investment banking report

8/3/2019 Investment Banking Report

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Investment Banker


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Investment banking

An investment bank is a financial institution that assists individuals, corporations and

governments in raising capital by underwriting and/or acting as the client's agent in

the issuance of securities. An investment bank may also assist companies involved

in mergers and acquisitions, and provide ancillary services such as market making,

trading of derivatives, fixed income instruments, foreign exchange, commodities,

and equity securities.

Unlike commercial banks and retail banks, investment banks do not take deposits.

From 1933 (GlassSteagall Act) until 1999 (GrammLeachBliley Act), the United

States maintained a separation between investment banking and commercial banks.

Other industrialized countries, including G8 countries, have historically not

maintained such a separation.

There are two main lines of business in investment banking. Trading securities for

cash or for other securities (i.e., facilitating transactions, market-making), or the

promotion of securities (i.e., underwriting, research, etc.) is the "sell side", while

dealing with pension funds, mutual funds, hedge funds, and the investing public (who

consume the products and services of the sell-side in order to maximize their return oninvestment) constitutes the "buy side". Many firms have buy and sell side

components.

An investment bank can also be split into private and public functions with a Chinese

wall which separates the two to prevent information from crossing. The private areas

of the bank deal with private insider information that may not be publicly disclosed,

while the public areas such as stock analysis deal with public information.

An advisor who provides investment banking services in the United States must be a

licensed broker-dealer and subject to Securities & Exchange Commission(SEC)

and Financial Industry Regulatory Authority (FINRA) regulation.


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Top Ten Investment Bank

Rank Company Fees ($m)

1 J.P. Morgan $5,533.85

2 Bank of America Merrill Lynch $4,581.59

3 Goldman Sachs $4,386.52

4 Morgan Stanley $4,055.48

5 Credit Suisse $3,379.12

6 Deutsche Bank $3,286.80

7 Citi $3,238.67

8 Barclays Capital $2,864.44

9 UBS $2,614.44

10 BNP Paribas $1,433.89

Organizational structure

Main activities


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Investment banking is split into the so-called front office, middle office, and back

office. While large service investment banks offer all of the lines of businesses,

both sell side and buy side, smaller ones sell side investment firms such as boutique

investment banks and small broker-dealers focus on investment banking and

sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors

buying securities. For corporations, investment bankers offer information on when

and how to place their securities on the open market, an activity very important to an

investment bank's reputation. Therefore, investment bankers play a very important

role in issuing new security offerings.

Core investment banking activities

Front office

Investment banking (corporate finance) is the traditional aspect of investment banks

which also involves helping customers raise funds in capital markets and giving

advice on mergers and acquisitions (M&A). This may involve subscribing investors to

a security issuance, coordinating with bidders, or negotiating with a merger target.

Another term for the investment banking division is corporate finance, and its

advisory group is often termed mergers and acquisitions. A pitch book of financial

information is generated to market the bank to a potential M&A client; if the pitch is

successful, the bank arranges the deal for the client. The investment banking division

(IBD) is generally divided into industry coverage and product coverage groups.

Industry coverage groups focus on a specific industry, such as healthcare, industrials,

or technology, and maintain relationships with corporations within the industry to

bring in business for a bank. Product coverage groups focus on financial products,

such as mergers and acquisitions, leveraged finance, project finance, asset finance and

leasing, structured finance, restructuring, equity, and high-grade debt and generally

work and collaborate with industry groups on the more intricate and specialized needs

of a client.

Sales and trading: On behalf of the bank and its clients, a large investment bank's

primary function is buying and selling products. In market making, traders will buy

and sell financial products with the goal of making money on each trade. Sales is the


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term for the investment bank's sales force, whose primary job is to call on institutional

and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and

take orders. Sales desks then communicate their clients' orders to the

appropriate trading desks, which can price and execute trades, or structure new

products that fit a specific need. Structuring has been a relatively recent activity

as derivatives have come into play, with highly technical and numerate employees

working on creating complex structured products which typically offer much greater

margins and returns than underlying cash securities. In 2010, investment banks came

under pressure as a result of selling complex derivatives contracts to local

municipalities in Europe and the US Strategists advise external as well as internal

clients on the strategies that can be adopted in various markets. Ranging from

derivatives to specific industries, strategists place companies and industries in a

quantitative framework with full consideration of the macroeconomic scene. This

strategy often affects the way the firm will operate in the market, the direction it

would like to take in terms of its proprietary and flow positions, the suggestions

salespersons give to clients, as well as the way structurers create new products. Banks

also undertake risk through proprietary trading, performed by a special set of traders

who do not interface with clients and through "principal risk"risk undertaken by a

trader after he buys or sells a product to a client and does not hedge his total exposure.

