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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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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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