Week 1 Notes

● History plays a major role in the field of investment banking. This might not be the case
in many modern businesses.
● History, Name, Tradition and Reputation are some of the most valuable assets that
investment banking companies have
■ For E.g.: An investment bank established 200 years ago will have the
connections and know-how and hence will be able to attract more client

CRITICAL FACTORS that must be examined are:

● Government Regulations
● Market Dynamics

Some of the largest investment banks in the world are:

■ Barclays: 1690
■ J.P.Morgan: 1799
■ Citi Bank: 1812
■ Credit Suisse: 1856
■ Goldman Sachs: 1869
■ Deutsche Bank: 1870
■ Merrill Lynch: 1914
■ Morgan Stanley: 1935

Q) Challenge Question: Which is the oldest bank in the word and when it was founded?

The Sveriges Riksbank – founded in 1668

The investment banks originated in United states in the 19th century when the economy was
growing so rapidly that the commercial banks could not serve the expansion of the economy

The main activity of investment banks now is known as Security underwriting

● They buy financial securities like bonds and stocks from issuers and resell these
securities to a group of investors.
● Investment bank serves as a bridge between demand and offer. Between people who
had capital and wanted to invest and people who needed financing

Q) Challenge Question: Name 3 other families that formed investment banking

dynasties?

■ Rockefeller Family: J.P.Morgan chase

■ Morgan Family: Morgan Stanley
■ Mellon Family: Bank of New York(BNY) Mellon
Difference between commercial and investment banks?

COMMERCIAL BANKS

● Take deposits and provide loans to the people

● Main source of revenue of the commercial bank is the difference between the interest
income and interest expense which is known as the Spread.
○ NOTE: Interest expense is the expense that the bank pays to its depositors. Eg:
Interest on savings account.

Difference between the business model of commercial bank and investment bank

● Commercial bank deals with deposits, mortgage loans and lending loans whereas the
investment bank deals with buying and selling of securities
● Main source of earning for the commercial banks is the spread between interest income
and interest expense whereas the source of income for the investment bank is the fixed
fee that is charged on different services

Universal Banks = Commercial Banks + Investment Banks

● ADVANTAGES OF UNIVERSAL BANKS

○ It can sell more product to the same client
○ Can offer a one stop shop
○ Can be a client’s trusted advisor
● DISADVANTAGES OF UNIVERSAL BANKS
○ Since they know about the normal business of their client because of their
commercial banking, they might be tempted to sell risky positions to the investors
through their investment banking operations for the sake of cutting their own
losses.
● Advisory is one of the primary services provided by investment banks.
● Debt and equity underwriting
● Trading
● Asset Management
● Conflict of interest in case of TRADING AND ASSET MANAGEMENT
○ In case the bank purchases some securities on its account as well as its client’s
account and suddenly the market crashes, then which securities will be dealt with
first?
WAVES OF MERGER AND ACQUISITION CONSOLIDATION

● MERGER AND ACQUISITION CONSOLIDATION WAVES

○ What are mergers and acquisitions?
■ In mergers, companies come together and run their operations together
■ In acquisitions, the acquired company is merged into the acquiring
company
○ HORIZONTAL MERGERS?
■ Companies from same industry buy each other to form giant entities
○ VERTICAL INTEGRATION?
■ EG: A steel company buys a steel transportation company rather than
buying another steel company.
○ CONGLOMERATES?
■ Combination of several different companies for diversification and tapping
multiple industries
○ HOSTILE TAKEOVERS AND LEVERGAED BUYOUTS
■ When the takeover doesn’t have the approval of existing Board of
Directors and the majority of the shareholders
■ NOTE: Public firms are often subjected to such takeovers

● 4 MAIN ACTIVITIES OF INVESTMENT BANKING

1. Capital Markets
2. Advisory Services
3. Trading & Brokerage
4. Asset Management

● CAPITAL MARKETS:
○ This service is mainly used when the company wants to go public OR wants to
issue debt sole to the public
○ When the company wants to raise equity, we talk about ECM(Equity capital
markets) and when the company wants to raise debt, we talk about DCM(Debt
capital market)
○ EQUITY CAPITAL MARKETS:
○ The company undergoing IPO must be ready in terms of:
■ Size
■ Profitability
■ Administrative capacity
■ Growth Potential
 ■ Solid Management i.e the investors must be convinced that their
money is in right hands

■ Role of investment banks in IPOs

● Provide guidance as to when is the right time to go public
● How the company can positions itself to attract investor’s
interest
● To organise meeting between investors and company’s
management
● To present to investors, the investment opportunity
● Find investors who will invest in the company
● Determines the price at which the company will sell its
shares
● After the IPO, investment banks use the tools at their
disposal to stabilize the stock prices in the first few days of
its trading on the market
■ Seasoned Equity Offerings(SEO) = Same as Follow on public
offerings(FPO)

