Investment Banking and Finance PDF

Investment banker →purchase Entire Offering at predetermined price → then resell the offering (securities) In the market Services provided during this process include: giving advices / filling documents / underwriting, best efforts or Private placements Giving advice? Explain current market conditio...

Investment banker →purchase Entire Offering at predetermined price → then resell the offering (securities) In the market Services provided during this process include: giving advices / filling documents / underwriting, best efforts or Private placements Giving advice? Explain current market conditions → determine the type of security to offer (debt, equity...) determine when to issue, how many, at what price (More important IPO's) Filling documents? Underwriting? = firm commitment SEC registration ( required for issues > $1.5 M and maturity > 270 days ) creation of the prospectus (for the public) debt issues → more steps : acquire credit rating, band counsel hiring... equity issues → security appear on one of the exchanges Underwriter may form an underwriting syndicate to diffuse part of the underwriting risk placement of a tombstone in the financial press( prevent le public des potentials risks) Goal : it is for all the shares in an offering to be spoken for → may not always occur: Best efforts? fully subscribed = all shores are spoken for ( that's what we want) undersubscribed = underwriting syndicate unable to generate interest in the available shares oversubscribed = interest in more shares than are available (may lead to rationing) Alternative to a firm commitment → underwriter does not buy the issue but makes its "best efforts" to sell the entire issue Private placement? The entire issue is sold to a small select group of investors → rarely done W equity Equity sales ? Mergers and acquisition? When a firm sells an entire division (or company) enlisting the aid of an investment banker determine value of the firm and find potential Byers dev. Confidential financial statements (confidential memorandum ) for prospective buyer prepare a letter of intent, assist with due diligence and help a reach definitive agreement Investment banker assist both: - potential Target - acquiring firm → deal may be a hostile takeover (target doesn’t want to be acquired) → investment banker will assist in all areas ( deal specifics, financing, legal issues.. think of investment bankers as matchmakers in the world of business. When a company wants to buy another company (but the feeling might not be mutual), or if a company is open to being bought, investment bankers step in to make it happen smoothly. They handle all the nitty-gritty details like figuring out the best way to pay for the deal, making sure everything is legal, and generally making sure the whole process goes off without a hitch. So, whether it's a friendly merger or a not-so-friendly takeover, investment bankers are there to make it happen. = a part of the underwriting section Primary market = Investment banks. Secondary market = Securities dealers/brokers + investment banks Pre-market= Venture capital firms Brokerage? Orders? Securities orders: when you call a brokerage house To buy or sell a security → 3 options: market order: buy or fill security at current price limit order: you specify the most you are willing to pay / least willing to accept a for security short sales: sell A Security you don't own with the intent of buying it back at a later date (hopefully at a lower price) → other services: insurance against loss of actual security documents margin credit for purchasing equity W borrowed funds other services driven by market demand (Ex: Merrill lynch cash management account) Brokers ? → Full service brokers : offers clients research and investment advice →> usually charge a higher commission on trades → discount broker : provide facilities to buy/sell securities but offer no advice Dealers? Regulation of securities? Hold inventories of securities on their own account provide liquidity to the marker By standing by ready to sell/buy securities (market makers) especially important for thinly traded securities Primary basis of today's Market: 1933 and 1934 acts : establishment of the SEC registration requirements for new security reporting requirements for companies and insiders prohibition of market manipulation Securities and Exchange Commission (SEC), which keeps an eye on the market to make sure everyone follows the rules. They also made it so that companies have to register before they can sell their stocks to the public, and they have to share certain information regularly, like how they're doing financially. Plus, they made it illegal for people to cheat by manipulating the market. So basically, these laws help keep the stock market honest and safe for everyone involved. Glass -Steagall stipulated that they both would be separated Investment banks → G-L-B Act removed some of these barriers ( securities firms ) Vs commercial banks ? →→ Commercial banks are slowly gaining regulatory permission to engage in the full range of services offered by investment banks Private equity ? (PE) Alternative to investing via public securities → limited partnership can raise funds (PE) to invest in new companies / buyout existing division more common PE : ventures fund and capital buyouts PE got a boost in 1978 when pension funds were permitted to invest in PE firms These firms provide funds for Start up companies (→ often become involved with firm management and provide expertise ) Venture capital ? → typically limited partnerships ( venture baked firms ex: apple computer, Cisco systems, Starbucks... ) → Source of capital includes: wealthy individuals, pension funds, And corporations → Investors must be willing to wait years before Withdrawing money → long term investment ( might take time to see profit) First U.S venture = 1946 most venture 1950'S - 1960'S → Oil and real estate funding shifted from wealthy individuals to pension funds (one of the few risky investments portions are permitted) Profitability: 20 year average return > 23.4% 90'S avenge return = 30% venture capital market suffered during 2008 - 2009 Recession (16.5% loss) Venture capitalist ? Managers of start-ups may have objectives that differ significantly from profit maximization → capitalists reduce asymmetric information in several ways: long-term motivation (incentives) sit on the board of directors they invest In Funding: Funds are often disbursed in stages based on the achievement of disburse fund in stages based on required results Staged specific milestones or results. This ensures that the startup meets certain targets before receiving additional funding, reducing the risk for investors invest in diff. Firms ( diversification) I) Fundraising ( usually solicits < 100 Commitments (investors) per deal ) Life of venture 2) investment phase Capital deal ? seed investing early stage investing later stage investing 3) Exit ( usually IPO as merger ) Private equity buyouts? Exit: The ultimate goal of venture capital investment is to generate a return for the investors. This typically occurs through an exit event, which could take the form of: Initial Public Offering (IPO): The startup goes public, allowing investors to sell their shares on the stock market. Merger or Acquisition: The startup is acquired by another company, providing investors with a return on their investment through the sale of their shares. When a public company goes private Why: avoid SEC regulations (ex: sarbanes - oxley) provide flexibility - ability to avoid public scrutiny of earnings - attract top talent no longer interested tax advantages - high compensation for partners → high risk high return → as market for underperforming firms becomes more competitive → PE may not perform as well or industry will shrink Cycle: Investors pledge money (usually $1 million or more) and intent to leave money in partnership for 5+ years. Partners identify an opportunity, buy it, and then manage its future (typically hire a CEO for day-to-day operations). The company is then sold to the public via an IPO