Goldman Sachs 2004 Annual Report Download - page 47

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management’s฀discussion฀and฀analysis
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 4 5
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀15฀•฀Proof฀11฀•฀2/4/05฀•฀0700
Net revenues in our segments include allocations of interest
income and interest expense to specific securities, commodities
and other positions in relation to the cash generated by, or fund-
ing requirements of, such underlying positions. See Note 15 to
the consolidated financial statements for further information
regarding our segments.
The cost drivers of Goldman Sachs taken as a whole — compen-
sation, headcount and levels of business activity — are broadly
similar in each of our business segments. Compensation
expenses within our segments reflect, among other factors, the
overall performance of Goldman Sachs as well as the perfor-
mance of individual business units. Consequently, pre-tax mar-
gins in one segment of our business may be significantly affected
by the performance of our other business segments. A discus-
sion of segment operating results follows.
Investment฀Banking
Our Investment Banking segment is divided into two components:
• f i nancial฀adv isory ฀–฀Financial Advisory includes advi-
sory assignments with respect to mergers and acquisitions,
divestitures, corporate defense activities, restructurings
and spin-offs.
• u n derwri t i n g฀– ฀Underwriting includes public offerings
and private placements of equity, equity-related and
debt instruments.
2 00 4฀ v er su s฀ 2 00 3฀– ฀Net revenues in Investment Banking of
$3.37 billion for 2004 increased 24% compared with 2003.
Net revenues in Financial Advisory of $1.74 billion increased
45% compared with 2003, primarily reflecting a significant
increase in industry-wide completed mergers and acquisitions.
Net revenues in our Underwriting business of $1.64 billion
increased 8% compared with 2003, reflecting a significant
increase in industry-wide public common stock offerings and
industry-wide initial public offerings. The increase in Investment
Banking net revenues primarily reflects higher levels of activity
in the industrial and consumer sectors. Our investment banking
backlog at the end of 2004 was higher than the end of 2003.(1)
(1)฀฀Our฀investment฀banking฀backlog฀represents฀an฀estimate฀of฀our฀future฀net฀rev-
enues฀from฀ investment฀ banking฀ transactions฀where฀ we฀ believe฀ that฀ future฀
revenue฀realization฀is฀more฀likely฀than฀not.฀
The following table sets forth the operating results of our Investment Banking segment:
investment฀banking฀operating฀results
฀ ฀ YEAR฀ENDED฀NOVEMBER฀
(IN฀MILLIONS)฀ 2004฀ 2003฀ 2002
Financial Advisory $1,737 $1,202฀ $1,499
Equity underwriting 819 678฀ 734
Debt underwriting 818 831฀ 597
Total Underwriting 1,637 1,509฀ 1,331
Total net revenues 3,374 2,711฀ 2,830
Operating expenses 2,973 2,504฀ 2,454
Pre-tax earnings฀$฀฀฀401฀ $฀฀฀207฀ $฀฀฀376
The following table sets forth our financial advisory and underwriting transaction volumes:
goldman฀sachs฀global฀investment฀banking฀volumes(1)
฀ ฀ YEAR฀ENDED฀NOVEMBER
(IN฀BILLIONS)฀ 2004฀ 2003฀ 2002
Announced mergers and acquisitions $436 $430฀ $313
Completed mergers and acquisitions 515 354฀ 414
Equity and equity-related offerings(2) 52 41฀ 48
Debt offerings(3) 232 250฀ 203
(1)฀฀Source:฀Thomson฀Financial.฀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฀volumes฀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.
(2)฀Includes฀public฀common฀stock฀offerings฀and฀convertible฀offerings.
(3)฀฀Includes฀non-convertible฀preferred฀stock,฀mortgage-backed฀securities,฀asset-backed฀securities฀and฀taxable฀municipal฀debt.฀Includes฀publicly฀registered฀and฀Rule฀
144A฀issues.