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  • 1. Chapter 2 Investment Banking Industry
  • 2. I. Investment Banking in the U.S.
    • Investment Banking Regulations
      • 1933 The Securities Act and 1934 The Securities Exchange Act
        • The Securities Act of 1933
          • Regulation before public offering
          • Full disclosure in Prospectus(Due-diligence)
        • The Securities Exchange Act of 1934
          • Securities Exchange Commissions (SEC)
          • Securities Exchange Systems
          • Securities Settlement Rules
          • Registration Requirements
  • 3. I. Investment Banking in the U.S.
          • Illegal trades
          • Registration statement (S-1)
            • Financial statements
            • Pricing
            • Underwriter commission
            • Contracts, documents
          • Securities Exchange Commission (SEC)
            • Regulations Implementation
            • Corporate Finance
            • Market Regulation
            • Investment Management
  • 4. I. Investment Banking in the U.S.
      • The Glass-Steagall Act of 1933
        • Separate the deposit-taking and loan-making banker form the underwriter or dealer banker; create firewall between the commercial bankers and investment bankers
        • The commercial banker was prohibited from participating in risk taking with regard to all corporate securities and governmental securities. e.g. J.P. Morgan, Morgan Stanley
  • 5. I. Investment Banking in the U.S.
      • c. Gramm-Leach-Bliley Act of 1999
        • Glass-Steagall Act repeals
          • Section 20 repealed
          • Section 32 repealed
        • Financial holding company or Financial affiliation
        • Financial activities
          • Insurance
          • Securities underwriting
          • Merchant banking
  • 6. I. Investment Banking in the U.S.
    • Investment Bankers
      • The New Inter-firm Competition
        • Specialization
          • Individual investors – Merrill Lynch
          • Institutional investors – Salomon Smith Barney
        • Deregulation
          • Shelf-registration
        • M&A and Junk bonds (LBOs)
  • 7. I. Investment Banking in the U.S.
      • Leading Investment Bankers
        • Securities Underwriting
          • Conventional Negotiated Debt
          • (Salomon Smith Barney, Morgan Stanley)
          • High-yield Corporate Debt
          • (Drexel Burnham Larnbert)
          • Asset-Backed Debt
          • (Salomon Smith Barney, CS First Boston)
          • Municipal Debt
          • (Merrill Lynch, Goldman Sachs)
          • U.S. Government Securities
          • (Merrill Lynch, Goldman Sachs)
          • Corporate Equity Securities
          • (Merrill Lynch, Lehman)
  • 8. I. Investment Banking in the U.S.
        • Secondary Market Business
          • Commissions
          • Trading profit
          • Research Service (Merrill Lynch, Goldman Sachs)
          • Money management (Merrill Lynch, Lehman)
        • Corporate Financing Activities
          • Traditional Corporate Finance
          • M&A (Goldman Sachs, Morgan Stanley)
          • Venture Capital ( Donaldson Lufkin and Jenrette, DLJ)
          • Real Estate (Morgan Stanley, Goldman Sachs)
  • 9. I. Investment Banking in the U.S.
    • Investment Banking Activities
      • Investment banking
        • Securities underwriting
        • Merger and acquisition
        • Financial consulting
        • Venture capitalist
        • Securities (derivatives) dealer and broker
        • Bonds (derivatives) dealer and broker
        • Futures
        • Forex trading
        • Investment Management
        • Real estate investment
  • 10. I. Investment Banking in the U.S.
      • Underwriting types
        • Negotiation Underwriting (Full Underwriting)
          • Syndicate (Syndicate Manager)
          • Proportional distribution
          • Price stabilization
          • Gross spread (1%-10%, Mostly 7%)
            • Hot issue?
            • Risk? (Market, idiosyncratic)
            • Distribution channel
          • Components of revenue
            • Syndicate manager expenditures
            • Investment bankers return
            • Selling commission
  • 11. I. Investment Banking in the U.S.
          • Hot issues
            • Overallotment ( short 15%)
            • Overallotment Option (Green Shoe, x<p)
          • Pricing
            • Price negotiation
            • Underpricing (10% -20%)
        • Stand-by Underwriting
          • Absorb by investment bankers
        • Best-efforts Underwriting
          • Commission only
  • 12. II. Investment Banking in the U.K.
    • Investment Banking Regulations
      • 1986 Financial Services Act
        • Department of Trade and Industry
        • Securities and Investment Board Limited
          • Minister of DTI
          • Governor of the Bank of England
        • The Securities and Futures Authority, SFA (The Securities and Investment Board, SIB)
  • 13.
