Investment Banking

Investment BankingInvestment Banking

A Report byA Report by

Raymund SanchezRaymund Sanchez

AgendaAgenda

DefinitionsDefinitions Functions of an Investment BankerFunctions of an Investment Banker Distribution MethodsDistribution Methods Events in a Negotiated SaleEvents in a Negotiated Sale Private PlacementsPrivate Placements ReferencesReferences

DefinitionsDefinitions

Investment Banker:Investment Banker: A financial specialist involved as an intermediary A financial specialist involved as an intermediary

in the merchandising of securities. in the merchandising of securities. Acts as a middleman by facilitating the flow of Acts as a middleman by facilitating the flow of

savings from those economic units that want to savings from those economic units that want to invest to those units that want to raise funds.invest to those units that want to raise funds.

Functions of an Functions of an Investment BankerInvestment Banker

Functions of an Investment BankerFunctions of an Investment Banker

Core BusinessCore Business UnderwritingUnderwriting DistributingDistributing AdvisingAdvising OthersOthers

Back OfficeBack Office OperationsOperations TechnologyTechnology

Middle OfficeMiddle Office Risk ManagementRisk Management Corporate TreasuryCorporate Treasury Financial ControlFinancial Control Corporate StrategyCorporate Strategy ComplianceCompliance


Core Business > UnderwritingCore Business > Underwriting assuming the risk of selling a security issue at a assuming the risk of selling a security issue at a

satisfactory price satisfactory price term borrowed from insurance term borrowed from insurance


Core Business > DistributingCore Business > Distributing selling function of investment banking selling function of investment banking the primary function of an investment bank is the primary function of an investment bank is

buying and selling products. buying and selling products.


Core Business > AdvisingCore Business > Advising providing advise in the issuance & marketing of providing advise in the issuance & marketing of

securities securities research is the division which reviews companies research is the division which reviews companies

and writes reports about their prospects, often with and writes reports about their prospects, often with "buy" or "sell" ratings."buy" or "sell" ratings.


Core Business > OthersCore Business > Others Global transaction banking Global transaction banking Investment management Investment management Merchant banking Merchant banking


Middle Office > Risk Management Middle Office > Risk Management involves analyzing the market and credit risk that involves analyzing the market and credit risk that

traders are taking onto the balance sheet in traders are taking onto the balance sheet in conducting their daily tradesconducting their daily trades

setting limits on the amount of capital that they are setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall a detrimental effect to a desk overall


Middle Office > Corporate TreasuryMiddle Office > Corporate Treasury responsible for an investment bank's funding, responsible for an investment bank's funding,

capital structure management, and liquidity risk capital structure management, and liquidity risk monitoring. monitoring.


Middle Office > Financial ControlMiddle Office > Financial Control tracks and analyzes the capital flows of the firm tracks and analyzes the capital flows of the firm adviser on essential areas such as controlling the adviser on essential areas such as controlling the

firm's global risk exposure and the profitability firm's global risk exposure and the profitability and structure of the firm's various businesses and structure of the firm's various businesses


Middle Office > ComplianceMiddle Office > Compliance responsible for an investment bank's daily responsible for an investment bank's daily

operations' compliance with government operations' compliance with government regulations and internal regulations regulations and internal regulations


Back Office > Operations & TechnologyBack Office > Operations & Technology data-checking trades that have been conducted, data-checking trades that have been conducted,

ensuring that they are not erroneous, and ensuring that they are not erroneous, and transacting the required transfers transacting the required transfers

Distribution ModelsDistribution Models


Negotiated PurchaseNegotiated Purchase Competitive Bid PriceCompetitive Bid Price Commission / Best Efforts BasisCommission / Best Efforts Basis Privileged SubscriptionPrivileged Subscription Direct SaleDirect Sale


Negotiated PurchaseNegotiated Purchase the underwriting firm that needs funds makes the underwriting firm that needs funds makes

contact with an investment banker & contact with an investment banker & deliberations concerning the new issue begin. deliberations concerning the new issue begin.

most prevalent method of distributing securities most prevalent method of distributing securities in the private sectorin the private sector

most profitable technique as far as investment most profitable technique as far as investment bankers are concernedbankers are concerned


Competitive Bid PriceCompetitive Bid Price several underwriting groups bid for the right to several underwriting groups bid for the right to

purchase the new issue from the corporation that is purchase the new issue from the corporation that is raising funds. raising funds.

