Goldman Sachs 2002 Annual Report Download - page 35

GO L D M A N SA CH S 2002 A N N UAL R EPO RT 33
Net revenues in our segments include allocations of
interest income and interest expense to specific securi-
ties, commodities and other positions in relation to the
cash generated by, or funding requirements of, such
underlying positions. See Note 15 to the consolidated
financial statements for further information regarding
our segments.
The cost structures of each of our segments are broadly
similar to that of Goldman Sachs taken as a whole in that
they are primarily influenced by discretionary compensa-
tion, headcount and levels of business activity. Our over-
all compensation and benefits expenses are generally
targeted at 50% (plus or minus a few percentage points)
of consolidated net revenues. A substantial portion of our
compensation expense represents discretionary bonuses.
Compensation expense within our segments reflects,
among other factors, the overall performance of
Goldman Sachs as well as the performance of individual
business units.
Investment Banking
Goldman Sachs provides a broad range of investment
banking services to a diverse group of corporations,
financial institutions, governments and individuals. The
activities of our Investment Banking segment are divided
into two categories:
•f inancial adviso r y – Financial Advisory includes
advisory assignments with respect to mergers and
acquisitions, divestitures, corporate defense activi-
ties, restructurings and spin-offs; and
•und er wr it ing – Underwriting includes public
offerings and private placements of equity and
debt securities.
Managem ent’s D iscussion and A nalysis
The following table sets forth the operating results of our Investment Banking segment:
INVESTMENT BANKING OPERATING RESULTS
YEAR ENDED NOVEMBER
(IN MILLIONS) 2002 2001 2000
Financial Advisory $1,499 $2,070 $2,592
Underwriting 1,331 1,766 2,779
Total net revenues 2,830 3,836 5,371
Operating expenses 2,454 3,117 3,645
Pre-tax earnings $ 376 $ 719 $1,726
2002 ver sus 2001
Net revenues in Investment Banking were $2.83 billion
for the year compared with $3.84 billion in 2001. Net rev-
enues in Financial Advisory decreased 28% from the prior
year to $1.50 billion, reflecting a 49% decline in industry-
wide completed mergers and acquisitions.(1) Net revenues
in our Underwriting business declined 25% to $1.33 bil-
lion, primarily reflecting a 17% decline in industry-wide
initial public offerings and a 7% decline in industry-wide
total equity underwriting volume,(1) as well as a decline in
Goldman Sachs’ market share in global debt underwrit-
ing. The reduction in Investment Banking net revenues
was primarily due to lower levels of activity across all sec-
tors, particularly communications, media and entertain-
ment, natural resources, high technology and healthcare.
Our investment banking backlog at the end of 2002 was
significantly lower than at the end of 2001.(2)
Operating expenses decreased 21% , primarily due to
decreased compensation and benefits expenses, reflecting
lower discretionary compensation and lower employ-
ment levels. Market development and communications
and technology expenses also decreased, reflecting the
continued impact of expense reduction initiatives first
implemented in 2001, reduced employment levels and
lower levels of business activity. For a further discussion
of operating expenses and our expense reduction initia-
tives, see “—Operating Expenses” below. Pre-tax earn-
ings were $376 million in 2002 compared with $719
million in 2001.
2001 ver sus 2000
Investment Banking generated net revenues of $3.84 bil-
lion compared with $5.37 billion for 2000, as the slow-
down in global economic growth led to significantly
lower equity valuations and reduced investment banking
activity. Net revenues in Financial Advisory decreased
20% from the prior year to $2.07 billion, primarily
reflecting a 31% decline in industry-wide completed
(1) Source: Thomson Financial Securities Data – December 1, 2001
through November 29, 2002 and November 25, 2000 through
November 30, 2001.
(2) Our investment banking backlog represents an estimate of our
future net revenues from investment banking transactions where we
believe that future revenue realization is more probable than not.