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Investment Banking

Investment Banking: The New Rules & Brokerage of the Game

-Jonh F. Marshall
-M.E. Ellis

» What is investment banking?

Investment banks engage in public and private market transactions for corporations,
governments and investors. These transactions include mergers, acquisitions, divestitures
(selling of subsidiary) and the issuance of equity or debt securities, or a combination of both.
Investment bankers advise and assist clients with specialized industry expertise.
Investment banking has been narrowly defined as those financial services associated with
the issuance of new (Principally corporate) securities. This is another way of saying that
investment banking is the act of making the primary market for securities.
At an only slightly broader level, investment banking is also secondary market making by
brokers and dealers in securities.

» Who are the world's major investment banks?

The world's most well-known investment banks are:
(1) Bank of America Merrill Lynch
(2) Barclays Capital
(3) Credit Suisse
(4) Deutsche Bank
(5) Goldman Sachs
(6) J.P. Morgan
(7) Morgan Stanley

» Investment banks offer the following services

(1) Underwriting – Capital raising and underwriting groups work between investors and
companies that want to raise money or go public via the IPO process. This function serves
the primary market or “new capital”. 1
(2) Mergers & Acquisitions (M&A) – Advisory roles for both buyers and sellers of
businesses, managing the M&A process start to finish.
(3) Sales & Trading – Matching up buyers and sellers of securities in the secondary market.
Sales and trading groups in investment banking act as agents for clients and also can trade
the firm’s own capital.
(4) Equity Research – The equity research group research, or “coverage”, of securities helps
investors make investment decisions and supports trading of stocks.
(5) Asset Management – Managing investments for a wide range of investors including
institutions and individuals, across a wide range of investment styles.
So, “investment banking is what investment banks do”.
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» Investment banking by focusing on investment banking's functional areas

Under "functional areas," we include both revenue-generating and support activities.
The revenue generating areas include:
(i) primary market making,
(ii) secondary market making,
(iii) trading,
(iv) corporate restructuring,
(v) financial engineering,
(vi) advisory services,
(vii) merchant banking,
(viii) investment management, and
(ix) consulting.
The support areas include:
(i) clearing services,
(ii) research,
(iii) internal finance, and
(iv) information service.

» Four groups of expertise have developed in investment banking

(1) Traders/Dealers execute orders to buy and sell securities on the financial markets for
his own account.
(2) Brokers offer advice to investors, informing them about investment opportunities in
order to generate securities transactions. They sell and buy securities on behalf of
customers.
(3) Analysts support these efforts by conducting research on market and corporate
developments, assessing whether a particular security is correctly priced or not.
(4) Corporate bankers, finally, advise and assist top managers in the creation of new
securities, for instance, in connection with mergers, acquisitions and other situations where
companies wish to raise capital.
These four groups of experts typically perform their tasks side by side within the same
2 bank.
organization, which may be called an investment

» Investment banking versus commercial banking

The expansion of commercial banking is important in the study of investment banking
because it is becoming increasingly difficult to distinguish between these two types of
businesses.
Differences and similarities:
(1) Investment banks underwrite municipal general obligation bonds, industrial
development bonds, corporate issues etc.
Sometimes commercial banks also underwrite corporate issues.
(2) As financial markets, both investment banks and commercial banks became players, also
became competitors. Example, issuance of futures, options, swaps, etc.
Advice on asset/liability management, risk management and liquidity management, etc.
provided by investment banks as well as commercial banks.
(3) The commercial banking community had sole access to Central Bank’s open market
operation.
This allows a bank to borrow another bank's excess reserves, held within the Central Bank,
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on an overnight basis.
The investment banking community, on the other hand, had no access to this market.
Investment banks have access to a very liquid repo market and can use it for short-term
financing at very low cost.
(4) The development of real estate operations and mortgage products by investment banks.
And the development of commodity and equity swap operations by commercial banks.
(5) Both commercial and investment banks strive to expand their business globally and
become more full- service oriented to compete effectively.

» Types of investment banks

There are two basic types of investment bank:- full-service and boutique.
(1) Full-service institutions or shops provide the full range of investment banking services,
engage in all kind of activities, including underwriting, trading, merger and acquisition
(M&A), securities services, investment management and research.
(2) Boutique houses or only boutiques, on the other hand, specialize in just a few services.
Boutiques are also sometimes called specialty shops. Some specialize in M&As, some in
financial institutions and some in Silicon Valley business. For example, some, such as
Morgan Stanley and Goldman Sachs, are largely issuer driven; others, such as Bear Steams,
are largely investor driven.
One of the major investment banks in Bangladesh, the Investment Corporation of
Bangladesh (ICB). BRAC EPL Investments Limited is one of the full-fledged investment banks
of Bangladesh.

» Investment banks’ clients

Investment bankers advise a wide range of clients on their capital raising and M&A needs.
These clients can be located around the world.
Investment banks’ clients include:
(1) Governments – Investment banks work with governments to raise money, trade
securities and buy or sell govt. corporations.
(2) Corporations – Bankers work with both private and public companies to help them go
3 businesses, make acquisitions, sell business
public (IPO), raise additional capital, grow their
units and provide research for them and general corporate finance advice.
(3) Institutions – Banks work with institutional investors who manage other people’s
money to help them trade securities and provide research.
(4) Private equity firms－They help them to acquire other companies and exit those
positions by either selling to a strategic buyer or via an IPO.
(5) Individuals－ Buy/sell securities, manages portfolio, provides advice, etc.

» Investment banking skills (for investment bank managers)

Investment banking work requires a lot of financial modeling and valuation.
Investment bank managers need the following skills:
(1) Financial modeling – Performing a wide range of financial modeling activities such as
building 3-statement models LBO models (use of significant debt to acquire a company),
etc.
(2) Business valuation – Using a wide range of valuation methods such as comparable
company analysis, DCF analysis, etc.
(3) Pitchbooks and presentations – Building pitchbooks (a sales document ) and PPT
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presentations to pitch ideas to prospective clients and win new business.

(4) Transaction documents – Preparing documents such as a confidential information
memorandum (CIM), confidentiality agreement, building a data room and much more.
(5) Relationship management – Working with existing clients to successfully close a deal
and make sure clients are happy with the service being provided.
(6) Sales and business development – Constantly meeting with prospective clients to pitch
them ideas, offer them support in their work and provide value-added advice that will
ultimately win new business.
(7) Negotiation – Being a major factor in the negotiation tactics between buyers and sellers
in a transaction and helping clients maximize value creation.