fin 8 investment banking firms

7/27/2019 Fin 8 INVESTMENT BANKING FIRMS

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Initial Public Offering (IPO) First public sale of a companys stock Requires SEC approval

Three Choices to Market Securities in PrimaryMarket Public offering Rights offering Private Placement


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Underwriting the offering: promoting the stockand facilitating the sale of companys shares

Prospectus: registration statement describingthe issue and the issuer

Red Herring: preliminary prospectus availableduring the waiting period

Quiet Period: time period after prospectus is

filed when company must restrict what is saidabout the company

Road Show: series of presentations to potentialinvestors


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Underwriting the issue: purchases the securityat agreed-on price and bears the risk of resellingit to the public

Underwriting syndicate: group formed by

investment banker to share the financial risk ofunderwriting

Selling Group: other brokerage firms that helpthe underwriting syndicate sell issue to thepublic

Tombstone: public announcement of issue androle of participants in underwriting process

Investment Banker Compensation: typically inthe form of a discount on the sale price of thesecurities


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Secondary Market: the market in whichsecurities are traded after they have been issued

Role of Secondary Markets Provides liquidity to security purchasers

Provides continuous pricing mechanism Organized Securities Exchanges: centralized

institutions in which transactions are made inalreadyoutstanding securities

Over-the-counter (OTC) Market: widelyscattered telecommunications network in whichtransactions are made in both initial publicofferings and already outstanding securities


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Third Market Large institutional investors go through market makers

on theOTC market

Institutional investors (mutual funds, life insurance

companies, pension funds) receive reduced trading costsdue to large sizeof transactions

Fourth Market

Large institutional investors deal directly with eachother to bypass OTC market makers Electronic Communications Networks (ECNs) allow direct

trading ECNs account for about a third of all Nasdaq transactions


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Bull Market Favorable markets Rising prices Investor/consumer optimism Economic growth and recovery Government stimulus

Bear Market Unfavorable markets Falling prices

Investor/consumer pessimism Economic slowdown Government restraint


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Long Purchase

Investor buys and holds securities

Buy low and sell high

Make money when prices go up


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Margin Trading

Uses borrowed funds to purchase securities

Currently owned securities used as collateralfor margin loan from broker

Margin requirements set by Federal ReserveBoard Determines the minimum amount of equity required On $4,445 purchase with 50% margin requirement,

investor puts up $2,222.50 and broker will lend

remaining $2,222.50 Can be used for common stocks, preferred

stocks, bonds, mutual funds, options, warrantsand futures


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Advantages Allows use of financial leverage Magnifies profits

Disadvantages Magnifies losses Interest expense on margin loan Margin calls


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Short Selling

Investor sells securities they dont own

Investor borrows securities from broker

Broker lends securities owned by other investorsthat are held in street name

Sell high and buy low

Investors make money when stock prices

go down


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Advantages Chance to profit when stock price declines

Disadvantages

Limited return opportunities: stock pricecannot go below $0.00

Unlimited risks: stock price can go up anunlimited amount

If stock price goes up, short seller still needs tobuy shares to pay back the borrowed sharesto the broker

Short sellers may not earn dividends


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1. Position Trading- involves purchases of large

blocks of securities on the expectation of afavorable price move.

2. Pure Arbitrage- entails buying an asset in one

price and selling it immediately in anothermarket at a higher price.

3. Risk Arbitrage- involves buying securities in

anticipation of some information release-such as a merger or takeover announcementon a Federal Reserve interest rateannouncement.


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Private placementA securities issue placed with one or a fewlarge institutional investors.

Cash Management AccountsMoney market mutual fund sold by

investment banks that offer check-writing

privileges.


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4. Program Trading- a type of pure arbitragetrading in that it is often associated withseeking to profit from differences betweenthe cash market price and the futuresmarket price of a particular instrument.

5. Stock Brokerage- involves the trading ofsecurities on behalf of individuals who wantto transact in the money or capital markets.

6. Electronic Brokerage- offered by majorbrokers, involves direct access, via theInternet, to the trading floor thereforebypassing traditional brokers.


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Venture capitalA professionally managed pool of money

used to finance to finance new and often high-risk firms.

Institutional Venture Capital FirmsBusiness entities whose sole purpose is to

find and fund the most promising new firms.

Angel Venture Capitalist (angel)Wealthy individuals who make equity

investments.


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Mergerthe combination of two or more firms, in

which the resulting firm maintains the identityof one of the firms, usually the larger.

Consolidationthe combination of two or more firms to

form a completely new corporation.Holding Company- A corporation that has voting

control of one or more other corporations.


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Subsidiariesthe companies controlled by a holding

company.

Acquiring companythe firm in a merger transaction that

attempts to acquire another firm.

Target company

the firm in a merger transaction that theacquiring company is pursuing.


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Friendly Merger

a merger transaction endorsed by thetarget firms management approved by its

stockholders, and easily consummated.

Hostile Merger

a merger transaction that the targetfirms management does not support, the

acquiring company to try to gain control ofthe firm buying shares in the marketplace.


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Strategic mergera merger transaction undertaken to

achieve economist of scale

Financial merger

a merger transaction undertaken withthe goal of restructuring the acquiredcompany to improve its cash flow and unlockits hidden value.


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Horizontal merger- a merger of two firms inthe same line of business.

Vertical merger- a merger in which a firmacquires a supplier or a customers.

Congeneric merger- a merger in which one ofthe firm acquires another firm that is in thesame general industry but neither in thesame line of business nor a supplier or

customer.Conglomerate merger- a merger combining

firms in unrelated businesses.


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THE END

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fin 8 investment banking firms

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