The Untold Story of Goldman's Relationship with Baidu

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Much has been said today about Goldman Sachs dubious financial practices, but most have not heard about Goldman's involvement in the initial public offering (IPO) of Baidu and the subsequent BIDU share price movements.

Goldman Sachs and Piper Jaffray, along with Credit Suisse First Boston, underwrote Baidu's IPO. The IPO would be the first for a pure-play Chinese search engine company. Baidu American depositary shares (ADS) started trading on August 5, 2005. An initial 4.04 million ADSs were offered at $27 per ADS; opened at $66, more than double its $27 price, climbed, stabilized and then rallied anew before ending its historic opening day at $122.54.

With a rise of 354%, Baidu's first-day gain ranks 18th in history and ranks as the best performance ever by an overseas deal. At its IPO price of $27 a share, the company raised $109 million. Part of the big debut-day move from Baidu.com can be traced to the relatively small size of the deal. With only 4.04 million shares in the IPO and strong indications of interest from both retail and institutional investors, demand had driven up the price throughout the process. The widely circulated rumor at the time that Google had attempted to buy the firm fueled interest in the stock and gave investors confidence in it as well.

Typically, underwriters would only be overjoyed when a stock they took IPO shot up like this in its debut. But the course of action Goldman and Piper Jaffrey took next was totally unprecedented and completely out of character for investment bankers.

Forty days after Baidu went public, the minimum period before an underwriting firm can release an analyst report, on Sep. 14, 2005, at 6:00 am before the market opened, Goldman Sachs and Piper Jaffray, two of Baidu's underwriters, issued a joint statement that rated the company stock as "underperform". Goldman even went so far as to say that the company is worth exactly $27 a share, which is the same as its IPO price. Anthony Noto, the Goldman analyst, also said that "at the most extreme", Baidu could be worth $45 a share. At the Piper Jaffray camp, $45 was also cited as the price target on the stock - a mark, Safa Rashtchy, the analyst at Piper Jaffray said, that includes "an aggressive valuation premium". Shares of Baidu closed at $113the day before, and it had been as high as $153.

At the time, media touted Goldman's unusual move as a welcoming sign that analysts and investment banks were moving away from rubber-stamping clients stocks. Investment banks normally wouldn't have been so harsh on a recent IPO, fearing it might get left out of future lucrative banking deals. In the 1999 and 2000 heyday, only 3% of IPOs were initiated with a "hold" or lower rating after the IPO.

According to Taibbi, Goldman's bankers used techniques called "laddering" and "spinning". In laddering, an investment bank would allot IPO shares to institutional investors who promised to buy more once trading in the new firm began. There is also 'spinning" where the investment bank would offer a chosen few the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price - ensuring that those "hot" opening-price shares it had handed out would be more likely to rise quickly, supplying bigger first day rewards for the "insiders". Now, don't they sound eerily familiar in the case of Baidu's IPO?

BIDU dropped 29% to $81.05 by Oct 26, 2005. Goldman then subsequently made five consecutive major downgrade calls from October 2005 through Nov 2006. However, Baidu only reached its lowest ever share price of around $51 in Feb. 2006. Despite four more Goldman downgrades from Feb. to Nov 2006, Baidu shares went up to $117 by Dec. 15, 2006.

Up till May 2006, Goldman was still saying Baidu shares at $65 were 10% overvalued. True to the old saying "If you can't beat them, join them.", in Dec. 2006, Goldman raised Baidu target price to $128, only about one year after the conspicuous joint press conference with Piper Jaffray, where Goldman named an exact $27 as fair price on Baidu.

So, at this point, anyone would be highly suspicious of this suddenly emerged "objectivity" of BIDU`s fair value. One could only draw the conclusion: it was to Goldman's benefits to push down the share price of Baidu. There are three possible scenarios:

(1) Goldman did not do its homework and seriously undervalued Baidu; therefore, the 6:00 am press conference could be meant to save face and avoid potential law suits from Baidu. Baidu and Goldman were reportedly far apart on valuation. Baidu was looking for a market cap of $1 billion, and Goldman, suggested around a third of that.

(2) Between the laddering and spinning, Baidu shares probably went up too high, too quickly for Goldman and its insiders to profit. So, at that point, the only way Goldman could have rectified the situation expeditiously was to issue a major downgrade immediately after the 40-day lockout period.

(3) The growth momentum of the Internet run in China had and still has room to expand, and is expected to accelerate on the heels of strong user base expansion and increased utilization. Goldman, who spent all this time, energy and money doing road shows, knew the true value of Baidu, judging by the $128 target price about one year after the "objective" $27 valuation, could be trying to accumulate positions. The company trades at $632.25 as of today's close.

Among all the things in which Goldman has allegedly been involved or under investigations by regulatory authorities, this little anomaly has never caught any publicity or scrutiny, mostly because Baidu just went about its business as usual without escalating it into a public fiasco, which has been Baidu's management style. In addition, Baidu was an overseas start-up company, hence probably under most major media's radar screen.

