Goldman Sachs Takes Center Stage as Tech Companies Test IPO Market

This week, large tech initial public offerings (IPOs) are making a comeback after a long period of inactivity. However, this isn’t just a test of investors’ interest in new and risky offerings; it is also a crucial moment for the top advisor on Wall Street, Goldman Sachs.

Arm, a chip designer, is set to begin trading on Thursday in the largest listing of the year. Delivery firm Instacart and marketing automation platform Klaviyo are expected to go public as early as next week.

While these companies operate in different sectors of the tech industry, they all have one thing in common: Goldman Sachs is their key adviser.

The stakes are high for everyone involved. Last year, American IPO activity was at its lowest in thirty years due to higher interest rates, geopolitical tensions, and the fallout from poor-performing listings in 2021. Successful IPO performance from companies like Arm could boost confidence among CEOs who have been waiting on the sidelines and help revive other areas of finance, such as mergers and financing.

This would be particularly meaningful for Goldman Sachs, as the bank is more reliant on investment banking than its competitors JPMorgan Chase and Morgan Stanley. In a year marked by declining revenues, Goldman Sachs has taken the biggest hit among the six largest U.S. banks, and CEO David Solomon has faced internal dissent and departures due to strategic mistakes and his leadership style.

“This is the core of the core of what Goldman Sachs does,” said Mike Mayo, a banking analyst at Wells Fargo, in a phone interview. “Expectations are high, and they’re likely to meet those expectations. Should they fall short, there will be far more questions than anything we’ve seen so far.”

Goldman Sachs holds the lead advisory role for Instacart and Klaviyo, which means they guide decision-making, coordinate with other banks, and typically earn the largest portion of fees. For Arm, Goldman Sachs shares the top billing with JPMorgan, Barclays, and Mizuho. Additionally, Goldman Sachs was named the deal’s allocation coordinator.

However, being the lead advisor also means facing increased scrutiny if the IPOs underperform.

If the shares of Arm or the other two companies fail to trade at a premium compared to their initial listing price in the coming weeks, doubts may arise regarding the nascent market rebound. This would not be favorable for Goldman Sachs and could raise questions about the company under David Solomon’s leadership.

Unlike Goldman Sachs’ ill-fated venture into consumer finance, the bank’s position at the top of Wall Street’s league tables has remained unchanged. In fact, the bank has even gained market share in advisory and trading since Solomon took over in 2018.

However, even in its strong suit, there is room for vulnerability. Goldman Sachs is currently under investigation for its role in advising Silicon Valley Bank before its collapse.

Initial public offerings can be complex transactions to navigate. Advisors must accurately assess investor interest in shares, balance client demands, and price the shares to provide potential upside for investors.

While Arm’s IPO is reportedly generating high demand, there are concerns about the company’s valuation, its significant exposure to the Chinese market, and its ability to capitalize on the artificial intelligence boom. The valuation of the company, which is owned by SoftBank, has fluctuated in recent weeks, initially reaching as high as $70 billion, but now aiming for a target share price of $47 to $51, representing a valuation of around $55 billion.

“We believe investors should avoid this IPO, as we see very limited upside ahead,” wrote David Trainer, CEO of research firm New Constructs, in a note on Tuesday. “SoftBank is wasting no time by offering Arm Holdings to the public markets, and at a valuation that is completely disconnected from the company’s fundamentals.”

In addition, Arm is selling a relatively small portion of its overall stock, about 9%, which creates scarcity. This limited public float means new investors will have reduced voting power and fewer rights related to corporate governance, as noted by Trainer.

The IPO is expected to raise over $5 billion for Arm and generate more than $100 million in fees for its advisors.

According to bankers familiar with the market, there are over 20 tech companies considering going public in the next year, provided that market conditions remain favorable. While some have already taken steps towards listing in the first half of 2024, the situation remains delicate.

“If these three IPOs don’t go well, it doesn’t bode well for the rest of the IPOs or mergers and acquisitions (M&A) because people will lose confidence,” said one of the bankers.