undue influence of the investment banker over the undue influence of the investment banker over the firm is mitigated & the price received by the firm firm is mitigated & the price received by the firm for each security should be higher for each security should be higher

as far as fund raising is concerned, the benefits as far as fund raising is concerned, the benefits gained from the advisory function of the gained from the advisory function of the investment banker is lost investment banker is lost


Commission / Best Efforts BasisCommission / Best Efforts Basis investment banker acts as an agent rather than as a investment banker acts as an agent rather than as a

principal in the distribution process. principal in the distribution process. typically used for more speculative issues typically used for more speculative issues


Privileged SubscriptionPrivileged Subscription new issue is marketed to a definite & select new issue is marketed to a definite & select

group of investorsgroup of investors 3 target markets involved (1) current stock 3 target markets involved (1) current stock

holders (2) employees (3) customersholders (2) employees (3) customers


Direct SaleDirect Sale the issuing firm sells directly to the public without the issuing firm sells directly to the public without

going through an investment banker in the process going through an investment banker in the process relatively rare relatively rare

Events in a Negotiated Events in a Negotiated SaleSale

Events in a Negotiated SaleEvents in a Negotiated Sale

Selection of an investment bankerSelection of an investment banker Pre-underwriting conferencesPre-underwriting conferences Formation of the underwriting syndicateFormation of the underwriting syndicate Registering of the securitiesRegistering of the securities Formation of the selling groupFormation of the selling group Due diligence meetingDue diligence meeting Price peggingPrice pegging Syndicate terminationSyndicate termination


Selection of an investment bankerSelection of an investment banker Pre-underwriting conferencesPre-underwriting conferences

Key Items to be discussed:Key Items to be discussed: Amount of capital to be raisedAmount of capital to be raised Whether capital markets seem to be receptive at the time & Whether capital markets seem to be receptive at the time &

the type of financing instrumentthe type of financing instrument Whether the proposed use of funds appears reasonableWhether the proposed use of funds appears reasonable

Tentative underwriting agreementTentative underwriting agreement Approximate price the investment banker will pay for the Approximate price the investment banker will pay for the

securitiessecurities Upset price (escape mechanism for the benefit of the issuing Upset price (escape mechanism for the benefit of the issuing

firm)firm)


Formation of the underwriting syndicateFormation of the underwriting syndicate

syndicate: temporary association of investment bankers formed syndicate: temporary association of investment bankers formed to purchase a security issue from a corporation for subsequent resale, for to purchase a security issue from a corporation for subsequent resale, for a profit to the underwriters.a profit to the underwriters.

purpose of syndicates:purpose of syndicates: The original investment banker could not finance the entire underwriting himselfThe original investment banker could not finance the entire underwriting himself Lowers the risk of loss for a single underwriterLowers the risk of loss for a single underwriter Widens the eventual distribution effortWidens the eventual distribution effort


Registering of the securitiesRegistering of the securitiesRegistration statementRegistration statement

Historical facts about the firmHistorical facts about the firm Financial facts about the firmFinancial facts about the firm Administrative facts about the firmAdministrative facts about the firm


Formation of the selling groupFormation of the selling group Due diligence meeting: Due diligence meeting: a last chance gathering to get a last chance gathering to get

everything in order before taking the offering publiceverything in order before taking the offering public

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

offering price to mitigate downward price movements in the secondary markets offering price to mitigate downward price movements in the secondary markets

Syndicate termination: Syndicate termination: dissolution of the syndicate at the end dissolution of the syndicate at the end

of the contractual agreement of the contractual agreement

Private PlacementsPrivate Placements


Public offeringsPublic offerings :security issuer does not :security issuer does not meet the ultimate investors in the financial meet the ultimate investors in the financial instruments instruments

Private placementsPrivate placements :securities are sold :securities are sold directly to a limited number of institutional directly to a limited number of institutional investorsinvestors


AdvantagesAdvantages SpeedSpeed Reduced floatation costsReduced floatation costs Financing capabilityFinancing capability

DisadvantagesDisadvantages Interest costsInterest costs Restrictive covenantsRestrictive covenants Possibility of future SEC registrationPossibility of future SEC registration

ReferencesReferences

Stanley Block & Geoffrey Hirt, “Foundations Stanley Block & Geoffrey Hirt, “Foundations of Financial Management”, 1994, P430 of Financial Management”, 1994, P430

John Martin, William Petty, Arthur Keown, John Martin, William Petty, Arthur Keown, David Scott, “Basic Financial Management”, David Scott, “Basic Financial Management”, 1979, p512 1979, p512

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Investment Banking