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Investment Banking

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Investment Banking

Investment Banking

  1. 1. Investment Banking A Report by Raymund Sanchez
  2. 2. Agenda <ul><li>Definitions </li></ul><ul><li>Functions of an Investment Banker </li></ul><ul><li>Distribution Methods </li></ul><ul><li>Events in a Negotiated Sale </li></ul><ul><li>Private Placements </li></ul><ul><li>References </li></ul>
  3. 3. Definitions <ul><li>Investment Banker: </li></ul><ul><ul><li>A financial specialist involved as an intermediary in the merchandising of securities. </li></ul></ul><ul><ul><li>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. </li></ul></ul>
  4. 4. Functions of an Investment Banker
  5. 5. Functions of an Investment Banker <ul><li>Core Business </li></ul><ul><ul><li>Underwriting </li></ul></ul><ul><ul><li>Distributing </li></ul></ul><ul><ul><li>Advising </li></ul></ul><ul><ul><li>Others </li></ul></ul><ul><li>Back Office </li></ul><ul><ul><li>Operations </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><li>Middle Office </li></ul><ul><ul><li>Risk Management </li></ul></ul><ul><ul><li>Corporate Treasury </li></ul></ul><ul><ul><li>Financial Control </li></ul></ul><ul><ul><li>Corporate Strategy </li></ul></ul><ul><ul><li>Compliance </li></ul></ul>
  6. 6. Functions of an Investment Banker <ul><li>Core Business > Underwriting </li></ul><ul><ul><li>assuming the risk of selling a security issue at a satisfactory price </li></ul></ul><ul><ul><li>term borrowed from insurance </li></ul></ul>
  7. 7. Functions of an Investment Banker <ul><li>Core Business > Distributing </li></ul><ul><ul><li>selling function of investment banking </li></ul></ul><ul><ul><li>the primary function of an investment bank is buying and selling products. </li></ul></ul>
  8. 8. Functions of an Investment Banker <ul><li>Core Business > Advising </li></ul><ul><ul><li>providing advise in the issuance & marketing of securities </li></ul></ul><ul><ul><li>research is the division which reviews companies and writes reports about their prospects, often with &quot;buy&quot; or &quot;sell&quot; ratings. </li></ul></ul>
  9. 9. Functions of an Investment Banker <ul><li>Core Business > Others </li></ul><ul><ul><li>Global transaction banking </li></ul></ul><ul><ul><li>Investment management </li></ul></ul><ul><ul><li>Merchant banking </li></ul></ul>
  10. 10. Functions of an Investment Banker <ul><li>Middle Office > Risk Management </li></ul><ul><ul><li>involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades </li></ul></ul><ul><ul><li>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 </li></ul></ul>
  11. 11. Functions of an Investment Banker <ul><li>Middle Office > Corporate Treasury </li></ul><ul><ul><li>responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring. </li></ul></ul>
  12. 12. Functions of an Investment Banker <ul><li>Middle Office > Financial Control </li></ul><ul><ul><li>tracks and analyzes the capital flows of the firm </li></ul></ul><ul><ul><li>adviser on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses </li></ul></ul>
  13. 13. Functions of an Investment Banker <ul><li>Middle Office > Compliance </li></ul><ul><ul><li>responsible for an investment bank's daily operations' compliance with government regulations and internal regulations </li></ul></ul>
  14. 14. Functions of an Investment Banker <ul><li>Back Office > Operations & Technology </li></ul><ul><ul><li>data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers </li></ul></ul>
  15. 15. Distribution Models
  16. 16. Distribution Models <ul><li>Negotiated Purchase </li></ul><ul><li>Competitive Bid Price </li></ul><ul><li>Commission / Best Efforts Basis </li></ul><ul><li>Privileged Subscription </li></ul><ul><li>Direct Sale </li></ul>
  17. 17. Distribution Models <ul><li>Negotiated Purchase </li></ul><ul><ul><li>the underwriting firm that needs funds makes contact with an investment banker & deliberations concerning the new issue begin. </li></ul></ul><ul><ul><li>most prevalent method of distributing securities in the private sector </li></ul></ul><ul><ul><li>most profitable technique as far as investment bankers are concerned </li></ul></ul>
  18. 18. Distribution Models <ul><li>Competitive Bid Price </li></ul><ul><ul><li>several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds. </li></ul></ul><ul><ul><li>undue influence of the investment banker over the firm is mitigated & the price received by the firm for each security should be higher </li></ul></ul><ul><ul><li>as far as fund raising is concerned, the benefits gained from the advisory function of the investment banker is lost </li></ul></ul>
