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The Success Of Goldman Sachs Essay, Research Paper
Imagine we could step back to Manahattan?s financial district circa 1869, we might see a man in a frock coat and high silk hat hurrying along the cobblestone streets. This could be Marcus Goldman, an immigrant from Europe and maturing entrepreneur. Would he have ever thought that he would be the founder of the ?greatest financial success stories of the twentieth century?? (Endlich, 1999)
Goldman Sachs is a global leading investment banking and securities firm. It commenced as a little-known business, founded by Marcus Goldman in 1869. Almost 20 years later, Samuel Sachs joined his father-in-law, Marcus Goldman, and created Goldman Sachs as a private partnership with a ?minor reputation and a huge dream? (Endlich, 1998). After more than a century of substantial growth from 2 to 200 private partners, the firm became a public company in 1999, creating a publicly traded organization worth $48 billion.(fortune, 1999). Along with a presence in over 90 countries, across three continents, the Goldman Sachs group Inc. is headquartered in New York City and has 41 offices nationwide. Goldman is the investment banker to companies such as Microsoft, Ford Motor Company, General Electric, and American Express. This prestigious investment-banking firm is one of the oldest, largest and omniscient companies across the globe.
The two main services provided by Goldman Sachs include investment banking and equities. The departments of the Investment Banking Division include The Corporate Finance Department, which advises clients worldwide on structuring and carrying out financial strategies, to meet their financial objectives across a wide range of industries including ?retail, high technology, chemical production and transportation? (Business Week, 1997). The Mergers and Acquisitions Department provides advice worldwide regarding ?acquisitions, divestitures, joint ventures, recapitalizations, leverage buyouts and takeover attempts? (New Yorker) The merger and acquisition process involves analyzing features of companies and industries; determining likely buyers and sellers; and marketing, negotiating and closing transactions. The real estate department provides complex and original investment banking services worldwide to the primary real estate companies. Their clients include ?real estate investment trusts, the hospitality industry and a variety of fortune 500 companies? (Fortune, 1997).
The Equities Division of the Goldman Sachs empire is another profitable business for the firm. This division offers every kind of equity feature and plays a large role in the primary equity markets across the globe. Working with corporations, institutions, governments and individuals, the equity division develops customized investment strategies and facilitates activity in both public and private equity markets (Goldman Sachs pamphlet, 1997). Their wide range of expertise allows them to successfully achieve their clients? goals, which include; trading large amounts of equity securities in various currencies; portfolio hedging and restructuring; providing market information, investment perspective and guidance; facilitating initial public offerings and governmental privatization programs (Goldman Sachs pamphlet, 1997) and advising wealthy individuals and families on ways in which to build and protect their posessions.
One example of how the equities division provides a great deal of business for the firm is when 1997 Goldman Sachs made one of the biggest equity trades through buying and selling a 2 billion dollar block of British Petrolium within 24 hours. This evidence is authoritative because it is provided in the recommended and prevalent Business Week Magazine. Smaller services provided by the firm entail: Fixed income, currencies and commodities, asset management, Global Operations, technology, treasury, Controllers, Credit, Tax, Management controls and legal advising.
As early as 1880, relationships with major organizations such as several European banks were being formed to support the international needs for its clientele. Their relationships with Sears and Ford Motor Company are another two examples of their dealings with major corporations during the early 20th century. A recent article in Fortune magazine, in 1997, reported Goldman Sachs paying $1.325 billion for a two-thirds of AMF, owner of 390 bowling centers and the world biggest manufacturer of bowling equipment. (GS.com)
Goldman Sachs, joined the New York Stock Exchange in 1896, (GS.com) and quickly became a leader on Wall Street by the 1930s. During the 1950s, the firm played a leader role in establishing the U.S. municipal bond market as a means of financing public projects. And in 1981, the firm acquired J. Aron & Co., which later on became a leader in currency and commodity markets worldwide. (GS.com)
Goldman Sachs reputation of being the best and brightest goes back to the 1920s when it was one of the first Wall Street Firms to recruit MBAs. During the 1950s, it was first to establish a group of professionals advising institutional investors on trading large blocks of stock, at the same time serving the individual investor. In addition, it was the first to set up a group to market it?s the full range of investment banking services, an approached that came to be imitated by competitors.(GS.com) In 1970s, it formed the first Wall Street Mergers & Acquisitions and Real Estate department. Lately, according to Forbes magazine, Goldman Sachs launched an online platform enabling clients to access all the world?s major equity markets on a real time basis.