    • b. The Financial Services and Markets Act, 2000
      • Financial Services Authority
        • Market confidence
        • Public awareness
        • Protection of consumers
        • Reduction of financial crime
  • 14. II. Investment Banking in the U.K. Lord Chancellor Financial Service tribunal Secretary of state For Trade and Industry Financial Services Authority Self-regulatory organizations Recognized Investment exchanges
  • 15. II. Investment Banking in the U.K
    • Characteristics
      • The U.K. Structure is fundamentally pyramidal
      • The secretary of state for Trade and Industry is vested with the full oversight authority and power of the system
      • FSA has power to regulate the functioning of a broadly defined financial and investment business in the U.K.
  • 16. II. Investment Banking in the U.K
      • SROs are responsible for regulating the relationships between their members and customers
      • The International Stock Exchange determines listing requirement (LSE)
  • 17. II. Investment Banking in the U.K.
    • Investment Bankers
      • Financial System in the U.K.
        • Clearing banks (Commercial Banks)
        • Merchant banks (Investment Banks)
        • Stock brokers
        • Jobbers
      • Investment bankers
        • Merchant bank (S.G. Warburg, N.M. Rothschild, J. Henry, Schroder Wagg)
          • Financial advisory services ( James Capel, Barclays, Warburg)
  • 18. II. Investment Banking in the U.K.
          • M&A
          • Underwriting securities (Samuel Montagu, Goldman Sachs)
        • Stock brokers
          • Fixed commission agent for individual or institutional investors ( Zoete & Bevan, Strauss Turnbull, etc. )
        • Jobbers
          • Market makers (Specialist)
          • (Akroyd & Smithers, Wedd Durlacher)
  • 19. II. Investment Banking in the U.K.
    • Investment Banking Activities
      • Securities Underwriting
        • Corporate Equity Underwriting
          • Merchant banks
          • Underwriting syndicates
          • Right offerings
        • Debt underwriting
          • Debentures (secured)
          • Loan stocks (unsecured)
  • 20. II. Investment Banking in the U.K.
      • U.K. Government Securities Trading
        • Short (up to five years)
        • Medium (5-15 years)
        • Long (over 15 years)
        • Undated (perpetual)
      • Other Securities Trading
        • * Eurobonds
          • *Domestic equities
          • *International equities
        • The Stock Exchange Automated Quotation System (SEAQ)
  • 21. II. Investment Banking in the U.K.
        • * Alpha stocks – most active
          • * Beta stocks – second rank in volume
          • * Gamma stocks – less active
          • * Delta stocks – least liquid
      • Research activities
      • Money Management
      • Mergers and Acquisitions
  • 22.
      • Underwriting Types
        • Full Underwriting
          • Merchant banks
          • Syndicates (Syndicates Manager)
          • * Merchant banks
          • * British institutional investors
          • * Foreign securities firms
          • Offering for sale ( proportional distribution)
          • Shares may be privately placed directly to institutions
    II. Investment Banking in the U.K.
  • 23. II. Investment Banking in the U.K.
          • Best-efforts Underwriting
            • Moral underwriting
            • No legal obligation
          • Rights offering
            • Existing shareholders
            • Purchase price 15-30% below current market price
  • 24. III. Investment Banking in Japan
    • Investment Banking Regulations
    • Characteristics of Japanese Business Environment
        • A pervasive national concern with external perils
        • Society’s acceptance of a major role for government in the financial markets
        • Openness to adapting the practices of Western financial institutions to its own needs
  • 25.
        • The particularly Japanese structure of Industrial organization – the “zaibatsu”
          • Meiji era
          • Giant Conglomerates
          • Holding company with a major private bank
          • The bank nourished the companies in its zaibatsu with the necessary financing
    III. Investment Banking in Japan
  • 26.
      • The early Meiji Restoration Period
        • The Stock Exchange Regulations, 1878
          • London Stock Exchange style
          • Tokyo Stock Exchange, etc.
          • Government bond issues
          • ( Warriors of samurai family)
          • Two sessions’ trade
          • ( 10 a.m. and 2 p.m.)
        • Bourse Regulations,1887
          • German legal advisor, Hermann Roesler
          • Public securities trading
    III. Investment Banking in Japan
  • 27.
      • WWI to the Great Depression
        • 1922, the Law of Trust Companies
      • The postwar recovery to internationalization
        • 1947, Securities and Exchange Law
        • Article 65:
        • A bank, trust company or such other financial institution as may be designated by a Securities and Exchange Commission Regulation shall not engage in any of the acts enumerated in Paragraph 8 of Article 2.
