Investment Banking

A Report by Raymund Sanchez

Agenda

Definitions Functions of an Investment Banker Distribution Methods Events in a Negotiated Sale Private Placements References

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.

Functions of an Investment Banker

Functions of an Investment Banker

Core Business

Middle Office

Underwriting Distributing Advising Others

Operations Technology

Back Office

Risk Management Corporate Treasury Financial Control Corporate Strategy Compliance

Functions of an Investment Banker

Core Business > Underwriting

assuming the risk of selling a security issue at a satisfactory price term borrowed from insurance

Functions of an Investment Banker

Core Business > Distributing

selling function of investment banking the primary function of an investment bank is buying and selling products.

Functions of an Investment Banker

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.

Functions of an Investment Banker

Core Business > Others

Global transaction banking Investment management Merchant banking

Functions of an Investment Banker

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

Functions of an Investment Banker

Middle Office > Corporate Treasury

responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.

Functions of an Investment Banker

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

Functions of an Investment Banker

Middle Office > Compliance

responsible for an investment bank's daily operations' compliance with government regulations and internal regulations

Functions of an Investment Banker

Back Office > Operations & Technology

data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers

Distribution Models

Distribution Models

Negotiated Purchase Competitive Bid Price Commission / Best Efforts Basis Privileged Subscription Direct Sale

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 investment bankers are concerned

Distribution Models

Competitive Bid Price

several underwriting groups bid for the right to purchase 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 firm for each security should be higher as far as fund raising is concerned, the benefits gained from the advisory function of the investment banker is lost

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

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

Distribution Models

Direct Sale

the issuing firm sells directly to the public without going through an investment banker in the process relatively rare

Events in a Negotiated Sale

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

Events in a Negotiated Sale

Selection of an investment banker Pre-underwriting conferences

Key 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 the securities Upset price (escape mechanism for the benefit of the issuing firm)

Events in a Negotiated Sale

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

Events in a Negotiated Sale

Registering of the securities

Registration statement
Historical facts about the firm Financial facts about the firm Administrative facts about the firm

Events in a Negotiated Sale

Formation of the selling group Due diligence meeting: a last chance gathering to get
everything in order before taking the offering public

Price pegging: placing orders to buy at the agreed upon public

offering price to mitigate downward price movements in the secondary markets

Syndicate termination: dissolution of the syndicate at the end

of the contractual agreement

Private Placements

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

Private Placements

Advantages

Speed Reduced floatation costs Financing capability

Interest costs Restrictive covenants Possibility of future SEC registration

Disadvantages

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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