4. Investment Banking & Brokerage

4.1 What is an Investment Bank?

An investment bank, simply put, is an intermediary organization that uses its expertise and financial knowledge to make it possible for companies, institutions and governments to take advantage of business or investment opportunities. More specifically:

1. Investment banks link companies that need money to grow with other companies, institutions or investors willing to provide them with that money via a variety of forms, be it loans, stocks, bonds or hybrid financing arrangements. The investment bank structures these transactions and is capable of bringing them to market in the case of stock and bond offerings.

      2.   Investment banks use financial expertise to provide corporate finance advice. For                    example, the banks can help clients manage their business and investment risks, buy             other companies, divest themselves of unwanted operations or finance their                              expansion into new countries or industries.

      3.  Sales and Trading areas of investment banks (also termed as ‘Brokerage’) link                          investors with the world’s financial markets, including stock (equity) markets, bond                (fixed income) markets, derivative markets, foreign exchange, commodities and more.           Research areas (equity and fixed income) may contribute expertise to these market                  activities by monitoring companies, industries, market sectors and key economic                     factors, then providing the investment bank’s traders and clients with information that           helps them to invest intelligently.

• Investment Banking Functions

1. Strategic Advisory - 

                  1.1 Mergers and Acquisition (M&A) - 

Acquisition

When a company takes over another one and becomes the new owner, the purchase is called an acquisition. Acquisitions can be either friendly or unfriendly. Friendly acquisitions occur when the target firm agrees to be acquired; unfriendly acquisitions don't have the same agreement from the target firm.

Merger

Merger is the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

M&A Advisory

Investment banks provide advice to clients on all aspects of buying, selling, and merging with other companies. They assist with everything from suggestions about the timing of a sale or purchase, to identification of potential buyers or sellers, and negotiation of a favorable price. If a client company is subject to an unwanted takeover bid, M&A bankers will also offer advice on repelling unwanted advances.

Typically, deals between $50 million and $ 1 billion are charged investment banking fees equivalent to between 1% and 2% of the transaction value. Deals worth more than $ 1 billion are usually charged a base fee of $ 10 million plus additional costs based on the amount of work involved.

           1.2 Financial Restructuring - 

When a company cannot pay its cash obligations - for example, when it cannot meet its bond payments or its payments to other creditors (such as vendors) - it goes bankrupt. When this happens, the company would need to file for protection under the bankruptcy laws in the country. The company can either stop all operations and liquidate the company’s assets or restructure to remain in business.

                1.3 Securitized Products - 

Securitization is the process of converting whole assets into smaller tradable securities through appropriate structuring. The most commonly securitized assets are mortgage loans and credit card receivables.

       2. Securities Underwriting -

When an organization needs money, it has two options. It can either directly go to someone who has the money (like a bank), or go to a “broker” (an Investment Bank) which would help it raise the money from lenders/investors. The money may be raised in form of stocks (equity) or bonds (debt).

The Investment Bank, acting as the broker, prices the security and sells it to the target customers, usually guaranteeing the sale of a certain number of securities. This process is called underwriting.