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Midas touché

17 October 2011 By Jeffrey Goldfarb

Goldman Sachs hasn’t forgotten how to play all the angles. With a possible existential crisis brewing, the bank dropped a reminder of what it does best in Sunday’s Kinder Morgan deal. It owns a stake in the U.S. pipeline operator, underwrote its initial public offering after financing its leveraged buyout and even surfaced as adviser to its $38 billion takeover target, El Paso. Such finesse is a big part of what set the firm apart. It’s just not clear the gift will keep on giving.

Managing conflicts has been a hallmark of Goldman’s modus operandi. Clients will often overlook them to secure the firm’s know-how. Deals like the New York Stock Exchange’s 2005 acquisition of Archipelago, where Goldman advised the buyer and seller while owning stakes in the NYSE and a specialist firm with seats on the exchange, was representative of Goldman’s creative abilities to profit on multiple layers.

The bank hasn’t always been smooth enough to make it work. Goldman uncorked a backlash in London in 2006 when it proposed to become a principal investor on a buyout for a British company. And its crafty effort to navigate the U.S. housing crisis left a pricey tab from regulators and the court of public opinion. But successes have more than made up for the shortcomings.

Kinder Morgan epitomizes the skill. Goldman has pocketed about $90 million in fees from the firm’s equity and debt deals over the last decade, according to Thomson Reuters. Goldman also has made a handsome paper profit on its original 25 percent stake in Kinder Morgan. And it’s poised to earn $56 million more from El Paso.

And while a great advertisement for the model, Goldman didn’t benefit alone. It secured a big premium for El Paso’s owners in a deal that also created value for Kinder Morgan’s shareholders. The buyer’s stock surged more than 5 percent.

The question is whether this transaction will be an epilogue to a golden Goldman era gone by. If the Volcker Rule had been around five years ago, the firm would have been hard pressed to make such a big bet with its own capital on Kinder Morgan. Without it, the advisory mandate might have been harder to secure.

More recent hits to Goldman’s reputation may make future clients queasier about signing off on such arrangements. Goldman’s expertise in such controversial matters is unparalleled, but the skill set may no longer be in quite the same demand.

 

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