Primer onInvestment Banking

An Overview of Investment Banking28 MARCH, 2006

Table of ContentsIntroduction.............................................................................................................................2Valuation.................................................................................................................................3Capital Structuring...................................................................................................................4Mergers and Acquisitions (M&A).............................................................................................6New Issues (Debt And Equity)................................................................................................8Financial Engineering............................................................................................................11Summary...............................................................................................................................11Reference Charts..................................................................................................................12A Glossary of Terms.............................................................................................................17Resources and Guides:.........................................................................................................29

IntroductionUnlike retail banking, investment banking has only really been in existence since the early 1900s with many of the concepts that it employs today being first put into full practice as late as the 1950s.

Investment Banking is all about adding value to existing businesses. It aims to achieve this goal in a number of different ways, but Investment Banking is perhaps best described as the discipline that helps businesses make the right financial and investment choices.

Companies are usually managed to maximize the shareholder value of the company. Of course, each business may have different short, medium or long-term views on how to maximize shareholder value. For example, one company may wish to increase its market share of a sector, even at the expense of short-term profits, while another company may wish to streamline its operations or concentrate on increasing its profit margins.

If the company’s management are not achieving this then somebody else will – be it the competition (and the business goes under) or some other party in the form of a takeover or a merger.

Thus the role of the investment bank is clear – its role is to aid the management of a company to maximize the company’s shareholder value.

Therefore today’s investment bank has to be a client driven organization, tailoring its expertise and product offerings to best meet and accomplish whatever financial and investment needs clients may have.

For this reason investment banking is constantly evolving and creating a range of (and in today’s diverse and competitive market – increasingly complex) solutions. These solutions are more commonly known as transactions or deals.

Investment banks will thus operate in a number of different areas and sectors, offering an equally diverse range of expertise and products.

Although by no means totally inclusive, investment banking is generally considered to relate to one of the following activities. It is important to note that several of these activities could be part of any one transaction or deal.

1 Valuation2 Capital Structuring3 Mergers and Acquisitions4 New Issues (Equities and Debt)5 Financial Engineering

We will now take a closer look at these activities and outline the role that investment banking plays in each.

ValuationGiven that the management of a company is tasked with the maximization of shareholder value, it follows then that the biggest challenge for any company management is to come up with the ideas and recommendations that allow this maximization to occur.

Even the most successful management teams cannot afford to be complacent. In today’s ever-changing world, nothing remains the same for long, especially a business advantage.

The old saying “if its not broken then don’t fix it” has been replaced with “if you are standing still, then you are already behind the competition”.

The challenge then for a company’s management is to both constantly review where they have been (i.e., what has been successful and what needs to change) and where they are going (i.e. what will the marketplace, the competition, the technology and a host of other variables be like in the short and long term future).

Maximum shareholder value is thus achieved through strategic and sound financial management decisions. These decisions are most successful when based upon past performance and future plans.

This process can be enhanced by following the advice of an investment bank which will assess the value of the company (the past) and proposed projects (the future).

Investment banks are experts at calculating what a business is worth.

They are also able to predict how that worth could be altered (i.e. what happens to the value of a company in a number of different scenarios and what those potential futures would mean financially).

This is invaluable to a management team that is considering one of several future plans.

It is much easier to make the right decision (to maximize shareholder value) once it is known what the likely outcomes will be (i.e. what that transaction will add to future shareholder value).

This valuation ability is generally used for the following purposes:

To price a securities offering (i.e. what is the likely price and best time to sell company stocks and bonds)

To measure the impact of any restructuring (i.e. selling off or down sizing existing business areas) or investment plans

To set the value of a merger or acquisition (i.e. how much it would cost to “buy” a company)

Financial models* are constructed by investment banks to capture the most important fixed and variable financial components that could influence the overall value of a company.

These models, depending upon the proposed transaction, can be extremely complex with special variables being added for special areas (i.e. there are different financial factors to consider in different sectors, countries and markets when predicting or measuring a company’s value).

* Models are mathematical representations of the company’s value in various scenarios.

Capital StructuringCapital Structuring is, simply put, how a company chooses to arrange its finances in terms of income, expenses, assets and debts.

How a company chooses to structure its capital is not dissimilar to how someone structures their personal finances.

On a daily basis people have to make decisions with regard to how they choose to spend their money and a company’s management is no different.

Some people may take a long-term view with their finances and save for a point in the future while others may decide to take the short-term view and enjoy themselves in the present. Of course both views have their own rewards and consequences.

