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INVESTMENT BANKS AND
BROKERAGE FIRMS
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Marijana Ćurak - University of Split, Faculty of Economics
Academic year: 2014/2015
10/23/2014
International Week – New Frontiers in Finance and Accounting 2014
University of Economics in Katowice
Course: Financial Institutions
These lecture slides are based on the
book:
Mishkin F. S., Eakins, S. G. (2012), Financial
Markets + Institutions, Addison Wesley
10/23/2014
Marijana Ćurak- University of Split, Faculty of Economics
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AGENDA
Investment banks
Securities brokers and dealers
Review points
Marijana Ćurak - University of Split, Faculty of Economics
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INVESTMENT BANKS (1)
Intermediaries that help corporations raise funds
In addition to underwriting the initial sale of
securities, investment banks also play a role as
deal makers in the mergers and acquisitions
intermediaries in the buying and selling of companies
private brokers to the very wealthy individuals
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Marijana Ćurak - University of Split, Faculty of Economics
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INVESTMENT BANKS (2)
They usually earn their income from fees
charged to clients
These fees are often set as a fixed
percentage of the dollar size of the deal
being worked
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Marijana Ćurak - University of Split, Faculty of Economics
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UNDERWRITING STOCK AND BONDS (1)
When corporation wants to borrow or raise funds, it may
decide to issue long-term debt or equity instruments
It than usually hires an investment bank to facilitate the
issuance and sale of the securities
The investment bank may underwrite the issue
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Marijana Ćurak - University of Split, Faculty of Economics
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UNDERWRITING STOCK AND BONDS (2)
The process of underwriting a stock or bond
issue requires that the securities firm purchase
the entire issue at a predetermined price and
then resell it in the market
There are a number of services provided in the
process of underwriting
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Marijana Ćurak - University of Split, Faculty of Economics
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GIVING ADVICE
The financial managers at most firms are not familiar
with how to proceed with a new security offering
A firm may not know if it should raise capital by selling
stocks or by selling bonds
Firms may also need advice as to when securities should
be offered
The most difficult advice an investment banker must
give a customer concerns at what price the security
should be sold
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Marijana Ćurak - University of Split, Faculty of Economics
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FILING DOCUMENTS (1)
Issuers of new securities to the general public must file
registration statement with supervision agency
This statement contains information about the firm’s
financial condition, management, competition, industry,
and experience
The firm also discloses what the funds will be used for
and management’s assessment of the risk of the
securities
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Marijana Ćurak - University of Split, Faculty of Economics
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FILING DOCUMENTS (2)
A portion of the registration statement is
reproduced and made available to investors for
review
This widely circulated document is called a
prospectus
Investors must be given a prospectus before
they can invest in a new securities
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Marijana Ćurak - University of Split, Faculty of Economics
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UNDERWRITING (1)
Once all of the paperwork has been completed,
the investment banker can proceed with the
actual underwriting of the issue
At a prespecified time and date, the issuer will
sell all of the stock or bond issue to the
investment banking firm at the agreed price
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Marijana Ćurak - University of Split, Faculty of Economics
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UNDERWRITING (2)
The investment bank must distribute this issue
to the public at a greater price to earn
The investment bank is clearly taking a huge risk
One way that it can reduce the risk is by forming
a syndicate
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SYNDICATE
It is a group of investment banks, each of
which buys a portion of the security issue
Each firm in the syndicate is then
responsible for reselling its share of the
securities
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Marijana Ćurak - University of Split, Faculty of Economics
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PRIVATE PLACEMENT (1)
An alternative method of selling securities
Securities are sold to a limited number of
investors rather than to the public as a
whole
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Marijana Ćurak - University of Split, Faculty of Economics
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PRIVATE PLACEMENT (2)
The buyers of private placements must be
large enough to purchase large amounts
of securities at one time
The usual buyers are insurance
companies, banks, pension funds, and
mutual funds
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Marijana Ćurak - University of Split, Faculty of Economics
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EQUITY SALES (1)
Investment bank helps with the sale of
companies or corporate divisions
The investment bank provides a detailed
analysis of the current market for similar
companies and apply various sophisticated
models to establish company value
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Marijana Ćurak - University of Split, Faculty of Economics
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EQUITY SALES (2)
The bank prepares a confidential memorandum that
presents the detailed financial information required by
prospective buyers to make an offer for the company
The next step in an equity sale will be the letter of intent
issued by a prospective buyer
This document signals a desire to go forward with a
purchase and outlines preliminary terms
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Marijana Ćurak - University of Split, Faculty of Economics
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EQUITY SALES (3)
The investment bank will negotiate the terms of sale on
the seller’s behalf
Due diligence
The buyer verify the accuracy of the information
contained in the confidential memorandum
The findings shape the terms of definitive agreement
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MERGERS AND ACQUISITIONS (1)
Investment banks serve both acquirers and target
firms
Acquiring firms require help in locating attractive
firms to pursue, soliciting shareholders to sell their
shares in a process called a tender offer, and raising
the required capital to complete the transaction
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Marijana Ćurak - University of Split, Faculty of Economics
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MERGERS AND ACQUISITIONS (2)
Target firm may hire investment bankers to help
reject undesired takeover attempts
The mergers and acquisitions markets require
very specialized knowledge and expertise
Investment bankers involved in this market are
highly trained
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TOP TEN INVESTMENT BANKS BY VOLUME OF
M&A DEALS
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Source: Financial Times, Bloomberg, according to:http://www.relbanks.com/worlds-top-banks/top-investment-banks
(Accessed: October 18, 2014)
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BROKERAGE FIRMS
They trade in secondary markets
Brokers are pure middlemen who act as agents
for investors in the purchase or sale of securities
Their function is to match buyers with sellers, a
function for which they are paid brokerage
commissions
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Marijana Ćurak - University of Split, Faculty of Economics
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BROKERAGE SERVICES
Execution of securities orders
Other services
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FULL-SERVICE BROKERAGE HOUSES
They provide research and investment
advice to their customers
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DISCOUNT BROKERS
They simply execute trades on request
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Marijana Ćurak - University of Split, Faculty of Economics
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SECURITIES DEALERS
Dealers link buyers and sellers by standing ready to buy
and sell securities at given prices
They hold inventories of securities, which they sell to
customers who want to buy
They also buy securities from customer who want to sell
Market makers (liquidity)
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Marijana Ćurak - University of Split, Faculty of Economics
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REVIEW POINTS
Investment banks serve large companies
Activities: issuing securities, M&A, buying and selling
securities
Brokerage firms buy and sell securities for their
customers
Securities dealers buy and sell securities for their own
account
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REFERENCES
Mishkin F. S., Eakins, S. G. (2012), Financial
Markets + Institutions, Addison Wesley
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