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Agenda
Definitions Functions of an Investment Banker Distribution Methods Events in a Negotiated Sale Private Placements References
Definitions
Investment Banker:
A financial specialist involved as an intermediary in the merchandising of securities. Acts as a middleman by facilitating the flow of savings from those economic units that want to invest to those units that want to raise funds.
Core Business
Middle Office
Back Office
assuming the risk of selling a security issue at a satisfactory price term borrowed from insurance
selling function of investment banking the primary function of an investment bank is buying and selling products.
providing advise in the issuance & marketing of securities research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings.
involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall
responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.
tracks and analyzes the capital flows of the firm adviser on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses
responsible for an investment bank's daily operations' compliance with government regulations and internal regulations
data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers
Distribution Models
Distribution Models
Negotiated Purchase Competitive Bid Price Commission / Best Efforts Basis Privileged Subscription Direct Sale
Distribution Models
Negotiated Purchase
the underwriting firm that needs funds makes contact with an investment banker & deliberations concerning the new issue begin. most prevalent method of distributing securities in the private sector most profitable technique as far as investment bankers are concerned
Distribution Models
several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds. undue influence of the investment banker over the firm is mitigated & the price received by the firm for each security should be higher as far as fund raising is concerned, the benefits gained from the advisory function of the investment banker is lost
Distribution Models
investment banker acts as an agent rather than as a principal in the distribution process. typically used for more speculative issues
Distribution Models
Privileged Subscription
new issue is marketed to a definite & select group of investors 3 target markets involved (1) current stock holders (2) employees (3) customers
Distribution Models
Direct Sale
the issuing firm sells directly to the public without going through an investment banker in the process relatively rare
Selection of an investment banker Pre-underwriting conferences Formation of the underwriting syndicate Registering of the securities Formation of the selling group Due diligence meeting Price pegging Syndicate termination
The original investment banker could not finance the entire underwriting himself Lowers the risk of loss for a single underwriter Widens the eventual distribution effort
Registration statement
Historical facts about the firm Financial facts about the firm Administrative facts about the firm
Formation of the selling group Due diligence meeting: a last chance gathering to get
everything in order before taking the offering public
Private Placements
Private Placements
Public offerings :security issuer does not meet the ultimate investors in the financial instruments Private placements :securities are sold directly to a limited number of institutional investors
Private Placements
Advantages
Disadvantages
References
Stanley Block & Geoffrey Hirt, Foundations of Financial Management, 1994, P430 John Martin, William Petty, Arthur Keown, David Scott, Basic Financial Management, 1979, p512
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