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The High Stakes of Arm’s IPO: A Crucial Moment for Goldman Sachs

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Introduction

When Arm makes its highly-anticipated public debut on Thursday, all eyes will be on the U.K.-based chip maker. However, it’s worth noting that the lead underwriter for this deal is none other than Goldman Sachs, which will also be in the spotlight.

A Potential Gamechanger for Goldman Sachs

A successful initial public offering for Arm has the potential to reinvigorate the lackluster IPO market. This would undoubtedly translate into more business and success for Goldman Sachs (ticker: GS) and its investment banking peers. On the other hand, any misstep – whether caused by market conditions or Goldman’s own efforts – would only exacerbate the prevailing chill in the public debut space and could further tarnish the reputation of embattled Goldman chief David Solomon.

Arm’s Ambitious Plans

Arm is aiming to raise approximately $5 billion at a staggering valuation of $54.5 billion. If achieved, this would make it the largest tech IPO since Uber Technologies (UBER) made its debut in 2019. In addition to Arm, other companies expected to make public debuts include renowned delivery company Instacart, sandal maker Birkenstock, and marketing platform Klaviyo – all with Goldman as their lead underwriter.

The Measure of Success

The success of these companies cannot simply be defined by their ability to go public but by a smooth execution at the opening trade and subsequent stock prices that remain above the IPO price in the weeks that follow. Achieving these milestones would serve as a testament to Goldman and Solomon’s expertise, reinforcing the bank’s prowess in taking companies public even after encountering setbacks while attempting to establish a consumer finance business.

Bumps in the Road

The slow IPO market cannot solely be attributed to Goldman Sachs. Factors such as rapidly rising interest rates and geopolitical concerns have played a significant role in this downturn. Nevertheless, the timing couldn’t have been worse for the bank, as it is currently grappling with reports of discontent among its partners and doubts surrounding Solomon’s leadership. Despite these challenges, the bank continues to maintain a strong position in IPO league tables. Nonetheless, a resounding success in Arm’s IPO will unquestionably silence the skeptics and affirm Goldman’s capabilities.

In conclusion, the upcoming IPO of Arm not only presents a major opportunity for the U.K.-based chip maker but also serves as a pivotal moment for Goldman Sachs. The outcome of this high-stakes debut will undoubtedly have far-reaching implications for both parties involved.

The Spotlight on IPOs

Gerard Cassidy, an analyst at RBC Capital Markets, emphasizes the importance of pricing IPOs correctly. He believes that if the IPOs fall below the syndicate price, it could sour the pipeline.

Goldman Sachs, when approached for comment, declined to respond.

During a recent conference, Solomon, CEO of Goldman Sachs, acknowledged the significance of Arm and other upcoming IPOs in their pipeline.

He stated, “It has been quite a while since I could say to you we have a handful of very significant IPOs in the market. That’s an improvement. I do believe that if these go well and it feels at the moment like they’re progressing nicely, it kind of creates a virtuous cycle of bringing more of the pent-up backlog to market.”

Simply put, this backlog means more revenue for Goldman Sachs. Although the equity underwriting revenue has increased by 41% in the first half of 2023, it started from a low base. Between 2021 and 2022, equity underwriting revenue fell 83% to $848 million.

According to data from Renaissance Capital, there have been 72 IPOs so far this year, surpassing the 71 debuts in 2022. However, this number falls significantly short of the 397 debuts in 2021. The Renaissance IPO exchange-traded fund (IPO) has climbed 35% this year, but it is down 51% over the past two years as investors have turned cautious towards new issuances.

Matt Kennedy, Senior IPO Market Strategist at Renaissance Capital, believes that if investors make money on Arm’s IPO, they are more likely to invest in the next deal.

Ultimately, this means more profits for Goldman Sachs.

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