Investment Banking

Basic Concepts
An Investment Bank is a financial institution that assists

individuals, corporations and governments in raising capital by underwriting and / or acting as the clients agent in the issuance of securities.
Investment banks provide four primary types of services

raising capital, advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most major wall street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories.

Underwriting
In securities underwriting the investment bankers raise

capital for corporations through the structuring and sale of securities such as stocks and bonds. Municipal finance is securities underwriting (strictly bonds) on behalf of government entities such as states, counties, municipalities and public authorities. This is a way of selling a newly issued security such as stocks or bonds to the investors. A syndicate of banks (the lead managers) underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they be unable to find enough investors , they will have to hold some securities themselves.

Mergers And Acquisitions

A merger refers to a combination of two or more companies,

usually of not great disparate size, into one company. Horizontal Merger Merger of two companies that are in direct competition and share the same product lines and markets. Vertical Merger Merger of a customer and a company or a supplier and a company. Think of a cone supplier merging with an ice cream company. Market Extension Merger Merger of two companies that sell the same products , but in different markets. Product Extension Merger Merger of two companies selling different but related products in the same market. Conglomeration Merger of two companies that have no common business areas.

Acquisitions
Acquisition is an action in which a company buys most, if not all, of the target companys ownership

stakes in order to assume control of the target firm. Acquisitions are often paid for in cash, the acquiring companys stock or a combination of both.
Acquisition can be Congenial or Hostile. Reverse Take Over (RTO) This is the case of a Private Company becoming a Public Company

without an IPO.

Mergers & Acquisitions Differentiated

Mergers Acquisitions
The case when two companies, It is a case when one company

often of the same size, decide takes over another and to move forward as a single establishes itself as the new new company instead of owner of the business. operating the business The buyer company separately. swallows the business of the The stocks of both the target company , which ceases companies are surrendered to exist. and new stocks are issued For example, Dr. Reddys Labs afresh. acquired the German For example, Glaxo Wellcome Company Betapharm and SmithklineBeecham through an agreement for merged as one company USD 597 Million. known as Glaxo Smithkline.

Securitized Products
Securitization is the financial practice of pooling various types of

contractual debts such as residential mortgages, auto loans , commercial mortgages, educational loan repayments, credit card receivables etc and selling the said debts as bonds or pass through certificates to various investors. The principal and interest on the debt underlying the security is paid back to the various investors regularly. Securities backed by mortgage receivables are called Mortgage backed securities while securities backed by other types of assets are called Asset backed securities.
The granularity of pools of securitized assets is a mitigant to the credit risk

of individual borrowers. Unlike general corporate debt, the credit quality of securitized debt is non stationary due to changes in volatility that are time and structure dependant. If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves. If improperly structured, the affected tranches may experience dramatic credit deterioration and loss.

Custody & Clearance Services

Investment banks provide timely, consistent and accurate information of trades to the participants

for efficient clearing.

It can support the custody of a variety of assets

including equity, fixed income and foreign exchange products, as well as Options, Swaps, Warrants, futures and other derivatives.
It integrates the entire trade cycle, preventing the inconsistencies arising due to dealing with different market practices, accounting standards and time zones.

Lending And Financing

It is a service provided by investment banks to large investors who can allow the investment bank to lend out their shares to other people. This is often done to investors of all sizes who have pledged their shares to borrow money to buy more

shares, but large investors like pension funds often choose to do this to their unpledged shares because they will receive interest income. In these types of agreements, the investor still receives any dividend as normal, the only thing they can not do generally is to vote their shares.

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