Surprise Surprise, Goldman Stiffs Saks

Maybe you've visited Saks Fifth Avenue's flagship department store in New York City. So large it commands its own zip code, Saks is the most famous of all the venerable shopping destinations in the Big Apple.

Last year, the company sold itself to Canadian Retailer Hudson's Bay for US$2.9bn. On Monday, only a year later, Hudson's Bay commissioned an appraisal of the real estate under Saks's flagship Manhattan store that pegged its value at US$3.7bn.

Saks has 38 other locations under its namesake brand, and an additional 80 locations in its Off Fifth discount chain brand. The flagship store only accounts for 20% of its sales. Either Saks's value has increased exponentially in a very short time period, or someone has gotten pathetically duped.

Saks's former CEO, Stephen Sadove deserves criticism for cutting what appears to be a very raw deal for his shareholders. But Goldman Sachs earns most of our ire. The investment bank provided Saks with a written “fairness opinion” advising that the sale price was fair. This is standard operating procedure for corporate deals and you have probably seen enough of them to know they aren't worth the paper they are written on (what's the saying, “know which side your bread is buttered on”?).

But here's the real nugget: Goldman is exactly the same bank that provided the updated US$3.7bn valuation of the flagship store location. Just one year after they told shareholders US$2.9bn was a fair price for the whole business, the Manhattan land alone is worth more than that.

Of course Goldman wasn't interested in determining true, intrinsic value. They wanted to close deals and earn their big, fat fees. In the first instance, they blessed Saks's sale price to grease the wheels and close a transaction. Even if they knew Saks was worth more at the time, why muck up a bird in the hand? This time around, they were providing Hudson's Bay with a loan that was contingent on a high valuation, skewing their incentive towards an inflated estimate. It should be noted that an independent party conducted the appraisal, but ultimately Goldman had to agree with it and sign off.

The true value of Saks's business is likely closer to the current estimate than the original buyout price. But, whatever the reality of the true valuation, Goldman has done its bit to keep the reputation of the investment banking industry in tatters.