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Goldman Sachs & Baidu - The Untold Story
Robin Li, CEO of Baidu.com at Nasdaq the day of the company's IPO
Much has been said about Goldman Sachs by articles like Mr. Matt Taibbi July 2, 2009 Rolling Stone article “Inside the Great American Bubble Machine”. But most have not heard about Goldman Sachs involvement in the initial public offering (IPO) of Baidu (BIDU) and the subsequent BIDU share price movements back in 2005 and 2006.
Goldman Sachs (GS), Piper Jaffray (PJC), along with Credit Suisse First Boston (CS), underwrote Baidu (BIDU) 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 $113 the 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 Jaffrey, where Goldman named an exact $27 as fair price on Baidu.
So, at this point, anyone would be highly suspicious of it’s 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 (GS) 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 sill 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.
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 ethical 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.
To Baidu’s credit, the company’s sound performance and strong market fundamentals have propelled its shares from the low point of around $51 back in Feb. 2006 to a high of about $409 the week of Oct. 29, 2007. BIDU closed at almost $327.40 on Tuesday 8/17/09.
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 an entirely new connotation.
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This is ridiculous. BIDU was widely seen as highly overvalued in the investment community after the IPO. The company did well,hence the stock price.
The author assumes GS knows it all and intentionally fools people,while in fact GS makes a lot of mistakes,just like everyone else in the market.
If BIDU didn't make it big,the stock would be now 90% below it IPO price and the author would blame GS for knowingly taking such a worthless overvalued junk public and intentionally ripping of IPO buyers.
The best scenario was to own them both.
Ridiculus - how does this implicate GS in any way? What was the PE at the time of the downgrade - I think it was north of 200. Baidu did not have to use GS for the IPO if there was really that tension. Why not do a reverse IPO like GOOG? I have always thought Noto was a decent analyst.
You must not be familiar with the zero hedge news formula:
1) observe prices moving (doesn't matter up or down)
2) blame goldman
3) observe prices moving in other direction
4) blame goldman
5) recieve standing ovation
And the hits just keep on coming!
It would be nice to know what Goldman did with any shares they had or what if anything happened with any over alloted shares.
This article is all conjecture and has literally zero evidence to back its claims.
No wonder the fanboys love it!
I think IPO underwriters do this all the time, drive IPO price down so their buddies can get the shares for cheap. I read a book about Google and they supposedly tried it with them as well, but since the guys were well aware of this type of crap going on and already had a strong negotiating position built up so managed to land a fair deal for themselves.
What do you get if you cross a rabbit with "Pinocchio" ????
-A side shot of Erin Burnett when she's interviewing someone. This girl is all nose, no breast and her sense of humor is like a kick in the balls.
Her favorite "jocke" is about "the Hains bottom..." and about "pup.." these can only mean one thing: She is begging for anal sex!!!
its tradeable information, generally, that an IPO's market price is essentially 'posted'
the initial share are kept scarce enought to support that 'posted' price, and the few shares available for sale are 'doled-out' - well thats tradeable information for marketplace traders lets not get indignant, then, if the 'parent' of the child will continue to manipulate that price in the post IPO market - ALL stocks are manipulated, so that the stock operators will always have 'inside information' - Big Time traders 'create' 'inside information', and prima facia know first, know 'inside'
So wonderful that you illuminate everyone here on ZH with excellent articles like this, and we can only hope your efforts will encourage a way to stop crimes like the one noted here.
Thank you!
Pay up, Suckers!
Great article.
Most likely scenario was to issue the downgrades to push the price down for the purpose of accumulating shares.
I think anyone who is stupid enough to actually follow Goldman's buy/sell recommendations deserves what they get.
The disseminators are just as culpable, the financial journos.
I spent some time reading deepcapture and it's clear that GS and the rest of the white shoe boys are doing the same dirties as the Rockers just on a massively larger scale. Who in financial media isn't on the take?
I disagree. I worked as a financial journalist for four years and knew no one that would deliberately distort stories for personal gain.
The problem, rather, is one of competence: I knew plenty of people who didn't have sufficient understanding of the issues to provide the right level of challenge or perspective. But you could have said that about many professions during the dot.com and credit bubbles.
Best comment in days. Wall St. gets way too much credit for being able to manipulate financial markets and pull off all sorts of tricks. The truth is that people just aren't that smart.
If the seemingly impervious Church of Scientology can fall (google "Anonymous" in YouTube) with its top management squealing all of their crimes to the public media in record numbers now then certainly GS will suffer the ultimate blow.
One can't cause harm to humanity without the natural laws of the universe reverberating back upon the doer.
Business is profitable and viable when everyone at the table wins. GS, the Fed, the banks can print all the money they want and it won't matter a single stitch. Once you shut the lights on the entrepreneur there goes the country.
I used to run three profitable businesses as owner/operator and worked 80 hours a week. Now I'm ready to relocate to Itacare, Brazil, live on the beach and give up my US citenship - true story. Why fight this mess?
"One can't cause harm to humanity without the natural laws of the universe reverberating back upon the doer."
on what planet? this is about stupid foaming greedy suckers being prey. that's how this planet works. governments and corporations are predators except in the fairy tale world where everybody wins. you wont escape that in brazil.
f you want to point the finger at the whole IB community, so be it - they all play these games
OUR INTENTION EXACTLY..you got it!
this stuff is all illegal and needs to be quelled.
Excellent write up.
Thank you.
sleazy linking practices; borderline fraud ..http://www..
hat tip: gay porn and deceitful, slimy operators
And how exactly is this an indictment of GS?.... If you want to point the finger at the whole IB community, so be it - they all play these games.
The only thing the piece seems to clearly indicate is a lack of objectivity regarding reality.
Maybe you were too young to experience the dot.com bubble?...
WTF are you talking about you apologist fucktard?
Sorry. "The Fucktard" (that's MR. Fucktard to you) was attempting to satirize the whiny defenders of Goldman and their grade school excuses "other banks did it too! wahhhhh!" it made me think of this...
http://www.youtube.com/watch?v=2qOW__TneAY
Leave Goldman Alone!!! How dare anyone out there make fun of Goldman after all it has been through.! IT’S A VAMPIRE SQUID! (wah! ooh!) What you don’t realize is that Goldman is taking all this money and all you do is write a bunch of crap about them. They haven’t acted ethically in years. Their song is called “give me more” for a reason because all they want is MORE! MORE-MORE, MORE: MORE!. LEAVE THEM ALONE! You are lucky they even manipulate you BASTARDS! LEAVE GOLDMAN ALONE!…..Please.
Great work, thanks SC. The sort of massive ego that it requires to run a joint like GS does fuck up. It's obvious that regulators/courts aren't going to press them, we'll just have to wait for their own little Hamlet moments and thrill as these compensated psychopaths unwind.
Fucking Assholes.