Investment Banking - FIFM

7/24/2019 Investment Banking - FIFM

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CHAPTER 4: INVESTMENT

BANKING

Size, Structure and CompositionBalance sheets and recent trendsRegulationGlobal Issues

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For years, the most

profitable industryin America has

been one that

doesnt design,

build, or sell asingle tangible

thing. Investment

banking industry


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INTRODUCTION

Investment bankingthe origination, underwriting, and placement ofsecurities in money and capital markets

assistance in the trading of securities in the secondary

marketsSecurities firmspurchase, sale, and brokerage of existing securities

Investment banksoriginating, underwriting, and distributing issues of newsecurities

M&As4-3


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M&AS SIZE DONE BY IBS

Merger activity for the period 19902009

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SIZE, STRUCTURE, AND

COMPOSITION

The size is measured by the equity capital of the firmsparticipating in these financial servicesEquity capital in this industry amounted to $180.9 billionat the beginning of 2009, supporting total assets of $4.44

trillionNumber of firms1980: 5,248 firms

1987: 9,515 firms and then the stock market crash

2006: 6,016, a decline of 37 percent since 1987Mid-2009: 4,800

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M&AS AMONG

INVESTMENT BANKING

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MAJOR CHANGE IN THE

STRUCTUREThe five largest investment banks in existence atthe beginning of 2008 were all goneLehman Brothers, Bears Stearns, Merrill Lynch,Goldman Sachs, and Morgan Stanley

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CLASSIFICATION OF

INVESTMENT BANKING

INDUSTRYNational full-line firmsCommercial bank holding companies

Serve both retail customers and corporate customersBank of America, Morgan Stanley, and J.P. Morgan Chase

Firms specialize more in corporate business and securitytradingGoldman Sachs and Salomon Brothers/Smith Barney, theinvestment banking arm of Citigroup

Large investment banksConcentrated in major cities and mainly serve institutional clientsLazard Ltd. and Greenhill & Co

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CLASSIFICATION OF

INVESTMENT BANKING

INDUSTRYRegional securities firmsRaymond James Financial

Specialized discount brokers

Charles SchwabSpecialized electronic trading securities firms

Venture capital firms

Other firms that do not fit into one of the categories

aboveKnight Capital Group (off-exchange trading of US equities

LaBranche & Cofloor specialist)

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KEY ACTIVITY AREASInvesting

Investment BankingVenture capital

Market Making

TradingCash ManagementCMAs (cash management accounts): money market mutualfunds sold by investment banks; most CMSs offer check-writing privileges

Mergers and Acquisitions

Back-Office and Other Service Functions

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INVESTING

Managing pools of assets and pension funds either asagents or principals (like life insurers)

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You are as sound as my investment portfolio!


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INVESTMENT BANKING

Underwriting and distributing new issues of debt and equity Include IPOs, secondary issues, and private placement

IPO: first time public offering of debt or equity by a corporation

Private placement: an issue placed with one or few largeinstitutional investors

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VENTURE CAPITAL

Venture capital: A professional managed pool ofmoney used to finance new and often high-riskfirmsInstitutional venture capital firms: business entities

whose sole purpose is to find and fund the mostpromising new firms

Angel venture capitalists: wealthy individuals whomake equity investments

Two standards to fund a firmHigh return

Easy exit

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MARKET MAKINGCreating a secondary market in an asset by asecurities firm or investment bankAgency transactions

Principal transactions

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TRADING

Position tradingpurchasing large blocks of securities on the expectation of afavorable price move

Pure arbitragebuying an asset in one market at one price and selling itimmediately in another market at a higher price

Risk arbitragebuying blocks of securities in anticipation of someinformation release

Program tradingsimultaneous buying and selling of a portfolio of at least 15different stocks valued at more than $1 million, usingcomputer programs to initiate such trades 4-15


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MERGERS AND

ACQUISITIONSProvide advice or assisting in M&Asfind merger partners

underwrite new securities

assess the value of target firmsrecommend terms of the merger agreement

help target firms prevent a merger

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10 LARGEST M&A FIRMS

RANKED BY VALUE OF

MERGERS, 2009

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RECENT TRENDS

Trends depend heavily on the state of the stockmarket

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RECENT TRENDS

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RECENT TRENDS

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BALANCE SHEET

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REGULATION

SEC: primary regulator who sets the overallregulatory standards for the industryAdministration of securities laws

Review and evaluation of registrations of new securities

offeringsReview and evaluation of annual and semiannual reports

Financial Industry Regulatory Authority (FINRA)day-to-day regulation of trading practices

monitors trading abuses, trading rule violations, andsecurities firms capital (solvency) positions

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REGULATION

U.S. CongressGoldman Sachs hearing in 2010

The 2010 Financial Services RegulatoryOverhaul BillFocus on any investment banks that may posesystemic risk

USA Patriot Act (effective on 10/1/2003)Include additional provisions to combat money

launderingSecurities Investor Protection Corporation (SIPC)Protect investors against losses up to $500,000caused by securities firm failures 4-23


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GLOBAL ISSUESMuch more so than other sectors of the financialinstitutions industry, securities firms and investmentbanks operate globally

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GLOBAL ISSUES

Total offerings increased from $570.5 billion in 1995to $5,909.7 billion in 2007, then decreased to $5,150.5billion in 2009

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Documents

Investment Banking - FIFM