Goldman Sachs 2012 Annual Report Download - page 54

Management’s Discussion and Analysis
Investment Banking
Our Investment Banking segment is comprised of:
Financial Advisory. Includes strategic advisory
assignments with respect to mergers and acquisitions,
divestitures, corporate defense activities, risk management,
restructurings and spin-offs, and derivative transactions
directly related to these client advisory assignments.
Underwriting. Includes public offerings and private
placements, including domestic and cross-border
transactions, of a wide range of securities, loans and other
financial instruments, and derivative transactions directly
related to these client underwriting activities.
The table below presents the operating results of our
Investment Banking segment.
Year Ended December
in millions 2012 2011 2010
Financial Advisory $1,975 $1,987 $2,062
Equity underwriting 987 1,085 1,462
Debt underwriting 1,964 1,283 1,286
Total Underwriting 2,951 2,368 2,748
Total net revenues 4,926 4,355 4,810
Operating expenses 3,330 2,995 3,459
Pre-tax earnings $1,596 $1,360 $1,351
The table below presents our financial advisory and
underwriting transaction volumes. 1
Year Ended December
in billions 2012 2011 2010
Announced mergers and acquisitions $707 $634 $500
Completed mergers and acquisitions 574 652 441
Equity and equity-related offerings 257 55 67
Debt offerings 3236 206 234
1. Source: Thomson Reuters. Announced and completed mergers and
acquisitions volumes are based on full credit to each of the advisors in a
transaction. Equity and equity-related offerings and debt offerings are based
on full credit for single book managers and equal credit for joint book
managers. Transaction volumes may not be indicative of net revenues in a
given period. In addition, transaction volumes for prior periods may vary from
amounts previously reported due to the subsequent withdrawal or a change
in the value of a transaction.
2. Includes Rule 144A and public common stock offerings, convertible offerings
and rights offerings.
3. Includes non-convertible preferred stock, mortgage-backed securities,
asset-backed securities and taxable municipal debt. Includes publicly
registered and Rule 144A issues. Excludes leveraged loans.
2012 versus 2011. Net revenues in Investment Banking
were $4.93 billion for 2012, 13% higher than 2011.
Net revenues in Financial Advisory were $1.98 billion,
essentially unchanged compared with 2011. Net revenues
in our Underwriting business were $2.95 billion, 25%
higher than 2011, due to strong net revenues in debt
underwriting. Net revenues in debt underwriting were
significantly higher compared with 2011, primarily
reflecting higher net revenues from investment-grade and
leveraged finance activity. Net revenues in equity
underwriting were lower compared with 2011, primarily
reflecting a decline in industry-wide initial public offerings.
During 2012, Investment Banking operated in an
environment generally characterized by continued concerns
about the outlook for the global economy and political
uncertainty. These concerns weighed on investment banking
activity, as completed mergers and acquisitions activity
declined compared with 2011, and equity and equity-related
underwriting activity remained low, particularly in initial
public offerings. However, industry-wide debt underwriting
activity improved compared with 2011, as credit spreads
tightened and interest rates remained low. If macroeconomic
concerns continue and result in lower levels of client activity,
net revenues in Investment Banking would likely be
negatively impacted.
Our investment banking transaction backlog increased
compared with the end of 2011. The increase compared
with the end of 2011 was due to an increase in potential
debt underwriting transactions, primarily reflecting an
increase in leveraged finance transactions, and an increase
in potential advisory transactions. These increases were
partially offset by a decrease in potential equity
underwriting transactions compared with the end of 2011,
reflecting uncertainty in market conditions.
Our investment banking transaction backlog represents an
estimate of our future net revenues from investment
banking transactions where we believe that future revenue
realization is more likely than not. We believe changes in
our investment banking transaction backlog may be a
useful indicator of client activity levels which, over the long
term, impact our net revenues. However, the time frame for
completion and corresponding revenue recognition of
transactions in our backlog varies based on the nature of
the assignment, as certain transactions may remain in our
backlog for longer periods of time and others may enter and
leave within the same reporting period. In addition, our
transaction backlog is subject to certain limitations, such as
assumptions about the likelihood that individual client
transactions will occur in the future. Transactions may be
cancelled or modified, and transactions not included in the
estimate may also occur.
52 Goldman Sachs 2012 Annual Report