Banks seek to maximize profitability for a given amount of risk on their balance

sheet. The necessity for numerical ability in sales and trading has created jobs for

physics, mathematics and engineering Ph.D.s who act as quantitative analysts.

Research is the division which reviews companies and writes reports about their

prospects, often with "buy" or "sell" ratings. While the research division may or may

not generate revenue (based on policies at different banks), its resources are used to

assist traders in trading, the sales force in suggesting ideas to customers, and

investment bankers by covering their clients. Research also serves outside clients with

investment advice (such as institutional investors and high net worth individuals) in

the hopes that these clients will execute suggested trade ideas through the sales and

trading division of the bank, and thereby generate revenue for the firm. There is a

potential conflict of interest between the investment bank and its analysis, in that

published analysis can affect the bank's profits. Hence in recent years the relationship


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between investment banking and research has become highly regulated, requiring

a Chinese wall between public and private functions.

Other businesses that an investment bank may be involved in

Global transaction banking is the division which provides cash management,

custody services, lending, and securities brokerage services to institutions. Prime

brokerage with hedge funds has been an especially profitable business, as well as

risky, as seen in the "run on the bank" with Bear Stearns in 2008.

Investment management is the professional management of various securities

(shares, bonds, etc.) and other assets (e.g., real estate), to meet specified investment

goals for the benefit of investors. Investors may be institutions (insurance

companies, pension funds, corporations etc.) or private investors (both directly via

investment contracts and more commonly via collective investment

schemes e.g., mutual funds). The investment management division of an investment

bank is generally divided into separate groups, often known as Private Wealth

Management and Private Client Services.

Merchant banking can be called "very personal banking"; merchant banks offer

capital in exchange for share ownership rather than loans, and offer advice on

management and strategy. Merchant banking is also a name used to describe the

private equity side of a firm. Merchant Banking: Past and Present Current examples

include Defoe Fournier & Cie. and JPMorgan's One Equity Partners and the

original J.P. Morgan & Co. Roths childs, Barings, Warburgs and Morgans were all

merchant banks. (Originally, "merchant bank" was the British English term for an

investment bank.)

Middle office

Risk management involves analyzing the market and credit risk that traders are

taking onto the balance sheet in conducting their daily trades, and setting limits on the

amount of capital that they are able to trade in order to prevent "bad" trades having a

detrimental effect on a desk overall. Another key Middle Office role is to ensure that

the economic risks are captured accurately (as per agreement of commercial terms

with the counterparty), correctly (as per standardized booking models in the mostappropriate systems) and on time (typically within 30 minutes of trade execution). In


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recent years the risk of errors has become known as "operational risk" and the

assurance Middle Offices provide now includes measures to address this risk. When

this assurance is not in place, market and credit risk analysis can be unreliable and

open to deliberate manipulation.

Corporate treasury is responsible for an investment bank's funding, capital structure

management, and liquidity risk monitoring.

Financial control tracks and analyzes the capital flows of the firm, the Finance

division is the principal adviser to senior management on essential areas such as

controlling the firm's global risk exposure and the profitability and structure of the

firm's various businesses via dedicated trading desk product control teams. In the

United States and United Kingdom, a Financial Controller is a senior position, often

reporting to the Chief Financial Officer.

Corporate strategy, along with risk, treasury, and controllers, also often falls under

the finance division.

Compliance areas are responsible for an investment bank's daily operations

compliance with government regulations and internal regulations. Often also

considered a back-office division.

Back office

Operations involves data-checking trades that have been conducted, ensuring that

they are not erroneous, and transacting the required transfers. While some believe that

operations provides the greatest job security and the bleakest career prospects of any

division within an investment bank, many banks have outsourced operations. It is,

however, a critical part of the bank. Due to increased competition in finance related

careers, college degrees are now mandatory at most Tier 1 investment banks.[A

finance degree has proved significant in understanding the depth of the deals and

transactions that occur across all the divisions of the bank.

Technology refers to the information technology department. Every major investment

bank has considerable amounts of in-house software, created by the technology team,

who are also responsible for technical support. Technology has changed considerably


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in the last few years as more sales and trading desks are using electronic trading.

Some trades are initiated by complex algorithms for hedging purposes.

