Investment Banks Essay

Cheap Custom Writing Service

Unlike consumer  banks, investment  banks offer services that  primarily  deal  with  the  restructuring of business ownership, including initial public offerings, mergers and acquisitions, leveraged buyouts, securitization, and private placements. In the sense that most people think of it, an investment  bank is not a bank at all—insofar as it does not act as a lender or depository, but rather as a middleman and consultant. Most of an investment bank’s income comes from fees.

As a business becomes more successful, it is usually to its benefit  to become  a corporation (having originated as a partnership or proprietorship, most of the time). Most of the corporation’s stock is owned by the core of the company—its founders  and various  key  employees—but  a  fast-growing  company will need to expand beyond the funding capacity of those stockholders. Usually the first source of outside funds is obtained through  private placements. These are stock issues that are extremely restricted and cannot be resold by their initial purchasers, and therefore do not have to be registered with the Securities and Exchange Commission  (SEC). Nonregistered  private placements are limited to 35 nonaccredited purchasers and an unlimited number of accredited investors, including the officers of the company, wealthy individuals, and institutional investors like banks, corporations, pension funds, and so on.

The next step in funding is to seek support  from a venture  capital fund, a private limited partnership that  pools money from a group of (usually) institutional  investors.  The  venture  capitalists  managing these funds are usually very knowledgeable in a particular  industry,  and limit their  activity to that  sector—the transportation industry, for instance, or food and beverages, or dotcoms.

IPOs

An initial public offering (IPO) of stock, which can then be traded on the secondary markets, may follow the venture  capital stage. This is the principal activity of investment banks: helping companies go public. Investment bankers act as intermediaries  to sell stock to their clients (a similar mix to the sort of investors interested  in private placements), and help to determine the stock’s initial offering price, based on various  factors  and  comparisons  to  similar  companies and the performance  of their  IPOs. Once the stock has been sold, the investment bank assigns an analyst to maintain  investors’ interest  in it, regularly issuing reports on the stock’s prospects.

During  an  IPO, an  investment  bank  can  underwrite the issue or work on a best-efforts basis. When underwriting  the issue, the bank purchases all of the offered stock and resells it itself, to guarantee that the company raises the money it seeks. This is usually the case. In a best-efforts sale, the bank makes no guarantees, only agrees to do what it can. From time to time, an underwriting investment bank misjudges the initial offering price, and is stuck with stock it cannot sell; it must pay the business within four days, while other investors have 10 days to pay for their stock. That is the risk the investment  bank takes, and encourages them to thoroughly investigate the business going public—which, in turn,  acts as a filter to encourage healthy business and healthy stock.

Since the New Deal created the Securities and Exchange Commission  in 1933, investment  banking services have been subject to significant regulation. All interstate  public offerings over $1.5 million fall under  SEC jurisdiction,  and state agencies generally have relevant regulations of their own. Newly issued securities must be registered 20 days before their IPO, providing  critical  information   to  the  government. After  registration,   representatives   of  the  company and the investment  bank go on a “road show,” making presentations to institutional investors to explain the merits of their company. The investment bankers will gauge investors’ interest  in the stock at various prices, as part of the process of determining  the initial offering price; if there are more interested  investors than  shares to go around,  the price will usually be increased before the IPO. From time to time, the road show may lead to withdrawing  the registration altogether, if there is too little interest in the company. During this period, nothing  can be disclosed that is not already in the SEC’s registration forms, a situation that invites a lot of spin. This quiet period lasts until 25 days after the IPO.

Mergers  And Other Activities

Another area in which investment banks are involved is in mergers—when two or more businesses combine into one business with management  drawn from all the constituent businesses, more or less equally—and acquisitions, when one business assumes control of or absorbs another.  Stockholders  can respond  to these situations  in various ways, depending  on the specifics; if a company  becomes  too  diversified through the results of a merger  or acquisition,  there  is typically a fear that  it is no longer strong  enough  in its field, no longer specialized—a jack of all trades  and master  of  none,  when  what  stockholders  want  to invest in is mastery. (Stockholders love diversity, but in their portfolios, not the individual companies they invest in.) Ideally, what stockholders want to see from a merger  or acquisition  is synergy: when the whole becomes greater  than  the sum of its parts, because of economies of scale, tax benefits, financial benefits, increased  efficiency, and  increased  market  power. The  Justice  Department’s  antitrust   division  regulates mergers and acquisitions to protect  consumers, and keeps an especially close eye on them when the involved businesses  are  large or  dominant  in their industries.

