WRITTEN REPORT

IN
CAPMAR

SUBMITTED TO:
PROF. MARLET MOLABOLA, CPA

SUBMITTED BY:
Angeles, Marivic F.
Cristobal, Jayson C.
Del Remedios, Maricor N.
Glariana, Maricel P.

BSBA FM IV-A

CHAPTER 6

INVESTMENT
BANKING FIRMS

LEARNING OUTCOMES

the nature of the investment banking business

the revenue-generating activities of investment banks

the activities of investment banking firms that require them to commit their own capital

the role investment bankers play in the underwriting of securities

the different types of underwriting arrangements

the difference between riskless arbitrage and risk arbitrage

the various roles investment bankers play in mergers and acquisitions

what is meant by merchant banking

why investment banking firms create and trade risk control instruments

INVESTMENT BANKING FIRMS

distribute newly issued securities and are involved in the secondary market as market
makers and brokers

2 GENERAL FUNCTIONS OF INVESTMENT BANKING FIRMS IN CAPITAL

MARKETS
1. Assist in obtaining funds
for corporations, government agencies, state and local governments that
need funds
2. Act as brokers or dealers in the buying and selling of securities
for investors who wish to invest fund

TWO CATEGORIES OF INVESTMENT BANKING FIRMS

1. Bank-affiliated Investment Banks
affiliated with large financial services holding companies
2. Independent Investment Banks
independent of a large financial services holding company

TWO CLASSIFICATIONS BASED ON THE INVESTMENT BANKING ACTIVITIES

1. Full-service Investment Banks
involved in the wide range of activities
2. Boutique Investment Banks

 specialize in limited areas of investment banking

SERVICES PERFORMED BY INVESTMENT BANKING FIRMS
(revenue-generating activities)

Public offering (underwriting) of securities

Trading of securities

Private placement of securities

Securitization of assets

Mergers and acquisitions

Merchant banking

Financial restructuring advising

Securities finance

Prime brokerage

Trading and creation of derivative instrument

Asset management

PUBLIC OFFERING (UNDERWRITING) OF SECURITIES

the traditional role associated with investment banking

TERMINOLOGIES:
Underwriting
the function of buying the securities from the issuer
Underwriter

 when an investment banking firm buys the securities from the issuer and accepts
the risks of selling the securities to investors at a lower price
Firm Commitment
an underwriting arrangement which the investment banking firms agrees to buy
the securities from the issuer at a set price
Best-efforts Underwriting
the investment banking firm agrees only to use its expertise to sell the securities
and doesnt buy the entire issue from the issuer
Gross Spread (Underwriter Discount)
the difference between the price paid to the issuer and the price at which the
investment bank offers the security to the public
2 Important Factors
1. Size of the offering
2. Type of security
Initial Public Offering (IPO)
common stock offering issued by companies that had not previously issued
common stock to the public
Secondary Common Stock Offering
an offering of common stock that had been issued in the past by the corporation
Underwriting Syndicate
group of firms that underwrites the issue
Concession Price
price less than the reoffering price
Privatization

 process in which investment bankers also may assist in offering the securities of
government-owned companies to private investors
THREE FUNCTIONS OF INVESTMENT BANKERS
1. Advising the issuer on the terms and the timing of the offering
2. Buying the securities from the issuer
3. Distributing the issue to the public

TRADING OF SECURITIES
Revenue from this activity is generated through:
1. the difference between the price at which the investment banking firm sells the
security and the price paid for the securities (called the bid-ask spread)
2. appreciation of the price of the securities held in inventory

TWO TYPES OF ARBITRAGE TRANSACTIONS

1. Riskless Arbitrage
calls for a trader to find a security or package of securities trading at different
prices
2. Risk Arbitrage
trading strategies that are unfortunately labeled

PRIVATE PLACEMENT OF SECURITIES

the sale of securities directly to an institutional investor such as insurance companies,
investment companies and pension funds

SECURITIZATION OF ASSETS
refers to the issuance of securities using a pool of assets as collateral
Asset-backed Securities
securities backed by a pool of loans or receivables

MERGERS AND ACQUISITIONS

Under Merger and Acquisitions (M&A) activity are:
Leveraged buyouts (LBOs)
Restructuring and recapitalization of companies
Reorganization of bankrupt and troubled companies

SEVERAL WAYS INVESTMENT BANKERS MAY PARTICIPATE IN M&A

1. finding M&A candidates
2. advising acquiring companies or target companies with respect to price and nonprice
terms of an exchange, or helping target companies fend off an unfriendly takeover
attempt
3. assisting acquiring companies in obtaining the necessary funds to finance a purchase

3 TYPES OF FEE STRUCTURE

1. the percentage can decline, the higher the selling price
2. the percentage can be the same regardless of the selling price

3. the percentage can be fixed with addition of an incentive fee if the price is better than a
specified amount
MERCHANT BANKING
an activity in which, when an investment banking firm commits its own funds by
either taking an equity interest or creditor position in companies

FINANCIAL RESTRUCTURING ADVISING

involves a significant modification of a corporations capital structure, operating
structure, and/or corporate strategy with the objective of improving efficiency

Financial restructuring may occur in order to:

1. Avoid a bankruptcy or problem with creditors
2. Reorganize the firm

SECURITIES FINANCE
the financing of positions in securities and the borrowing of securities fall into a little
known

2 Activities Involve in Securities Finance

1. Securities Lending
service of putting together borrowers and lenders of securities
2. Repurchase Agreements
is the sale of a security with a commitment by the seller to buy the same security

 back from the purchaser at a specified price at a designated future date

PRIME BROKERAGE
is a package of services to hedge fund and large institutional investor
is a fee-driven service except in the case of securities finance where interest income is
earned

TRADING AND CREATION OF DERIVATIVE INSTRUMENTS

Derivative Instruments:
Futures
Options
Swaps
Caps
Floors

Derivative Instruments can be used

1. To control the risk of an investors portfolio, or, in the case of an issuer, the risk
associated with the issuance of a security
2. Allow an investment banking firm to realize revenue in several ways
3. Acts as a counterparty to the agreement
4. To protect an investment banks own position in transactions

ASSET MANAGEMENT

 the management of an investors investment by a financial services company or financial

institutions

PREPARED AND REPORTED

BY:
Angeles, Marivic F.
Cristobal, Jayson C.
Del Remedios, Maricor N.
Glariana, Maricel P.

BSBA FM IV-A

2015