was the company's 1999 initial public offering. The reasons are too numerous to list here, but they include a change in business mix and risk tolerance toward trading activities, as well as a misalignment of its incentive structure.

In line with Graham's explanation for why companies go public, Mandis discussed one partner's reason for supporting the investment bank's decision to do so, explaining that "All his wealth from working at Goldman for more than twenty years was tied up in the firm, and the IPO offered a way to get it out." That is to say, he didn't support the plan in order to raise capital for the business, as most IPO filings proclaim, but rather to get rich personally.

To this end, Mandis included a list of the partners that received money from the offering and how much each of their stakes was worth at the time. I suspect you'll recognize many of the names in the following table, which lists the five biggest stakeholders. Needless to say, they did quite well for themselves.


Value at IPO Price

Value After First Day of Trading

Henry Paulson



Jon Corzine



Robert Hurst



John Thain



John Thornton



Source: Steven Mandis, What Happened to Goldman Sachs.

Are there exceptions to the rule that companies only go public to make their current stakeholders wealthy beyond imagination? Perhaps. The first that comes to mind is Facebook (NASDAQ: FB  ) , which was purportedly forced to go public by regulations limiting the number of shareholders a private company can have. Though, my guess is that there's less truth to that narrative than investors were led to believe at the time.

Much more representative of the types of companies that go public today are those that are owned and then expelled by private equity companies after every last ounce of legitimate value has been extracted. Noodles & Company (NASDAQ: NDLS  ) is a prime example of this, as is Chuy's Holdings (NASDAQ: CHUY  ) . Both are popular restaurant chains that were purchased by private equity companies, loaded full of debt, and then released onto the public markets much like the mob dumps radioactive waste into rivers.

Have their stocks gone up since their offering? Yes. But that has more to do with the overall market and the abilities of Chuy's, as it's far too early to draw any positive conclusions about Noodles & Company, to fight its way out of the hole that its private equity overlords dug for it.

At the end of the day, I'm not trying to criticize those individuals that get wealthy when a company goes public. In fact, I applaud them -- with the exception of private equity companies such as Blackstone  (NYSE: BX  ) and KKR, which I genuinely believe are bad for the American economy.

What I am trying to say, however, is that, like Graham exhorted more than 60 years ago, individual investors would be wise to steer clear of initial public offerings. The only thing your "investment" in one does is to line the pockets of the seller -- not your own.

Secure your future with these nine rock-solid dividend stocks
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2664947, ~/Articles/ArticleHandler.aspx, 9/27/2016 1:22:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,227.69 132.86 0.73%
S&P 500 2,158.81 12.71 0.59%
NASD 5,298.79 41.30 0.79%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/27/2016 1:06 PM
BX $25.09 Down -0.37 -1.45%
The Blackstone Gro… CAPS Rating: *****
CHUY $29.15 Up +0.20 +0.71%
Chuy's Holdings CAPS Rating: ****
FB $128.87 Up +1.56 +1.22%
Facebook CAPS Rating: ***
GS $163.01 Up +1.53 +0.95%
Goldman Sachs CAPS Rating: ***
NDLS $4.94 Down -0.18 -3.45%
Noodles and Co. CAPS Rating: *