Another  investment  bank activity is the leveraged buyout, in which a publicly held company is purchased in whole by an allied group of investors—which generally includes  the  company’s senior  management, and may include outside  investors  who provide the necessary capital—and is then  taken private. Leveraged buyouts may be motivated by the desire to take the  company  in directions  that  stockholders  would consider  too risky or otherwise  undesirable,  or as a way to remove  current  management.  They are less common when the stock market is healthy (making a leveraged buyout more expensive).

Lastly, securitization is the transformation of a debt instrument into  a publicly traded  financial  instrument, making it more liquid because of its ability to be bought and sold in open market. Home mortgages can be pooled, for instance, and used as collateral to issue bonds. Investment banks help to securitize debt instrument assets ranging from mortgages to automobile loans, credit card balances, and student loans.

History

Investment  banking has a long history in the United States, originally involving the  exchange of government  and  railroad-issued   bonds.  By the  time  of the  Civil War,  the  American  securities  market  had become more sophisticated,  in response to the large amount  of money changing hands thanks to the successes and changes of the Industrial  Revolution, the so-called robber  barons, and the various tycoons of industry like Andrew Carnegie. The Union funded its side of the war with the first mass-marketed securities  (war  bonds),  and  investment  banks  continued the practice after the war’s end. J. P. Morgan opened a banking house in New York principally to deal in gold, foreign currency, and securities, and later organized a syndicate to replenish  the country’s gold reserve by issuing government bonds.

Before the Great Depression, most commercial banks offered some investment-banking services, but banking mismanagement was blamed as one of the several causes of the Depression. New Deal banking reforms required banks that participate in the Federal Reserve System to abandon  the securities market by 1934, and prohibited  certain  members  of securities firms from  acting  as officers of commercial  banks. Many banks thus broke their investment banking services off into separate companies.

Once the Depression  had been weathered,  banking stayed stable until the 1970s, when inflation led to a series of bank failures and lengthy deregulation of many commercial bank activities. The 1999 Financial Services Modernization (FSM) Act allowed for the  mergers  of commercial  banks, securities  firms, and insurance companies, more or less repealing the earlier New Deal legislation, which soon led to the creation of companies like Citigroup (via a merger of Citicorp with Traveler’s Insurance, which itself owned Salomon  Smith  Barney, an  investment  bank).  The Citigroup merger actually took place a year before the FSM Act, which was passed in time that  Citigroup was not required to get rid of any of its services (there would have otherwise been a grace period in order to avoid radical overnight restructuring).

In 2008 the  U.S. government  intervened  to  prevent Bear Stearns from filing for bankruptcy. Later, it declined to bail out Lehman Brothers, which filed for Chapter  11 bankruptcy  protection.  Like other financial institutions  then, Lehman Brothers had souring real estate  investments  and  confronted  tight  credit markets.

 

Bibliography:

  1. Eugene F. Brigham and  Joel F. Houston, Fundamentals  of Financial Management  (South-western, 2009);
  2. Michel  Fleuriet,  Investment   Banking  Explained: An  Insider’s Guide to the Industry  (McGraw-Hill,  2008);
  3. Maretno Harjoto, Donald J. Mullineaux, and Ha-Chin  Yi,  “A Comparison  of Syndicated Loan Pricing at Investment and  Commercial  Banks,” Financial Management  (v.35/4, 2006);
  4. Mathew A. Hayward,  “Professional  Influence: The Effects of Investment  Banks on Clients’ Acquisition Financing and Performance,” Strategic Management  Journal (v.24/9, 2003);
  5. Thomas  Liaw, Investment  Banking and Investment Opportunities in China: A Comprehensive Guide for Finance Professionals (Wiley, 2007);
  6. Thomas Liaw, The Business of Investment Banking: A Comprehensive Overview (Wiley, 2005);
  7. Tom Lott, Vault Career Guide to Investment Banking (Vault, 2008);
  8. Alan D. Morrison, Jr., and William J. Wilhelm, Investment Banking: Institutions, Politics, and Law (Oxford University Press, 2008);
  9. Joshua Rosenbaum  and Joshua Pearl, Investment  Banking: Valuation, Leveraged Buyouts, and M&A Sale Process (Wiley, 2009);
  10. Wiegler, “Banking with a Green Conscience: The Story of America’s First All-Green Investment Bank,” Engineering and Technology (v.3/11, 2008).

This example Investment Banks Essay is published for educational and informational purposes only. If you need a custom essay or research paper on this topic please use our writing services. EssayEmpire.com offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.

See also:

ORDER HIGH QUALITY CUSTOM PAPER


Always on-time

Plagiarism-Free

100% Confidentiality
Special offer! Get discount 10% for the first order. Promo code: cd1a428655