Role of the Investment Banker in IPO (Initial Public Offer):


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Figure illustrates the role of an investment bank in a common stock IPO, which

represents the selling of a company to the general public for the first time. A stock

IPO is depicted here because of its relative visibility and potential opportunity for

leverage. IPOs are usually initiated by the company (corporate client) that wants to

sell its common stock to the public. The chief financial officer (CFO) represents the

interests of the corporate client during the IPO process. The client firm owners

influence the transaction through contact with the CFO.

Initially, the CFO hires an investment bank that understands the industry, and ideally,

one that previously has taken a similar firm public. The deal manager scrutinizes the

company to determine whether the

client and the market are ready for this firm to go public. Occasionally, the decision to

take on a corporate client may be referred to senior management. The opinions of

leaders within the investment community also can influence a banks decision to


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accept a client. Upon acceptance of the corporate client, the bank decides whether it

will manage the deal alone or with others (co-lead banks). Most large deals involve

multiple investment banks brought into the transaction by the lead bank at various

points. The deal team creates the prospectus (or offering circular) that describes the

company and security to be offered. Its contents are determined, through the due

diligence process, by internal counsel, in concert with the deal team: the deal

manager, financial analysts, technical support, and external advisors/consultants. The

documents contain everything an investor needs to know about the company such as

its products, markets, finances (including contingent liabilities), legal or

regulatory issues, and tax implications. The prospectus is filed with the regulators

(SEC in the United States) and then distributed to potential investors. During the

transaction, the deal

Manager considers the following questions:

What relevant tax laws affect the company going public?

Does the company have any historical environmental issues (such as site

contamination) that require disclosure?

Is the timing appropriate for an IPO (e.g., market conditions, government

regulations, other competing IPOs)?

The following activities occur concurrently:

The sell-side analysts evaluate and rate the corporate client to determine the

potential price of the IPO shares offered to the market. Marketing and salesforce, led

by a representative of the deal team, begin to travel and meet with potential investors

to explain the transaction (the roadshow). These potential investors include

corporate clients, private clients, investment houses, pension funds, mutual funds, and

sometimes the investment banks own portfolio. For potentially visible or sensitive

transactions, external relations

may be consulted to ascertain how the transaction will be promoted outside traditional

sales channels. Within a few weeks of the selected IPO date, public affairs prepares a

press release (a tombstone).

The offering is made on a particular day with various investor groups buying the

companys newly issued stock. All the funds obtained during the IPO sale flow

through a third-party trustee/custodial account for legitimization of the flow of funds.


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The original entrepreneurs or venture capital fund receive a sizable return on their

investment to date and may maintain some level of ownership that could result in

future profits.


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Role of the Investment Banker in Company Finances

The investment banker serves multiple roles as an adviser to a company. The banker

must understand the current situation of the company and help it move in the direction

it wishes to go. This means assisting the company to improve its competitive standing

while adding and subtracting assets and liabilities in order to strengthen the position

of the company. Bankers do this by finding takeover candidates, leading sales of stock

and bonds or suggesting new investment techniques. The ability of the banker to

understand the thinking of a corporate client is key to his or her success.

Achieving Strategic Objectives

o Investment bankers meet regularly with management to discuss what

objectives the company is strategically focusing on. The banker also

needs to provide an outside view of what competitor companies are

doing and what, if any, strategic complications this provides. Bankers

must provide solutions for achieving objectives and have the financial

strength to lead bond and stock offerings on behalf of the company.

Due Diligence

o If a company has made a bid for another company an outside third

party such as the investment banker will need to supply an opinion

regarding the careful study and decision making that went into

acquiring the company. This is called a due diligence report. The due

diligence report is a necessary document and requires that the

investment banker ask probing questions and ascertain that the

company did everything in its power to uncover problems that might

arise later.

Fairness Opinions

o Another document necessary for the purchase of one company by

another is the fairness opinion. The fairness opinion is written by the

investment banker and provides detailed determinations, often using

several investment metrics, to demonstrate that the company did notoverpay for the acquired company. Fairness opinions allow


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management to show that substantial effort was used to get the best

price possible for investors. An investment banker may be sued by

shareholders if it is later learned that his opinion was incorrect.

Managing Debt Offerings

o Investment bankers suggest ways to finance or refinance financial

obligations. In a period of low interest rates a banker may demonstrate

cost savings by redeeming outstanding debt at higher interest rates and

substituting a new, lower interest cost issue. The banker earns fees for

the underwriting while guiding the company's efforts to choose the

proper size and maturity of the offering as well as handlingnegotiations with the debt rating agencies.

