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ANALYSIS: IPO Diversity Plan May Cost Goldman $101M in Lost Fees

Jan. 28, 2020, 10:00 AM

Goldman Sachs CEO David Solomon dropped a bombshell at the World Economic Forum 2020 in Davos, Switzerland: Beginning July 1, the biggest underwriter of initial public offerings in the U.S. will refuse to take public any company that doesn’t have a minimally diverse board of directors. A Bloomberg Law analysis has determined that Goldman Sachs could have lost up to $101 million in underwriting fees from as many as 18 U.S. IPOs had the policy been effective in 2019. $101 million represents nearly one-third of the $318.68 million in advisory fees Goldman earned from the 59 U.S. IPOs it underwrote last year.

Goldman’s new diversity announcement applies only to the U.S. and Europe. Issuers may satisfy the requirement with either one woman or a “diverse” board member, per a Bloomberg report. Goldman is looking to expand the requirement to two directors in 2021, with a particular focus on increasing the representation of women on the boards of newly public companies. Solomon explained he feels the new policy is “right” and will “help [move] the market forward.”

To gauge the potential impact to Goldman’s bottom line, we analyzed 2019 data filed with the Securities and Exchange Commission, asking the following questions:

(1) How many of the U.S. IPOs Goldman Sachs backed in 2019 failed to include at least one female director on its board on its first day as a public company?
(2) How much does Goldman Sachs stand to lose in fees from this diversity policy?

According to Bloomberg Law’s Deal Analytics for equity offerings database, Goldman Sachs underwrote 59 IPOs in 2019 that are trading on U.S. exchanges, including SPACs (special purpose acquisition companies). We reviewed the offering documents for those 59 issuers via Bloomberg Law’s Advanced EDGAR Search to determine each board of directors’ gender composition. If a board member’s gender was not identifiable from SEC filings, we obtained the information from the company’s website. Owing to the difficulty of obtaining reliable sexual orientation, gender identity, ethnic and/or racial diversity data for board members of newly public companies, Bloomberg Law was unable to conduct such examinations.

A review and analysis of the data revealed two main findings:

More than thirty percent of all Goldman-backed IPOs in the U.S. in 2019 had no female directors.
Of the 59 companies Goldman Sachs helped take public, 18 (or 30.5%) of those companies failed to have even one female director named to its board of directors at the time its SEC registration statement went effective.

Dropping these IPOs could have cost as much as $101 million in fees in 2019.
The investment bank took in over $101 million in estimated underwriting fees (discounts and commissions) from those 18 IPOs with non-gender-diverse boards, representing about 32% of the total underwriting fees Goldman earned from U.S. IPOs during 2019, according to Bloomberg and Bloomberg Law data.

Below is our table listing all 59 IPOs Goldman underwrote in 2019, from largest offering to smallest offering. (Article continues below table.)

Regarding those 18 companies with no women on their boards, some might still be compliant with the Goldman Sachs diversity directive by virtue of a male board member qualifying as diverse through their race, ethnicity, sexual orientation or gender identity. Thus, the actual number of IPOs Goldman would have refused in 2019 actually might have been lower, perhaps significantly lower, than 18 offerings. Consequently, the hit to Goldman’s bottom line might also prove to be far less than $100 million.

Countries in Asia, Latin America, and the Middle East are exempt from the policy—for now. It is unclear how Goldman Sachs will treat companies that are based outside the United States but listed on a U.S. exchange. For instance, will Goldman consider a Russian company to be a European company or an exempt Asian company?

Of the 18 Goldman IPOs in 2019 with non-gender-diverse boards, fourteen companies were incorporated in the United States (13 Delaware, 1 Maryland), two in the Cayman Islands, one in Brazil, and one in Cyprus. The Cayman Islands and Brazil are often categorized as part of Latin America, while Cyprus is variously placed in Europe, Asia, or the Middle East.

To illustrate how confusing the classification analysis can be, consider this real-world example:

One company Goldman took public in 2019 was online recruitment services provider HeadHunter Group PLC. HeadHunter is both incorporated and has its principal executive offices in Cyprus. However, most of its business is in Russia and it is Russia’s top online recruiter. The company’s Goldman Sachs-backed IPO listed the company’s American depository shares on the Nasdaq Global Select Market, a U.S. exchange. If the company’s IPO were to take place in late 2020 instead of 2019, would Goldman still take it public? Would Goldman consider HeadHunter to be a U.S., European, or an Asian company? Time will tell how Goldman resolves these complexities.

Many will be watching to see how effective the policy proves to be in diversifying corporate boards and whether the other large investment banks like Morgan Stanley, BofA Securities, and J.P. Morgan will follow suit.

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