Since WWII, Goldman Sachs has followed a plan of aggressive global expansion. It?s first international office was opened in London in 1970. Thereafter, offices were opened in Tokyo, Zurich, Hong Kong, Beijing, Shanghai, Mexico City and other major commercial cities in the world. In these 30 years, they gradually built up their global network covering 90 countries. The Goldman Sachs name is now recognized as one of the world?s most pioneering financial groups.
In September 2000 seven leading investment firms, including Goldman Sachs, Merrill Lynch and five other well-known firms, launched the global financial gateway known as ?markets.com?, which offers a wealth of information for investors on equity research, initial public offering information, corporate news, as well as market data. (Forbes, 2000) Goldman Sachs has become renowned in terms of its worldwide scale and investments in new technology. These two characteristics relate to Chandler?s ideas about how an organization?s success is realized. According to Chandler, the economies of scale and scope, the efficiency of the organization structure and the innovation and strategy for market share and profits are three necessary requirements for an organization?s to success. Indeed, during it?s history Goldman Sachs has achieved a number of notable events, which refer to Chandler?s idea.
Goldman Sachs operates within a fast-paced, competitive, and rapidly changing environment. Since their clients? needs are constantly changing, the firm?s ability to respond to their clients must always be parallel to their demands. Its diversified clientele includes corporations, financial institutions, governments, and high-income individuals.
Goldman Sachs provides a full range of services by consolidating it?s various divisions. (GS.com)
The Financial Services Industry
In recent years market for financial services has undergone some drastic changes. One of the major trends in this sector has been the creation of mega-firms through mergers. Banks, Insurance companies, brokerage firms and so on have been able to realize economies of scale by merging their many services into comprehensive packages in order to better serve their increasingly demanding clientele. Some clear evidence of this is the fact that in the past decade there has been an ever-increasing number of people involved stock market trading. For example, Statistics show that over half of all households in the U.S. now own some form of stock, either through direct ownership, mutual funds, or 401(k)?s (RRSP in Canada). (www.plunkettresearch.com)
Another factor allowing for integration of financial services has been the revolutionary effects of the Internet in connecting businesses and clients. This has rendered services ranging from simple banking operations to life insurance more accessible to Internet savvy customers. According to John E. Cleghorn CEO of Royal Bank Group: ?technology is the key to offering our customers packages of services and information tailored to their financial situation. The ability to track their stock and access to free market research is essential in serving our clients effectively? (www.royalbank.com). Financial institutions that have made investments in new information technology have been able to realize economies of scale by reducing the cost of their information processing. In addition new technologies have facilitated entry into this sector by small and medium sized firms having fewer but better trained employees providing information-based services.
The reduction of legal barriers has also contributed significantly to the wave of consolidation in financial institutions. This convergence has occurred both geographically and across the scope of financial services. For example in 1998 national interstate banking legislation went into effect. These changes allowed multi-state bank holding companies to merge their state banks. As a consequence of these mergers American banks now benefit from greater efficiency in processing transactions, improved customer service, increase in the availability of funds for research and development. One such case is the consolidation of First Union with Signet Bank and CoreStates Bank (firstunion.com). Similarly in Canada the Chartered Banks were strictly limited to banking services. Again since the recent deregulation institutions like Royal Bank have expanded into Royal Investment Group in order to offer a full range of financial services to their growing clientele.(www.ris.com)
Being a first mover in the financial services industry, Goldman Sachs benefited from many advantages and quickly dominated the market. First movers as described by Chandler were companies that capitalized on economies of scale and scope, invested internationally, and recruited teams of management.
There are many factors that can affect the firm?s performance. These include relevant economic, demographic and political aspects and market conditions. Economic factors that can influence Goldman Sachs include the notion of the company going public ?creating a larger capital base? (Newsweek, 1999), growing the business through acquisitions by acquiring other companies and finally by expanding the business in the United States and globally, hence increasing capital gain. Chandler emphasizes economies of scale and scope, which is one of the first steps required in achieving competitive advantage. ?Right now, Goldman Sachs is expanding rapidly, especially overseas. Every market they enter, they dominate? (Newsweek 1999)
The firm constantly strives to foresee the rapidly changing needs of their clients and to develop new services to meet those needs. Despite the continuously changing needs, Goldman makes the best effort to sustain and expand their client relationships. However, their target market is restricted mainly to those with a high level of income. Political factors may consist of people?s interest being influenced by authoritative figures in the media. Goldman Sachs? ranking in comparison to their competitors in the political realm may often influence the demand for their services. In addition, regulatory restrictions prevent firms from providing services to their clients? competitors. Financially, Goldman Sachs revenue can be affected by increases or decreases in interest rates, inflation, taxation, or other sources that may alter stock markets.
