MORGAN AND AIG ARE POSSIBLE SUITORS: GOLDMAN SACHS EYES IPO-MERGER COMBO

A new committee formed by Goldman Sachs & Co. to consider whether the partnership should go public also is evaluating a possible merger with either J.P. Morgan & Co. or American International Group Inc.

Under a scenario being examined, Goldman Sachs would make an initial public offering first and then strike a deal with Morgan or AIG.

“An IPO would give them an enormous currency they could use in a stock swap,” says a source outside the firm who has knowledge of the committee’s work. Both J.P. Morgan and AIG, whose officials declined comment, are publicly held.

The committee, whose IPO work was reported recently, is likely to make its recommendations at Goldman Sachs’s annual partners meeting in June, though Goldman spokesmen insist that an IPO vote isn’t on the agenda.

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A merger with either AIG or J.P. Morgan would give Goldman Sachs more capital to make loans, underwrite securities and make direct investments. Being smaller than its top rivals has never held back Goldman Sachs before, but it could down the road — especially if the pace of consolidation in financial services continues and if the one-stop-shopping concept catches on with corporate clients.

The firm’s $6.3 billion in equity capital is half that of Merrill Lynch & Co. and one-eighth that of Citigroup, the company that would be created by the merger of Citicorp and Travelers Group. Should clients start demanding bank loans or credit lines in exchange for investment banking assignments, Goldman could find itself at a competitive disadvantage.

For its part, J.P. Morgan has been trying to transform itself from a commercial bank into an investment bank — with mixed results. In February, Chief Executive Douglas “Sandy” Warner fired off a memo to employees warning that a merger is “an option” if the bank cannot improve its subpar 13.4% return on equity.

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“It wouldn’t surprise me at all if discussions (between J.P. Morgan and Goldman Sachs) were taking place,” says Paul Scura, a J.P. Morgan alumnus who is now head of investment banking at Prudential Securities Inc.

“From Goldman’s standpoint, they get a huge balance sheet and the ability to offer more credit products,” Mr. Scura says. “From the standpoint of Morgan and its shareholders, it would help defray the tremendous cost of building investment banking infrastructure around the world.”

The argument for a Goldman deal with AIG is less obvious, although Michael Lewis, an insurance analyst with SBC Warburg Dillon Read, says the two firms have held discussions in the past.

AIG, the nation’s largest financial services company, derives most of its revenues from insurance. “I could see a case where a big insurance company and a sharp investment bank with a strong derivatives operation could do a lot together to advance the risk management business,” says John Keefe, an independent securities industry analyst.

AIG also would provide Goldman with tremendous corporate and governmental contacts abroad, particularly in the Far East, where AIG derives one-third of its revenues. That said, Raymond “Hank” Greenberg, AIG’s septuagenarian leader, has never been known to spend lavishly on acquisitions, though he might make an exception for Goldman.

Says an investment banker who has worked with Mr. Greenberg: “If he was going to do it, it would have to be with one of the top firms.”

Crain News Service