    III. Investment Banking in Japan
  • 28.
          • Article 2 :” Securities business”
          • To buy and sell securities
          • To act as broker, agent or proxy with respect to buying and selling of securities
          • To act as broker, agent or proxy with respect to the entrustment of transaction on a securities market
          • To underwrite securities
          • To sell securities by public offering
          • To handle the issuance or sale of securities by public offering
    III. Investment Banking in Japan
  • 29.
        • 1952, Long-term Credit Bank Law
          • Authorize banks to borrow 20-30 times of their capital to accommodate corporate borrowers
        • 1971, Law Concerning Foreign Securities Firms
          • Non-Japanese firms for branch-office license
          • Merrill Lynch (1972)
    III. Investment Banking in Japan
  • 30. III. Investment Banking in Japan
    • Investment Bankers
      • The Early Meiji Restoration Period
        • 1893, Standard Securities Underwriting
        • Managed by one or two national banks
        • National banks issue stock for public subscription
        • Other banks act as selling agents
        • 1902, Industrial Bank of Japan (IBJ)
        • Government created
        • Financing the longer-term capital needs of Japanese industry
        • Corporate debentures underwriters
  • 31. III. Investment Banking in Japan
      • WW I to the Great Depression
        • Emergence of leading securities firms
          • Koike Company (Yamaichi Securities)
          • Fujimote Bank(Daiwa Securities)
          • National City Co.(Nikko Securities)
        • Emergence of leading Trusts
          • Mitsui Trust (1924)
          • Mutual Trust (Yasuda Trust,1925)
          • Sumitomo Trust (1925)
          • Mitsubishi Trust (1927)
          • Issuance of new corporate debentures
          • Underwriting new securities offerings of their group affiliated companies
          • 1927,”Big Five” (Daiichi+Big Four)
  • 32. III. Investment Banking in Japan
      • The postwar recovery to internationalization
        • Japanese securities firms
          • the Big Four (Nomura, Daiwa, Nikko, and Yamaichi)
          • 21 other large firms directly supervised by the Tokyo office of MOF
          • Small Local firms supervised by the branch offices of MOF
        • International investment bankers
          • Merrill Lynch, 1972
          • 1986 TSE members
            • Merrill Lynch
            • Morgan Stanley
            • Goldman Sachs
            • Vickers da Costa
            • Jardine Flemming
            • S.G. Warburg
  • 33. III. Investment Banking in Japan
    • Investment banking activities
      • Investment banking activities
        • Brokerage activities
          • Brokerage commission (60% of revenue)
          • Secondary market trading
        • Future market
          • 1985, Japanese government bond futures
          • 1987, Nikkei stock index futures
          • 1989, TSE futures
            • Interest rate futures on Euroyen and Eurodollars
            • Currency futures
        • Japanese government bond underwriting
          • 40%--- Competitive bids from members of underwriting
          • syndicates
          • 60%--- Syndicates members under fixed allocation
  • 34. III. Investment Banking in Japan
        • Corporate Underwriting
          • Euromarkets and TSE
            • Government subsides rationing
            • insistence of collateral in banks
          • “ BIG Four” dominance
          • Equity-linked securities offering
        • Offshore Corporate Underwriting
          • Securities Firms, commercial banks
          • Commercial banks established subsidiaries in the major offshore markets
          • MOF “three bureaus agreement”
            • Banking
            • Securities
            • International finance
  • 35. III. Investment Banking in Japan
      • Corporate Finance Activities
        • Minor
        • The leading securities firms
          • Financial engineering skills
          • Long-term financial planning
          • Valuation and financing skill in M & A )
  • 36.
    • Securities Underwriting
      • Securities underwriting procedures
        • Financial plan consulting
        • Capital structure adjustments
        • IPO
          • Pricing
          • Time table
          • Review of corporate charter
          • Review of directors meeting
          • Review of management
          • Compliance
          • Registration(MOF)
          • Underwriting Syndicates (The Big Four
    III. Investment Banking in Japan
  • 37. III. Investment Banking in Japan
      • Proposal Method (MOF)
        • Electric utilities and Telephones
        • Compete for syndicate managers
      • Shelf Registration (Oct. 1. 1988)
        • Qualified issuers can preregister securities and hold them ready for an offering on short notice if market conditions become favorable
    • Public bidding System (April, 1989)
      • Fixed proportion for public bidding
      • Price floor, Price ceiling (Comparison,EPS,BPS)
      • Exclusive restriction (Major shareholders)
      • Top-down bidding
    • After market support
      • Application for price stabilization (MOF)
      • Restrictions of initiators, period, price limit, etc.