The Components of Investment Bank
Generally, the breakdown of an investment bank includes the following areas:
Corporate Finance
The bread and butter of a traditional investment bank, corporate finance, generally perform two different functions:
1) Mergers and acquisitions advisory and
2) Underwriting.
On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price by coordinating with the bidders, performing due diligence, structuring the deal, negotiating with the merger target and generally ensuring a smooth transaction.
Mergers and acquisition advice include buy-side and sell-side advice where competent buy-side analysts and sell-side analysts are appointed by the Investment banking companies to advice their clients on lucrative merger targets in case a firm wants to buy another firm and potential purchasing companies if a firm wants to sell its assets.
The traditional investment banking world is considered the sell-side of the securities industry. Why? Investment banks create stocks and bonds, and sell these to investors. Sell is the key word, as I-banks continually sell their firms' capabilities to generate corporate finance business. Who are the buyers of public stocks and bonds? They are individual investors (you and me) and institutional investors, firms like Fidelity and Vanguard. The universe of institutional investors is appropriately called the buy-side of the securities industry.
The underwriting function within corporate finance involves spearheading the process of raising capital for a company. In the investment banking world, capital can be raised by selling either stocks or bonds to the investors.
When a corporation wishes to issue new securities and sell them to the public, it makes an arrangement with an investment banker whereby the investment banker agrees to purchase the entire issue at a set price, known as underwriting. Underwriting can be done either through negotiations between underwriter and the issuing company (called negotiated underwriting) or by competitive bidding. A negotiated underwriting is a negotiated agreed arrangement between the issuing firm and its investment banker. Most large corporations work with investment bankers with whom they have long-term relationship. In competitive bidding, the firm awards offering to investment banker that bid the highest price.
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