So, there you have it - another possible explanation of how Goldman could afford to pay out record bonuses every year - they seem to play by a different set of rules. Goldman Sachs' powerful political and financial connections apparently have insulated it from regulators whose job is to maintain fair and balanced markets. However, when Goldman Sachs is involved - fair and balanced appears to have taken on entirely new connotations.

Comments (7)

Apr 16, 2010

Correct my if I am wrong, but how the hell does scenario 2 make any sense?
If you have shares before the open, and then it shoots up that much, wouldn't you be making money?

Apr 16, 2010

If you're so sure about this call up Bloomberg, the Times, or the Journal.

Good conspiracy theory, but remember, once their done with Goldman They'll move onto the bank that you work or you money is invested in....and you can kiss your kids college fund good bye.

I'm not condoning GS behavior, assuming these allegations are founded, but the best thing that could happen for the whole industry is this get thrown out by the courts as unfounded.

Other wise, say hello to 50% bank taxes. Everyone you know that works in Finance, and that's a good portion of the American public whether they are in IB, PWM, or work behind the counter and the drive-thru window, is going to get a pay cut, EVERYONE, not just "Wall Street"

Thank you liberal media and thank you Obama for shitting on the American dream, if Bush did any of this stuff he would have been impeached by now, but the media protects Obama.

All of this has turned me, a moderate, to be a strong Republican, just like Bush did to moderates in the last election the other way around.

Apr 17, 2010
m.c.trader:

Other wise, say hello to 50% bank taxes. Everyone you know that works in Finance, and that's a good portion of the American public whether they are in IB, PWM, or work behind the counter and the drive-thru window, is going to get a pay cut, EVERYONE, not just "Wall Street"

Thank you liberal media and thank you Obama for shitting on the American dream, if Bush did any of this stuff he would have been impeached by now, but the media protects Obama.

Is it the American dream to bundle faulty goods in a decieving package to screw people over, and then to short the very packages you are selling? No, it's scamming people. If America has a dream, I'm sure fraud doesn't come into it.

Your right, banker's bonuses are taking a hit, we're going to be punished for the mistakes of the few. Deal with it.

And think of the millions of people laden in debt without jobs because of the actions of our institutions. Though, again, the gluttony of the disneyland concept of the American Dream is the reason subprimes were getting eyeballed in debt. The whole system doesn't work properly - it needs a little once over.

Apr 17, 2010
rodneymullen:

And think of the millions of people laden in debt without jobs because of the actions of our institutions. Though, again, the gluttony of the disneyland concept of the American Dream is the reason subprimes were getting eyeballed in debt. The whole system doesn't work properly - it needs a little once over.

Well I don't work where you work at that's for sure.

This isn't about bonuses this is about Main street. You're both in IB right? Maybe Traders bankers, what ever.

You tell me what's going to happen: Your MD, whose team makes your bank millions of dollars every month, is going to have his bonus cut in half, or my personal banker at my local branch and the high school girl at the drive thru are going to loose their job?

Do you think the people trading debt, making millions of dollars for the bank, are going to pay a premium in their salaries? Or do you think Joe Homeowner's interest rates are going to go up and he's going to have to pay fee's we've never heard of before?

I don't work on Wall Street, nobody in my family works on Wall Street, this isn't about me, it's about low to lower middle class Americans like my parents who had a dream for their kids; a dream that I share for my kids; a dream that is unique to America.

Apr 18, 2010
m.c.trader:

Other wise, say hello to 50% bank taxes. Everyone you know that works in Finance, and that's a good portion of the American public whether they are in IB, PWM, or work behind the counter and the drive-thru window, is going to get a pay cut, EVERYONE, not just "Wall Street"

Thank you liberal media and thank you Obama for shitting on the American dream, if Bush did any of this stuff he would have been impeached by now, but the media protects Obama.

All of this has turned me, a moderate, to be a strong Republican, just like Bush did to moderates in the last election the other way around.

Are you serious with this comment? i work in the industry, albeit, we dont ever even come close to doing the blatantly fraudulent and slimy things Goldman does...Goldman sounds like slime, and should be destroyred, ive always hated their ways...the stab you in the back vs punch you in the face way...
I digress.
If this is more widespread, and it might be, we have a obligation to future generations to destroy the problem, even if it means me becoming a waiter.
Be accountable, who cares who has to pay, or for how long, if you dont clean a mess it gets biegger, and the mess will take longer to cure later on...
do you wait for gangrene to set in before treating a paper cut?
for fucks sake...im sick of this kind of thinking.
we do everything do water ourselves down as a civilisation, and its fucking pathetic..

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Apr 17, 2010

Geez, dial down the rhetoric, man. Are you a Tea Party member?

You're not condoning Goldman's behaviour? Do you even believe that? Does the fact that we're bankers mean we have to blindly follow whatever line the Republicans are throwing out now and pretend we're 'conservatives'? The GOP is such a clusterfuck they don't even know what they stand for anymore. You're just whatever lines your pockets for the time being.

Apr 18, 2010
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