  19. 19. Distribution Models <ul><li>Commission / Best Efforts Basis </li></ul><ul><ul><li>investment banker acts as an agent rather than as a principal in the distribution process. </li></ul></ul><ul><ul><li>typically used for more speculative issues </li></ul></ul>
  20. 20. Distribution Models <ul><li>Privileged Subscription </li></ul><ul><ul><li>new issue is marketed to a definite & select group of investors </li></ul></ul><ul><ul><li>3 target markets involved (1) current stock holders (2) employees (3) customers </li></ul></ul>
  21. 21. Distribution Models <ul><li>Direct Sale </li></ul><ul><ul><li>the issuing firm sells directly to the public without going through an investment banker in the process </li></ul></ul><ul><ul><li>relatively rare </li></ul></ul>
  22. 22. Events in a Negotiated Sale
  23. 23. Events in a Negotiated Sale <ul><li>Selection of an investment banker </li></ul><ul><li>Pre-underwriting conferences </li></ul><ul><li>Formation of the underwriting syndicate </li></ul><ul><li>Registering of the securities </li></ul><ul><li>Formation of the selling group </li></ul><ul><li>Due diligence meeting </li></ul><ul><li>Price pegging </li></ul><ul><li>Syndicate termination </li></ul>
  24. 24. Events in a Negotiated Sale <ul><li>Selection of an investment banker </li></ul><ul><li>Pre-underwriting conferences </li></ul><ul><li>Key Items to be discussed: </li></ul><ul><ul><ul><ul><li>Amount of capital to be raised </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Whether capital markets seem to be receptive at the time & the type of financing instrument </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Whether the proposed use of funds appears reasonable </li></ul></ul></ul></ul><ul><li>Tentative underwriting agreement </li></ul><ul><ul><ul><ul><li>Approximate price the investment banker will pay for the securities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Upset price (escape mechanism for the benefit of the issuing firm) </li></ul></ul></ul></ul>
  25. 25. Events in a Negotiated Sale <ul><li>Formation of the underwriting syndicate </li></ul><ul><li>syndicate: temporary association of investment bankers formed to purchase a security issue from a corporation for subsequent resale, for a profit to the underwriters. </li></ul><ul><li>purpose of syndicates: </li></ul><ul><ul><ul><li>The original investment banker could not finance the entire underwriting himself </li></ul></ul></ul><ul><ul><ul><li>Lowers the risk of loss for a single underwriter </li></ul></ul></ul><ul><ul><ul><li>Widens the eventual distribution effort </li></ul></ul></ul>
  26. 26. Events in a Negotiated Sale <ul><li>Registering of the securities </li></ul><ul><li>Registration statement </li></ul><ul><ul><li>Historical facts about the firm </li></ul></ul><ul><ul><li>Financial facts about the firm </li></ul></ul><ul><ul><li>Administrative facts about the firm </li></ul></ul>
  27. 27. Events in a Negotiated Sale <ul><li>Formation of the selling group </li></ul><ul><li>Due diligence meeting: a last chance gathering to get everything in order before taking the offering public </li></ul><ul><li>Price pegging: placing orders to buy at the agreed upon public offering price to mitigate downward price movements in the secondary markets </li></ul><ul><li>Syndicate termination: dissolution of the syndicate at the end of the contractual agreement </li></ul>
  28. 28. Private Placements
  29. 29. Private Placements <ul><li>Public offerings :security issuer does not meet the ultimate investors in the financial instruments </li></ul><ul><li>Private placements :securities are sold directly to a limited number of institutional investors </li></ul>
  30. 30. Private Placements <ul><li>Advantages </li></ul><ul><ul><li>Speed </li></ul></ul><ul><ul><li>Reduced floatation costs </li></ul></ul><ul><ul><li>Financing capability </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Interest costs </li></ul></ul><ul><ul><li>Restrictive covenants </li></ul></ul><ul><ul><li>Possibility of future SEC registration </li></ul></ul>
  31. 31. References <ul><li>Stanley Block & Geoffrey Hirt, “Foundations of Financial Management”, 1994, P430 </li></ul><ul><li>John Martin, William Petty, Arthur Keown, David Scott, “Basic Financial Management”, 1979, p512 </li></ul>
  32. 32. -END-

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