When Goldman Sachs Talks, Will Japan Listen?

(Washington, D.C.): The reverberations from a front page article in this
morning’s Financial
Times will likely be felt in the global financial system for some time to come. According
to the
FT, Japan’s Ministry of Finance is thinking about barring Goldman Sachs from
advising the
Japanese government on privatization — including the next tranche of shares to be sold by
Japanese telecom company, NTT — due to the Ministry becoming “increasingly alarmed about
Goldman’s management of some recent international share issues.”

The recent debacle involving PetroChina‘s Initial Public Offering on the
New York Stock
Exchange was prominently mentioned as an example of what a “senior [MoF] official” called
“four or five initial public offerings where Goldman Sachs has been the adviser and the best that
can be said is that there was a lack of judgment involved.” The FT observes (with
characteristic
British understatement) that “It is highly unusual for government clients of leading investment
banks to allow any concerns that they might have to become public. The MoF’s worries are
likely to prove a severe embarrassment to Goldman.” (Emphasis added.)

The Japanese government’s concerns about Goldman Sach’s “judgment” can only have been
intensified by a rather haughty op.ed. article authored by Goldman’s Chairman, Henry Paulson,
Jr., that appeared in the New York Times on 15 April. As interesting as Paulson’s
boasting about
his company’s role as “a proud underwriter of the [PetroChina IPO]” was what he did
not say:

• In the face of strenuous opposition from a broad-based coalition of national
  security-minded,
  human rights, religious freedom, environmental and trade union organizations, the IPO
  underwent draconian down-sizing from the originally-targeted amount of $10 billion to $2.89
  billion.

• Had PetroChina not “privately placed” as much as half of the total amount of the IPO with
  BP
  Amoco and several Hong Kong firms under Beijing’s influence the deal may have collapsed
  altogether (i.e., been “withdrawn.”)

• In its first day of trading in Hong Kong, the PetroChina stock suffered a 4.7% decline in the
  value and a 7.5% drop in the New York market on April 8, the first day of genuine market
  trading. At this writing, it is currently trading at roughly 10% below the opening price.

• A number of leading U.S. pension funds — with over $1 trillion in funds under management
  —
  were persuaded to state publicly that they would not purchase PetroChina stock, in most cases
  before SEC approval of the prospectus.

• The PetroChina debacle was reportedly an important contributor to the postponement of
  near-term IPO’s on the New York Stock Exchange by Sinopec (China’s second largest oil
  company reported to be seeking $6 billion) and Baoshan Iron and Steel Company (estimated
  to be a $1-2 billion offering).

Financial Times, 20 April 2000

Goldman May Lose Japanese Advisory Role

By Paul Abrahams and Gillian Tett

Japan’s ministry of finance is considering barring Goldman Sachs, the US investment bank,
from
advising it on privatisations – notably the next sale of government shares in NTT, Japan’s
dominant telecoms group.

The ministry has become increasingly alarmed about Goldman’s management of some recent
international share issues.

A ban would be a blow to Goldman’s franchise in Japan, where it has been aggressively
building
up its operations. It has the highest profile and is the most successful of western investment
banks in Tokyo.

The ministry is particularly concerned about last month’s $2.9bn offering for World Online,
the
Netherlands-based internet group, whose issue was co-managed by Goldman Sachs. Nina Brink,
World Online chairman, sold most of her 9.5 per cent stake before the offer.

Although the transfer of Ms Brink’s shares was included in the prospectus, she did not tell
the
media about it before the issue.

Goldman and ABN Amro Rothschild, the advisers, are facing compensation claims from
VEB,
the Netherlands’s largest shareholder association, after World Online shares fell more than 60 per
cent. Ms Brink resigned as chairman last week.

“There have been four or five initial public offerings where Goldman Sachs has been the
adviser
and the best that can be said is that there was a lack of judgment involved,” said a senior official
at Japan’s ministry of finance.

It is highly unusual for government clients of leading investment banks to allow any
concerns
that they might have to become public. The MoF’s worries are likely to prove a severe
embarrassment to Goldman.

Among recent international deals involving Goldman that have aroused questions are
PetroChina, one of China’s largest offerings, which had to be scaled back from an initial $10bn
to $3bn and faced heavy criticism over the company’s investments in Sudan during a roadshow
in the US.

The shares made a lacklustre debut earlier this month despite heavy support from Goldman.

In Europe, Goldman played a key role in the abortive planned merger of Germany’s Deutsche
Bank and Dresdner Bank, and has been criticised by some for allowing its client, Dresdner, to
sign up for a deal whose details had evidently not been fully worked through.

In Germany, Goldman sold shares in Ixos, a German software company, on March 10, just
three
weeks before the group issued a profits warning. Goldman says it had no knowledge of the
warning.

Goldman Sachs said it had received its first request for clarification on its role in the World
Online launch from the Japanese ministry of finance on Friday, had provided material on
Monday and would be sending a team into the ministry to explain its position later this week.

Goldman has generated large fees as joint global co-ordinator for the fourth and fifth
tranches of
NTT, the telecoms group, and NTT DoCoMo’s initial public offering.

NTT 4 was a $7.4bn deal, and the three global co-ordinators and syndicate generated fees of
$159m. NTT 5 was a $15bn deal, the world’s largest secondary offering, and generated fees
worth $247m. NTT DoCoMo’s initial public offering was the world’s largest share issue.

There is likely to be another NTT share issue this year during the fourth quarter. The
ministry is
set to sell a further 1m shares or 6 per cent of the company, worth 1,400bn ($13.4bn) at
yesterday’s close.

The government still owns 53 per cent of the company, and is keen to sell its holdings down
to
33 per cent. That suggests there could be at least three more tranches, offering a lucrative source
of fees for investment banks. Other large privatisations next year could include rail companies JR
East and JR West, as well as Japan Tobacco.

Goldman had already been facing growing criticism from some politicians and bureaucrats in
Japan over alleged potential conflicts of interests in its advisory work. This criticism forced it to
change a team that is advising Softbank, the internet group, on its attempted purchase of Nippon
Credit Bank, the nationalised bank.

The concerns had arisen because Goldman Sachs advised the government last year on the
sale of
Long Term Credit Bank, another nationalised bank.