WRITTEN REPORT
IN
CAPMAR
SUBMITTED TO:
PROF. MARLET MOLABOLA, CPA
SUBMITTED BY:
Angeles, Marivic F.
Cristobal, Jayson C.
Del Remedios, Maricor N.
Glariana, Maricel P.
BSBA FM IV-A
CHAPTER 6
INVESTMENT
BANKING FIRMS
LEARNING OUTCOMES
the nature of the investment banking business
the revenue-generating activities of investment banks
the activities of investment banking firms that require them to commit their own capital
the role investment bankers play in the underwriting of securities
the different types of underwriting arrangements
the difference between riskless arbitrage and risk arbitrage
the various roles investment bankers play in mergers and acquisitions
what is meant by merchant banking
why investment banking firms create and trade risk control instruments
INVESTMENT BANKING FIRMS
distribute newly issued securities and are involved in the secondary market as market
makers and brokers
2 GENERAL FUNCTIONS OF INVESTMENT BANKING FIRMS IN CAPITAL
MARKETS
1. Assist in obtaining funds
for corporations, government agencies, state and local governments that
need funds
2. Act as brokers or dealers in the buying and selling of securities
for investors who wish to invest fund
TWO CATEGORIES OF INVESTMENT BANKING FIRMS
1. Bank-affiliated Investment Banks
affiliated with large financial services holding companies
2. Independent Investment Banks
independent of a large financial services holding company
TWO CLASSIFICATIONS BASED ON THE INVESTMENT BANKING ACTIVITIES
1. Full-service Investment Banks
involved in the wide range of activities
2. Boutique Investment Banks
specialize in limited areas of investment banking
SERVICES PERFORMED BY INVESTMENT BANKING FIRMS
(revenue-generating activities)
Public offering (underwriting) of securities
Trading of securities
Private placement of securities
Securitization of assets
Mergers and acquisitions
Merchant banking
Financial restructuring advising
Securities finance
Prime brokerage
Trading and creation of derivative instrument
Asset management
PUBLIC OFFERING (UNDERWRITING) OF SECURITIES
the traditional role associated with investment banking
TERMINOLOGIES:
Underwriting
the function of buying the securities from the issuer
Underwriter
when an investment banking firm buys the securities from the issuer and accepts
the risks of selling the securities to investors at a lower price
Firm Commitment
an underwriting arrangement which the investment banking firms agrees to buy
the securities from the issuer at a set price
Best-efforts Underwriting
the investment banking firm agrees only to use its expertise to sell the securities
and doesnt buy the entire issue from the issuer
Gross Spread (Underwriter Discount)
the difference between the price paid to the issuer and the price at which the
investment bank offers the security to the public
2 Important Factors
1. Size of the offering
2. Type of security
Initial Public Offering (IPO)
common stock offering issued by companies that had not previously issued
common stock to the public
Secondary Common Stock Offering
an offering of common stock that had been issued in the past by the corporation
Underwriting Syndicate
group of firms that underwrites the issue
Concession Price
price less than the reoffering price
Privatization
process in which investment bankers also may assist in offering the securities of
government-owned companies to private investors
THREE FUNCTIONS OF INVESTMENT BANKERS
1. Advising the issuer on the terms and the timing of the offering
2. Buying the securities from the issuer
3. Distributing the issue to the public
TRADING OF SECURITIES
Revenue from this activity is generated through:
1. the difference between the price at which the investment banking firm sells the
security and the price paid for the securities (called the bid-ask spread)
2. appreciation of the price of the securities held in inventory
TWO TYPES OF ARBITRAGE TRANSACTIONS
1. Riskless Arbitrage
calls for a trader to find a security or package of securities trading at different
prices
2. Risk Arbitrage
trading strategies that are unfortunately labeled
PRIVATE PLACEMENT OF SECURITIES
the sale of securities directly to an institutional investor such as insurance companies,
investment companies and pension funds
SECURITIZATION OF ASSETS
refers to the issuance of securities using a pool of assets as collateral
Asset-backed Securities
securities backed by a pool of loans or receivables
MERGERS AND ACQUISITIONS
Under Merger and Acquisitions (M&A) activity are:
Leveraged buyouts (LBOs)
Restructuring and recapitalization of companies
Reorganization of bankrupt and troubled companies
SEVERAL WAYS INVESTMENT BANKERS MAY PARTICIPATE IN M&A
1. finding M&A candidates
2. advising acquiring companies or target companies with respect to price and nonprice
terms of an exchange, or helping target companies fend off an unfriendly takeover
attempt
3. assisting acquiring companies in obtaining the necessary funds to finance a purchase
3 TYPES OF FEE STRUCTURE
1. the percentage can decline, the higher the selling price
2. the percentage can be the same regardless of the selling price
3. the percentage can be fixed with addition of an incentive fee if the price is better than a
specified amount
MERCHANT BANKING
an activity in which, when an investment banking firm commits its own funds by
either taking an equity interest or creditor position in companies
FINANCIAL RESTRUCTURING ADVISING
involves a significant modification of a corporations capital structure, operating
structure, and/or corporate strategy with the objective of improving efficiency
Financial restructuring may occur in order to:
1. Avoid a bankruptcy or problem with creditors
2. Reorganize the firm
SECURITIES FINANCE
the financing of positions in securities and the borrowing of securities fall into a little
known
2 Activities Involve in Securities Finance
1. Securities Lending
service of putting together borrowers and lenders of securities
2. Repurchase Agreements
is the sale of a security with a commitment by the seller to buy the same security
back from the purchaser at a specified price at a designated future date
PRIME BROKERAGE
is a package of services to hedge fund and large institutional investor
is a fee-driven service except in the case of securities finance where interest income is
earned
TRADING AND CREATION OF DERIVATIVE INSTRUMENTS
Derivative Instruments:
Futures
Options
Swaps
Caps
Floors
Derivative Instruments can be used
1. To control the risk of an investors portfolio, or, in the case of an issuer, the risk
associated with the issuance of a security
2. Allow an investment banking firm to realize revenue in several ways
3. Acts as a counterparty to the agreement
4. To protect an investment banks own position in transactions
ASSET MANAGEMENT
the management of an investors investment by a financial services company or financial
institutions
PREPARED AND REPORTED
BY:
Angeles, Marivic F.
Cristobal, Jayson C.
Del Remedios, Maricor N.
Glariana, Maricel P.
BSBA FM IV-A
2015