○ DEBT CAPITAL MARKETS

■ Raise money through debt instruments like bonds
■ Role of investment banks in DCM
● Advice the loan
● Prepare company presentation
● Price the loan
● Find investors
■ NOTE: Bonds are easier to price than equity because the company that
issues a bond has a credit rating given by credit rating agencies
■ LOAN SYNDICAITONS:
● Multiple banks come together to offer loan to an organization
● It is a hybrid between commercial banking loans and bonds
● Banks get interested in loan syndication because:
○ Diversification
○ Fee generation
○ Lending opportunities in geographic areas where they
have no presence and expertise
○ Largest IPO in the history is of Alibaba group Holding Ltd for $25 billion
■ Its share price surged 38% to $93.89 on the first day of trading
● ADVISORY SERVICES OF INVESTMENT BANKS
○ Comprises of insisting in transactions such as mergers and acquisitions and debt
restructuring
○ In mergers and acquisitions, there is a buyer company and a target company
○ THE BUYER COMPANY:
■ Pays the shareholders of the target company. The technical term for the
payment is called as CONSIDERATION
■ Consideration can be multiple types. For example
● Cash
● Shares
● Combination of both
○ The role of investment banking here is to provide valuable insights to the
companies for mergers and acquisitions as they know their business and industry
in which they operate
○ Investment banks help in finding bidders or targets. Communication with them
and negotiation. Companies do not have the scale to carry out these transactions
hence investment banks are needed

○ 2 possible roles of investment bankers

■ BUY SIDE ROLE(ACQUIRING COMPANY)
● They receive a retainer(a fixed amount that covers their cost) and
a success fee in case the firm they are advising purchases the
target.
● The provide strategic business advice as to the whether the target
company is attractive and would fit in the buyer’s existing business
● The must provide the valuation of the target company
■ SELL SIDE ROLE(TARGET COMPANY)
● Usually all banks prefer to be on the sell side as the transactions
are likely and commissions are guaranteed.
● Their job is to find the bidders
● Prepare the company for all questions that can be asked by the
buyer company
● Provide their valuation of the business and suggest a minimum
bidding price
● They are responsible to coordinate the entire sales process and
work closely with the advisors of the bidding firms
○ Investment banks also help their clients with restructuring services(which are
required when the client firm is in danger of going bankrupt)
○ The two main alternatives are:
 ■ Private workout
● Provides faster results
● Provide higher recovery rates
■ Bankruptcy Procedure
○ Investment bankers play an active role in negotiating with lenders and preparing
recovery business plan. It is their job to make sure that the client has enough
cash in the first 12 months of the recovery plan

● TRADING AND BROKERAGE

○ Consist of selling and purchasing securities
○ It can be done using investment bank’s own money(PROPRIETARY TRADING)
○ It can involve buying securities on behalf of its clients(BROKERAGE)
○ Trading and brokerage accounts for 35% to 50% of the total revenue of pure
investment banks like Morgan Stanley and Goldman Sachs
○ They support trading of less liquid securities by applying a technique called
Market-Making, which consist of buying a small number of securities and being
ready to sell the securities to customers who place an order. The investment
banks get a substantial spread for providing this service
○ Investment banks typically deal with all type of financial instruments
○ NOTE: Derivative contracts are four types namely forwards, futures, options and
swaps

● ASSET MANAGEMENT(THE ABILITY OF USING MONEY TO MAKE MORE MONEY)

○ A client approaches an investment bank when their investment income is
substantial. In such cases asset managers offer expertise across a wide
spectrum of asset class such as
■ Stocks
■ Bonds
■ Commodities
■ Real estate
■ Private equity, etc
○ The asset managers study the client’s need, create an investment
strategy,implement the strategy in practice and also oversee its
development through time
○ Asset Managers build an investment portfolio across different asset classes
 ○ Asset managers may also invest in other asset classes such as Commodities or
Real Estate or they may invest in alternate investments like private equity and
hedge funds
○ The main objective is to maximize the return while minimizing the risk
○ CHALLENGE: Over the long term, stocks do better. Since 1926, large
stocks have returned an average of 10 % per year; long-term government
bonds have returned between 5% and 6%

● Not all banks offer all of the above mentioned core competencies. It depends on
the size, core competencies, and strategy of the banks
● Based on the above fact, investment banks strategies can be classified into 4
types:
○ Global investment banks
■ They have their presence in all financial centres around the world
■ They have expertise in all 4 areas
■ Eg: HSBC, citi bank, deutsche bank
○ Banks with focus on financial market services:
■ These banks focus on financial market services like corporate
lending or stock brokerage and are not that active as advisors
○ Wholesale banking
■ Wholesale services are intended for large institutional entities like
government, pension funds, large corporations and banks
■ It involves cash management, Large loans and interbank lending
○ Boutique Advisory firms
■ Usually established by an established banked
■ It is easier to setup since less capital is required
■ Employees: Between a few and few hundred
■ They specialize in ADVISORY SERVICES LIKE:
 ● Mergers
● Acquisitions
● Restructuring
● Corporate Consulting

● TRANSACTIONAL AND RELATIONSHIP BASED BANKING(Main approaches

used by investment banks while formulating their strategies and interacting with
clients)
○ TRANSACTION:
■ Very efficient in terms of cost and pricing
■ Manager to serve many people every day
■ Business is about high volume of transactions, each transaction
having a moderate, yet healthy profit margin
■ The services offered(sell standardised products) are basic in
nature, without much customization
■ In this, the bank gets a high client turnover and minimizes its risk
from particular client account. In addition, the amount of fee will be
higher due to more deals being closed
○ RELATIONSHIP
■ More time is given to the client and focuses on premium clients who
are willing to pay more
■ It is all about establishing contacts with important company
executives and cultivating the relationship throughout the years to
win their business
■ It involves risk since a banker may invest a lot of time and yet end
up with winning no business
■ Boutique Advisory Firms serve clients in a relationship based
banking