Managing Stock Offerings

o Investment bankers are responsible for bringing new companies to the

public markets for the first time (also called an IPO or initial public

offering), raising capital for privately held companies, or improving

the capital strength of existing public companies by redeeming debt

with additional stock offerings. Taking a company public is a difficult

task as the stock offering may not be received well if it is overpriced or

will rise greatly in value if it is under-priced. It is the job of the banker

to negotiate terms and get all legal, accounting and regulatory

documents prepared. In addition, the investment banker will work with

the sales force and other customers to buy the stock.


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Capital raising

If a company is to grow, it has to invest and, often, that capital comes from external

sources. This can be in the form of either "equity", when the company

issues more shares to investors, who buy them for cash; or debt, either from

banks or - more usually nowadays - directly from investors. Investors may

be either institutional (pension funds and the like) or retail (individuals).

Investment Banks advise on the raising of capital - in what form, how much, from

whom, timing - and may also charge a fee for arranging the financing or for

"underwriting" (guaranteeing to take up any securities that are unsold in the

market, so that the issuer knows for sure how much cash it is going to raise

and can plan accordingly).

Ways of Raising Capital

There are several ways of raising equity capital: These are discussed below:

Rights Offerings

Most company regulations or charters allow shareholders to have a pre-emptive rightin additional stock issues. Thus, anytime the company wants to raise additional equity

capital, it must make a formal offer to existing shareholders before it can seek the

interest of potential outside investors. Where it sells additional stock issues to existing

shareholders, it is called a rights offering. This offer may be pronounceable or non-

pronounceable. A pronounceable rights offering gives the shareholder the option to

exercise his right to purchase the new shares at the issue price. A non-pronounceable

rights offering obligates the shareholder to exercise his rights at the issue price.

Public Offerings

Where the corporate charter or regulations are silent on pre-emptive rights of existing

shareholders, it may decide to sell new shares or stock through a rights offering or a

public offering.


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Private Placements:

This method of selling securities is generally used by companies who are interested in

reducing their floatation costs and are interested in a specific group of investors.

Under private placements, new stocks are sold to one or a few investors, generally

institutional investors who invest in large blocks of shares.

Employees Purchase Plans and Employee Share/Stock Ownership Plan

In most organizations, the regulations or charter allows employees to purchase the

shares of the company usually at predetermined prices based on the financial

performance of the entity. This usually affects managerial staff in order to reduce the

prevalence of the principal-agency problem.


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Role of Investment Bankers in Merger and Acquisition.

Investment banker plays an Important role in M&A. They help the merging

companies in many ways like.

They help in organizing mergers.

They help target companies to develop and implement defensive tactics.

They help in valuing the target company.

They help in financing mergers and,

They invest in stock of firms which are likely to merge.

Investment bankers gain huge profits through these merger related activities.

Organizing Mergers: Suppose steel manufacturers interested in merging with

one of its suppliers such as iron or coal mining firm. Investment bankers help

steel manufactures to acquire its suppliers.

Developing Defensive Tactics: In order to avoid takeover by big firms, a

target firm make use of Investment banking firm and a law firm. Some of the

defensive strategies are Golden parachutes, Poison pills, white square, white

Knights etc.

Establishing a Fair Value.

Financing Mergers: If acquiring firms do not have enough fund of cash, then

there is need for searching source of funds. (FYI: Earlier in 1980, Junk bonds

were the only source for financing mergers and the primary developer for

those were Drekel Burnham Lambert)

Arbitrage Operations: Here it refers to buying and selling of securities in

different markets at different prices and taking risk free return.
http://layman-blog.blogspot.com/2011/05/role-of-investment-bankers-in-merger.htmlhttp://layman-blog.blogspot.com/2011/05/role-of-investment-bankers-in-merger.html


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Functions of investment banker

When corporation sells new securities to raise funds, the offering is called a

primary issue. The agent responsible for finding buyers for these securities is called

the investment banker. The investment banker purchase primary issue from

corporation and arranges immediate resell of these securities to the investors. Merrill

Lynch & Co., Goldman Sachs are some examples of well-known investment banking

firms. Broadly investment bankers (investment banking firms) perform three

functions: Investigation, Analysis and Research (Origination), Underwriting (Public

Cash offerings) and Distribution. Most of time a single investor banker performs all

functions, however some investment bankers are specialized in certain functional

areas only.

Investigation, Analysis and Research (Origination): Origination

includes the subsidiary operations of discovery, investigation, and negotiation.

