Mn50412 investment banking
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MN50412 Investment Banking. General information Lecturer: Dr Richard Fairchild Office: Wessex House 8.52 Email: [email protected] Lecture time: Thursdays 9.15 – 11.15 am Office hours: Tuesday 14.15pm- 15.15pm. What is investment banking?. The banking function.

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MN50412 Investment Banking

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MN50412Investment Banking


General information

Lecturer: Dr Richard Fairchild

Office: Wessex House 8.52

Email: [email protected]

Lecture time: Thursdays 9.15 – 11.15 am

Office hours: Tuesday 14.15pm- 15.15pm


What is investment banking?


The banking function

The banking function can be decomposed into:

  • Central banking:

    • Monetary policy (interest rates, money supply)

    • In the UK: Bank of England

  • Commercial banking:

    • Lending to the public (businesses, individuals, banks)

    • Receiving deposits from businesses and individuals

    • In the UK: HSBC, RBS, Barclays, HBOS

  • Investment banking


Investment banking activities

Investment banking activities include:

  • Mergers and acquisitions (+ divestitures)

    • Advise potential buyers on which companies to target

    • Help sellers screen potential buyers

    • Suggestions about what price to offer/accept

    • Negotiation support

    • Structuring the deal ( pay in cash vs. pay in stock)


  • Debt underwriting

    • IB help companies and governments raise money by issuing corporate or government bonds

    • Underwriting: IB act as intermediate between the issuer and investors (individuals, banks, mutual funds, hedge funds, sovereign funds etc.)

      • Act as primary dealers for the government

      • Have a certification role for companies that want to issue bonds

  • Proprietary trading: Trading with the bank own money


  • Equity underwriting

    -Evaluate the issuer

    -Determine the offering price

    -Buy the shares from the issuer

    -Find investors and sell the shares

    -Initial public offering (IPOs)

  • Asset management

    • Managing short-term cash flows of corporate clients

    • Management of long-term bonds and equity portfolios of investors

      • Institutional investors: insurance companies, pensions funds etc.

      • Private investors


  • Asset securitization

    • Issuance of securities using a pool a similar assets as collateral

    • Mortgage-backed securities, asset-backed securities

  • Private equity: refers to shares in companies that are not publicly traded

    -Venture capital

    -LBOs: using borrowed money for a substantial portion of the purchase price of the buyout company

    -IB can raise funds for private equity funds or manage these funds themselves


  • Investment banks

    • Investment banks are financial institutions that engage primarily in IB activities

    • Investment banks engage in public and private market

      transactions with corporations, governments and institutional

      investors.

    • Main differences with commercial banks:

      - IB have a marginal role in deposits and loan activities.

      - IB usually take short-term positions, i.e. few days (except in the non-core business of venture capital). Commercial banks take longer term positions.


    • Investment banks are intermediary between those needing funds and those having them:

      • Need funds: Corporations, government

      • Have funds: Corporations, investment vehicles such as mutual funds, pension funds etc.

    • How do they make money?

      • Fees (underwriting, M&A, asset management)

      • Trading revenues

    • Main IB up to early 2008: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns


    Commercial banks

    Institutions whose current operations consist mostly in granting loans and receiving deposits from businesses and customers

    Universal banks

    Banks that combine commercial and investment banking

    Example: UBS, Citibank, Bank of America


    Content of the course


    Content of the course

    • Introduction

    • Equity underwriting

      • Why go public?

      • The IPO process

      • Syndicates in IPOs

      • Market shares in IPOs

      • Underwriting spread in IPOs

      • Underpricing of IPOs

      • Long-run performance of IPOs


    • Debt underwriting

      • Pricing of bonds

      • Yield curve

      • Corporate vs. government bonds

      • Callable bonds, convertible bonds

    • Derivatives products

      • Futures

      • Options

      • SWAPS, CDO, CDS


    • Mergers and acquisitions

      • M&A valuation

      • Determinants of market shares

      • Who gains from mergers?

      • Financing: cash vs. stock

      • Why use IB? Investment banks vs. commercial banks

    • Role of IB in the financial and economic crisis

    • Asset management:

      -Active vs. passive management

      -Performance measurement


    Contribution of financial services to the UK economy


    Sectors' share in UK GDP


    Financial services jobs in central London


    UK sector trade balances


    Tax contribution of UK financial services


    International financial markets in the UK


    IB revenues


    Funds under management


    Sovereign wealth funds under

    management (global)


    Global private equity


    UK market shares


    Turnover of London based derivatives

    exchanges


    UK vs. US (1929-2007)


    Investment banking in the US

    The modern concept of “Investment Bank” was created by the Glass-Steagall act (Banking Act of 1933). Following the 1929 stock market crash, large banks went bankrupt.

    Glass-Steagall separated commercial banks, investment banks, and insurance companies.

    In 1999 the Glass-Steagall Act was waived (Graham-Leach-Bliley Act).


    Investment banking in the UK

    In the past, separation between:

    Brokers: Rout the orders of customers to the stock exchange, give advices on investments. They cannot take positions in the stocks that act as brokers for.

    Jobbers: Market makers that could trade only with the brokers, not with the general public.

    Merchant banks: Commercial banks that offer corporate finance services (M&A advisory, underwriting etc.). Did not own the brokers.

    In 1986: Big bang:

    Abolition of fixed commission to increase competition

    Dual capacity: Jobbers, brokers and merchant banks can integrate


    1990s: The failure of UK investment banks

    Problems

    The US had deregulated fees in 1975

    Business became much more complex, more difficult to manage

    Lack of managerial experience

    Clash of cultures brokers/jobbers/merchant banks

    Markets became volatile after the 1987 crash

    Results became volatile and UK banks made substantial losses

    1995 saw many UK banks fail amid losses


    Reasons for US success since the 1990s

    Large financial and management resources, meaning that they were less exposed

    Huge profits in the US market allowed cross-subsidisation in Europe

    Economies of scale for underwriting activities


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