Behind the story of Goldman Sachs lies a series of events contributing to their success. In the 1880?s, Goldman Sachs formed relationships with banks throughout Europe, leading to expansion, promotion and awareness of the firm. In 1970, Goldman Sachs opened an office in London, which was the initiation of their business offices opened in Europe; four years later followed Tokyo and Zurich. This drive to expand abroad has permitted Goldman Sachs to be recognized internationally as one of the most successful investment-banking firm. As proposed by Chandler, this is the next step a firm has to take in order to maintain competitive advantage. After capitalizing on economies of scale, the firm needs to expand internationally as explained above as well as recruiting teams of management leading on to the next step Goldman Sachs took.
Behind every success story lies a downfall. In 1994, Goldman Sachs was temporarily suffering very low revenues. In addition to the commotion of large trading losses and failure of poorly executed overseas expansion strategy Goldman Sachs was forced to downsize. Moreover, key partners were unexpectedly retiring early, there was careless management leading to poor morale and excessive costs resulting in weak earnings. It was time to invest in quality management. Goldman Sachs decided that in order to recover, a good management team had to be brought in. This new team included Hank Paulson and Jon Corzine. Paulson and Corzine?s management techniques brought the firm out of its temporary fall and will always be remembered for their role in taking the firm public. In 1999, when Goldman Sachs issued their own IPO, management decided to incorporate employee ownership in the company. Making employees part owners, created less conflict between management and shareholders. This helped boost employee morale creating a more dedicated and productive workplace. Stephen Friedman had summed up the benefits of ownership by saying ? no one washed a rental car? (Endlich, 1999). In other words, employees will provide full dedication and loyalty to what is now partly theirs.
Goldman Sachs? culture and history have been preserved for a long period of time due to its long standing dedication to maintaining and enhancing economies of scale and scope; as well as keeping in mind the importance if good management and international expansion. It has effectively done so through many factors, but particularly the ones mentioned above such as the ability to recruit consistently ?some of the most talented people on Wall Street? (Endlich, 1999). With the help of these practices ?the firm was able to generate $3 billion in profits in 19997? (Endlich, 1999) Since every firm?s goal is profit maximization, the publicly owned Goldman Sachs can now maximize its shareholding wealth. The shareholding will help expand the growth of the company due to the fact that the company is exposed to more people throughout the market and because Goldman Sachs is growing internationally which will inevitably make it one of the most profitable organizations internationally.
If only Marcus Goldman could visit the firm today he would be astonished at the amount of change in the company that bears his name. Now, 130 years later, Goldman Sachs is a newcomer in many parts of the world and ?[they] seek to sustain the entrepreneurial spirit that guided the founder of their firm? (Endlich, 1999).
Endlich, Lisa. Goldman Sachs: The Culture of Success. New York: Alfred A.Knopf Inc., 1999
Abbot, John S. ?Where Does Goldman Sachs Go From Here?? Business Week. 20 (March, 1995): 104-110.
Abbott, John S. ?Inside The Securities Firms.? Business Week. 22 (December, 1997): 86-90
Creswell, Julie. ?Goldman Goes Shopping.? Fortune. 10(May, 1999): 120-121
Goldblatt, Henry. ?The Big Name in Bowling is?Goldman Sachs?? Fortune. 3 (March, 1997): 32-34
Serwer Andy. ?Why Goldman Sachs Matters.? Fortune. 6 (July 1998): 219-220
Singer Mark. ?Penny Wise, Penny Foolish.? New Torker. Vol.74 no. 32
?Goldman Sachs.? Online. Internet. 2000. Abvailable: http://www.gs.com.
Goldman Sachs, The Investment Banking Division: Financial Analyst Program. (New York: Goldman Sachs & co., 1997)
Goldman Sachs, The Equities Division: Financial Analyst Program. (New York: Goldman Sachs & co., 1997)
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