Discovery is the finding of a prospective issue of securities; investigation is the

testing of the investment credit of the prospective security issuer, and the intrinsicsoundness of the issue; negotiation is the determination of the amount, the price, and

the terms of the proposed issue. Investigation usually involves an analysis of the

financial history of the corporation by accountants, investigation of legal factors, a

survey of its physical property by engineers, and in-depth review of operations. The

purpose of investigation and analysis is to determine whether a proposed issue has

sufficient merit to be offered to investment community. In other words, function of

investment banking is careful analysis of the soundness and reliability of the

corporation whose securities are seeking the investment market. The task of

investigation and analyzing the numerous factors, which govern the value of

investment securities, varies considerably with the different types of issuing bodies.

Underwriting (Public Cash offerings): When a corporation wishes to issue

new securities and sell them to the public, it makes an arrangement with an

investment banker whereby the investment banker agrees to purchase the entire issue

at a set price, known as underwriting. Underwriting also refers to the guarantee by the


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investment banker that the issuer will receive a certain minimum amount of cash for

their new securities. The investment banker buys a new security issue, pays the issuer,

and markets the securities. The underwriters compensation is the difference between

the price at which the securities sold to the public, and the price paid to the company

for the securities. Underwriting can be done either through negotiations between

underwriter and the issuing company (called negotiated underwriting) or by

competitive bidding. A negotiated underwriting is a negotiated agreed arrangement

between the issuing firm and its investment banker. Most large corporations work

with investment bankers with whom they have long-term relationship. In competitive

bidding, the firm awards offering to investment banker that bid the highest price.

In certain cases, for large or risky issues a number of investment bankers get

together as a group, they are referred to as syndicate. A syndicate is a temporary

association of investment bankers brought together for the purpose of selling new

securities. One investment banker is selected to manage the syndicate called the

originating house, which does underwriting of the major amount of the issue. There

are two types of underwriting syndicates, divided and undivided. In a divided

syndicate, each member group has liability of selling a portion of offerings assigned

to them. However, in undivided syndicate, each member group is liable for unsold

securities up to the amount of its percentage participation irrespective of the number

of securities that group has sold.

Distribution: Another function of investment banker it to market the security

issues. The investment banker acts as a specialist to distribute securities efficiently for

the corporation. It can be very expensive and ineffective for a corporation to sell an

issue by establishing marking and selling organization by its own. Investment banker

has established marketing and sales network to distribute securities. For a reputed

invest banker, with its past history of selecting good companies and pricing securities

builds a broad client base over time, and further increases the efficiency with which

securities can be sold.


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Functions of Investment Bankers

Apart from advising the investment bankers also performs various functions such as:

Investment bankers administer the bonds-issuance.

Commend and perform way-out to take over and collaborate with otherorganization

Control the selling of the stock of theirorganization to the general public.

They also play the role of strategists in order to solve out financial problems of

their clients

They also help the clients to develop their financial policies and also apply

them.

Even investment bankers act as the vital figures in molding economies of the

entire globe, managing collaborators of multibillion-dollar conglomerates and

tackling the Government asset's privatization.

Since all the works are time consuming investment bankers also work for

prolong hours.

Investment bankers also emerge new innovative ideas and schemes for

developing strategies to pitch to clients

Prepare pecuniary analyses and documents

Work with the sales teams of their banks in selling the bonds and stocks which

are produced by the investment-banking department's activities.

Investment banker also represents a pecuniary establishment that is in the

business of increasingcapital for corporations and municipalities

An investment banker should not accept deposits or make commercial loans.

Even Investment bankers do the grunt work for IPO's and bond issues.

An investment banker at cosmopolitan standard also possesses banking panels

which are controlled bysuperior associates who have authority and

experience in theirclients through out the world.

Investment bankers provide access to dedicated assistance which is featured

by commitment to national markets and an understanding of the profitable and

edifying differences between various countries.

The investment banks can enjoy an unexpected stage of strong economic

conditions and growth which enables them to transport trace gain through the

advice of the investment banker.


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Even it is the work of the investment bankers to spotlight on people and cost

control in the present situation also suggests controlling economy during good

and bad times.

The major concentration in the investment banking industry has always been

on growth at utmost level rather than diminishing cost and competence. But

investment bankers take care of all the aspects thoroughly in a very efficient

manner so that improvement takes place in the entire segment.

The investment bankers maintains and performs all the functions is a very

effective procedure without any loss incurred on the firms ororganizations as

the total financial and investment filed are governed by him.

investment banking report

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