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Investment Banking

A Report by

Raymund Sanchez


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Agenda

Definitions

Functions of an Investment Banker

Distribution Methods Events in a Negotiated Sale

Private Placements

References


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Definitions

Investment Banker:

A financial specialist involved as an intermediary

in the merchandising of securities.

Acts as a middleman by facilitating the flow of

savings from those economic units that want to

invest to those units that want to raise funds.


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Functions of an

Investment Banker


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Core Business

Underwriting

Distributing

Advising Others

Back Office

Operations

Technology

Middle Office

Risk Management

Corporate Treasury

Financial Control Corporate Strategy

Compliance


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Core Business > Underwriting

assuming the risk of selling a security issue at a

satisfactory price

term borrowed from insurance


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Core Business > Distributing

selling function of investment banking

the primary function of an investment bank is

buying and selling products.


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Core Business > Advising

providing advise in the issuance & marketing of

securities

research is the division which reviews companies

and writes reports about their prospects, often with

"buy" or "sell" ratings.


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Core Business > Others

Global transaction banking

Investment management

Merchant banking


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Middle Office > Risk Management

involves analyzing the market and credit risk that

traders are taking onto the balance sheet in

conducting their daily trades

setting limits on the amount of capital that they are

able to trade in order to prevent 'bad' trades having

a detrimental effect to a desk overall


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Middle Office > Corporate Treasury

responsible for an investment bank's funding,

capital structure management, and liquidity risk

monitoring.


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Middle Office > Financial Control

tracks and analyzes the capital flows of the firm

adviser on essential areas such as controlling the

firm's global risk exposure and the profitability and

structure of the firm's various businesses


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Middle Office > Compliance

responsible for an investment bank's daily

operations' compliance with government

regulations and internal regulations


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Back Office > Operations & Technology

data-checking trades that have been conducted,

ensuring that they are not erroneous, and

transacting the required transfers


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Distribution Models


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Distribution Models

Negotiated Purchase

Competitive Bid Price

Commission / Best Efforts Basis Privileged Subscription

Direct Sale


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Distribution Models

Negotiated Purchase

the underwriting firm that needs funds makes

contact with an investment banker &

deliberations concerning the new issue begin.

most prevalent method of distributing securities

in the private sector

most profitable technique as far as investmentbankers are concerned


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Distribution Models

Competitive Bid Price

several underwriting groups bid for the right topurchase the new issue from the corporation that is

raising funds. undue influence of the investment banker over the

firm is mitigated & the price received by the firmfor each security should be higher

as far as fund raising is concerned, the benefitsgained from the advisory function of theinvestment banker is lost


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Distribution Models

Commission / Best Efforts Basis

investment banker acts as an agent rather than as a

principal in the distribution process.

typically used for more speculative issues


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Distribution Models

Privileged Subscription

new issue is marketed to a definite & select

group of investors

3 target markets involved (1) current stock

holders (2) employees (3) customers


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Distribution Models

Direct Sale

the issuing firm sells directly to the public without

going through an investment banker in the process

relatively rare


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Events in a Negotiated

Sale


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Events in a Negotiated Sale

Selection of an investment banker

Pre-underwriting conferences

Formation of the underwriting syndicate

Registering of the securities

Formation of the selling group

Due diligence meeting

Price pegging

Syndicate termination


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Selection of an investment banker

Pre-underwriting conferencesKey Items to be discussed:

Amount of capital to be raised Whether capital markets seem to be receptive at the time &

the type of financing instrument

Whether the proposed use of funds appears reasonable

Tentative underwriting agreement

Approximate price the investment banker will pay for thesecurities

Upset price (escape mechanism for the benefit of the issuingfirm)


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Formation of the underwriting syndicate

syndicate: temporary association of investment bankers formed to

purchase a security issue from a corporation for subsequent resale, for a

profit to the underwriters.purpose of syndicates:

The original investment banker could not finance the entire underwriting himself

Lowers the risk of loss for a single underwriter

Widens the eventual distribution effort


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Registering of the securitiesRegistration statement

Historical facts about the firm

Financial facts about the firm

Administrative facts about the firm


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Formation of the selling group

Due diligence meeting: a last chance gathering to geteverything in order before taking the offering public

Price pegging: placing orders to buy at the agreed upon publicoffering price to mitigate downward price movements in the secondary markets

Syndicate termination: dissolution of the syndicate at the endof the contractual agreement


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Private Placements


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Private Placements

Public offerings :security issuer does

not meet the ultimate investors in the financial

instruments

Private placements :securities are sold directly

to a limited number of institutional investors


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Private Placements

Advantages

Speed

Reduced floatation costs

Financing capability

Disadvantages

Interest costs

Restrictive covenants

Possibility of future SEC registration


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References

Stanley Block & Geoffrey Hirt, Foundations

of Financial Management, 1994, P430

John Martin, William Petty, Arthur Keown,

David Scott, Basic Financial Management,

1979, p512


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-END-

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