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March 1, 1998

Goldman Sachs to Become a Mutual-Fund Giant? Major Institutional Firms Need Retail Customers to G

By Staff Reports

Goldman, Sachs & Company, the last privately-owned U.S. blue-blood investment bank, seems to have it all: over-the-counter and listed trading that whips up envy on Wall Street, fixed income, corporate finance and equity derivatives business that dwarf most competitors.

But Goldman is still struggling to catch up in a less glamorous business selling to Joe Sixpacks, the retail customers that could transform Goldman into a serious mutual fund player.

Goldman, however, recently took a major step to reverse its fortunes, hiring Ammirati Puris Lintas, the advertising agency in New York that handles the accounts of Compaq Computer Corporation, the General Motors Corporation and United Parcel Service.

The agency will research Goldman's public image before the firm decides whether to proceed with a major advertising campaign aimed at the general public.

Follow Lead

But it seems increasingly clear that Goldman will follow the lead of other major institutional firms, like the former Morgan Stanley & Co., pitching for retail customer's assets.

"It is a strategic imperative to be a retail player over the next twenty years," said Peter Starr, an industry analyst at Cerulli Associates, a Boston-based consulting firm. "As baby boomers retire in the next two decades, investments will be more retail-oriented."

Goldman currently has about $140 billion in assets under management, $8 billion in mutual funds.

Last year, both J.P. Morgan & Co. and Morgan Stanley were involved in major deals centered on expanding their retail asset management.

In June, Morgan Stanley completed its much-publicized $10.3 billion merger with retail giant Dean Witter, Discover & Co. The deal united one of Wall Street's top institutional houses, Morgan Stanley, with one of its top retail houses, Dean Witter.

"The Morgan Stanley merger with Dean Witter changed Wall Street's investment dynamics," said Beau Ogden, a merger and acquisition banker at Salomon Smith Barney in New York. "It let firms know they have to diversify to remain successful."

In July, J.P. Morgan purchased a 45-percent interest in Kansas City-based American Century Companies for $900 million. American Century, the fourth-largest no-load U.S. mutual-fund company selling directly to individuals, manages $60 billion in assets in almost 70 mutual funds. J.P. Morgan manages $234 billion in assets, approximately ten percent of which are in mutual funds.

Financial Obstacle

Goldman, however, has one major financial obstacle it does not have publicly-traded stock with which to make the kinds of aggressive acquisitions made by other firms. "I don't think their partners would welcome a retail firm if it meant they had to go public," Starr said. "But they certainly have the capital to make an acquisition without it."

Goldman, which has 200 partners, earned more than $3 billion before taxes for the 12 months ending Nov. 30, an average of $15 million for each partner.

"With firms priced so much higher than their value in this market, I think Goldman would just rather build their own retail base," Starr added.

One clear sign that Goldman is serious about retail investors: It has staffed a full-time, five-person public-relations team, supplementing the work of outside consultant Ed Navotne.

"Goldman has decided to build a retail business rather than buy one," Starr said. "By hiring an advertising firm and building public relations, they are trying to improve their image among retail investors."