Investment Banking
Investment Banking The New Rules &
Brokerage of the Game
-Jonh F. Marshall
-M.E. Ellis
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What Is Investment Banking?
Investment banks engage in public and private market
transactions for corporations, governments, and investors.
These transactions include mergers, acquisitions, divestitures
(selling of subsidiary), and the issuance of equity or debt
securities, or a combination of both.
Investment bankers advise and assist clients with specialized
industry expertise.
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Investment banking has been narrowly defined as those
financial services associated with the issuance of new
(Principally corporate) securities.
This is another way of saying that investment banking is the act
of making the primary market for securities.
At an only slightly broader level, investment banking is also
secondary market making by brokers and dealers in
securities.
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Who are the world's major investment banks?
The world's most well-known investment banks are::
➢ Bank of America Merrill Lynch
➢ Barclays Capital
➢ Credit Suisse
➢ Deutsche Bank
➢ Goldman Sachs
➢ J.P. Morgan
➢ Morgan Stanley
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Investment banks offer the following services:
Underwriting – Capital raising and underwriting groups work
between investors and companies that want to raise money
or go public via the IPO process. This function serves the
primary market or “new capital”.
Mergers & Acquisitions (M&A) – Advisory roles for both buyers
and sellers of businesses, managing the M&A process start to
finish.
Sales & Trading – Matching up buyers and sellers of securities in
the secondary market. Sales/buy and trading groups in
investment banking act as agents for clients and also can
trade the firm’s own capital.
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Equity Research – The equity research group research, or
“coverage”, of securities helps investors make investment
decisions and supports trading of stocks.
Asset Management – Managing investments or portfolio of
investments for a wide range of investors including
institutions and individuals, across a wide range of
investment styles.
So, “investment banking is what investment banks do”.
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Investment banking by focusing on investment banking's
functional areas.
Under "functional areas," we include both revenue-generating
and support activities.
The revenue generating areas include (i) primary market
making, (ii) secondary market making, (iii) trading, (iv)
corporate restructuring, (v) financial engineering, (vi)
advisory services, (vii) merchant banking, (viii) investment
management, and (ix) consulting.
The support areas include clearing services, research, internal
finance, and information service.
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Four groups of expertise have developed in investment
banking
Traders/Dealers execute orders to buy and sell securities on
the financial markets for his own account.
Brokers offer advice to investors, informing them about
investment opportunities in order to generate securities
transactions. They sell and buy securities on behalf of
customers.
Analysts support these efforts by conducting research on
market and corporate developments, assessing whether a
particular security is correctly priced or not.
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Corporate bankers, finally, advise and assist top managers in
the creation of new securities, for instance, in connection
with mergers, acquisitions and other situations where
companies wish to raise capital.
These four groups of experts typically perform their tasks side
by side within the same organization, which may be called
an investment bank.
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Investment Banking Versus Commercial Banking
The expansion of commercial banking is important in the study
of investment banking because it is becoming increasingly
difficult to distinguish between these two types of
businesses.
Differences and similarities:
First,
Investment banks underwrite municipal general obligation
bonds, industrial development bonds, corporate issues etc.
Sometimes commercial banks also underwrite corporate issues
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Second, as financial markets, both investment banks and
commercial banks became players, also became
competitors.
Example, issuance of futures, options, swaps etc.
Advice on asset/liability management, risk management, and
liquidity management etc. provided by investment banks as
well as commercial banks.
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Third, The commercial banking community had sole access to
Central Bank’s open market operation.
This allows a bank to borrow another bank's excess reserves,
held within the Central Bank, on an overnight basis.
The investment banking community, on the other hand, had
no access to this market.
Investment banks have access to a very liquid repo market and
can use it for short-term financing at very low cost.
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Fourth. the development of real estate operations and
mortgage products by investment banks and the
development of commodity and equity swap operations by
commercial banks.
Finally, both commercial and investment banks strive to
expand their business globally and become more full-
service oriented to compete effectively.
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Types of Investment Banks
There are two basic types of investment bank: full-service and
boutique.
Full-service institutions or shops provide the full range of
investment banking services, engage in all kind of activities,
including underwriting, trading, merger and acquisition
(M&A), securities services, investment management, and
research.
Boutique houses or only boutiques, on the other hand, specialize
in just a few services.
Boutiques are also sometimes called specialty shops. Some
specialize in M&As, some in financial institutions, and some in
Silicon Valley business. 14
For example, some, such as Morgan Stanley and Goldman Sachs,
are largely issuer driven,
others, such as Bear Steams, are largely investor driven.
One of the major investment banks in Bangladesh,
the Investment Corporation of Bangladesh (ICB)
BRAC EPL Investments Limited is one of the full-fledged
investment banks of Bangladesh
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Investment Banks’ Clients
Investment bankers advise a wide range of clients on their capital
raising and M&A needs. These clients can be located around
the world.
Investment banks’ clients include:
➢ Governments – Investment banks work with governments to
raise money, trade securities, and buy or sell govt.
corporations.
➢ Corporations – Bankers’ work with both private and public
companies to help them go public (IPO), raise additional
capital, grow their businesses, make acquisitions, sell
business units, and provide research for them and general
corporate finance advice. 16
➢ Institutions – Banks work with institutional investors who
manage other people’s money to help them trade
securities and provide research.
➢ Private equity firms-They help them to acquire other
companies and exit those positions by either selling to a
strategic buyer or via an IPO.
➢ Individuals- Buy/sell securities, manages portfolio, provides
advices etc.
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Investment Banking Skills (for investment bank managers)
Investment banking work requires a lot of financial modeling
and valuation.
Investment bank managers need the following skills:
➢Financial modeling – Performing a wide range of financial
modeling activities such as building 3-statement models
LBO models (use of significant debt to acquire a
company), etc.
➢Business valuation – Using a wide range of valuation
methods such as comparable company analysis, DCF, NPV
analysis, etc.
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➢ Pitchbooks and presentations – Building pitchbooks (a sales
document ) and PPT presentations to pitch ideas to
prospective clients and win new business.
➢ Transaction documents – Preparing documents such as
a confidential information memorandum (CIM),
confidentiality agreement, building a data room, and much
more.
➢ Relationship management – Working with existing clients
to successfully close a deal and make sure clients are happy
with the service being provided.
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➢ Sales and business development – Constantly meeting
with prospective clients to pitch them ideas, offer them
support in their work, and provide value-added advice that
will ultimately win new business.
➢ Negotiation – Being a major factor in the negotiation
tactics between buyers and sellers in a transaction and
helping clients maximize value creation
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