Likewise, a company may choose to make maximum short-term profits (a fast buck) or invest for middle and long-term gain.

Of course on both a personal and business level, spending money in itself is not necessarily bad, rather it is what you spend your money on that counts.

Let’s take some personal examples.

There is a big difference, in terms of capital structuring, between spending money on a holiday and a car (besides the obvious material ones).

The holiday has a very limited value in that when the holiday is over you cannot get back any of the money that you spent on it.

A car, on the other hand, is an asset because, depending on general wear and tear, it has some re-sale value. A re-sale value that could at some point in the future be utilized.

Another good example would be the use of a mortgage to help purchase a home.

As the years go by the actual outstanding debt decreases, the owner holds more equity value in the house and eventually the owner will own the property outright.

Because both the car and the property purchases have an asset-based component to them, the type of borrowing offered is normally cheaper than non-asset based lending.

A mortgage-lending rate, for instance, may be a quarter of that charged by a credit card company.

The reason for this difference is simple – with asset based lending the risk to the lender is reduced because if the person owing the debt cannot meet the repayments then the assets that the loan was used to purchase can simply be resold and all or part of the debt repaid.

For the managers of a business the same choices apply when deciding how to spend the company’s money and how to finance those purchases.

The role of Capital Structuring is simply to get the right balance between equity (its own money) and debt (borrowed money).

Getting the right balance between what a company owns and how it uses those assets to fund itself is a complex task.

An investment bank can constantly review a company’s capital structure, assessing the requirements for change based on the company’s latest business outlook, investment requirements and financial market conditions.

This review is not just limited to raising funds for investment and expansion. It can also be done to ensure that a company is being as efficient as possible in managing its debt.

Let us use another personal example. If a person who has many debts (i.e. credit cards, store cards and personal loans) each with its own repayment amount then it can be cheaper to take out one new loan, with an asset or assets as security (i.e. property).

This new loan can then pay off all the other debts. Its repayment amount will be substantially less because unlike the other loans this new one is secured. The money saved, by having this lower repayment, can then be used to purchase something else or save.

An investment bank can offer similar advice to a company and thus can change the existing balance between equity and debt. This process is known as restructuring.

When it comes to funding an investment or expansion as a company then there will always be a choice between risk and expected return.

The modeling work done by an investment bank during valuation can help to map out what the risks and the expected returns might be and hence allow a company’s management to make fully informed decisions.

This work may also help convince potential lenders that this is a low risk venture (i.e. investors are likely to get their original money back with profits).

Just as with personal lending, the amount of risk attached to the lender will determine to a large extent the amount charged for the raising of funds.

As you can imagine, there is a vast amount of ways in which a company can raise funds, or

restructure its debt, and the investment bank can use its expertise here to help the firm choose a path that maximizes its shareholder value.

The level of risk attached to lending money to a business in order for that business to expand or grow can be placed on the following spectrum:

At one end of the spectrum are the expansion plans in which all the money lent will be used to purchase assets. A good example is the purchase of a new vehicle that will be used in the core business of the company. These types of projects are good candidates for low-cost financing

Asset-backed loans, usually from one lender, are the most common type of lending for this type of expansion

At the other end of this spectrum are projects in which a substantial portion of the money lent is to be used to fund soft costs (i.e. they do not involve the purchase of assets – research and development being a common example). Because this type of expansion generates little in the way of assets, in the short term, it is more difficult to secure a traditional (secured) loan

The company may, therefore, issue securities (stocks and bonds) to fund this action.

Somewhere in the middle of this spectrum lie those situations in which the asset values are too low to secure asset-backed financing for the entire transaction, but in which the historic performance of the business is such, or the likelihood that the expansion effort will succeed are so great, that a senior lender will make what is termed a cash flow loan.

With a cash flow loan the lender holds his or her, metaphorical, breath for the period of the time that the loan is outstanding, hoping that the loan repayments hold up and the loan itself is repaid.

As you can imagine, cash flow loans are always more expensive than asset-backed, or secured, loans and are generally only available from larger, more sophisticated banks and financial institutions.

Mergers and Acquisitions (M&A)Merging with, or acquiring, a business is one way of increasing business value for a company.

It can include the following:

Acquisitions - buying a company by acquiring some or all of its stock or assets

Divestitures - splitting up and/or selling off existing parts of a business

Mergers – buying a company through a legal arrangement whereby all shareholders of the acquired company receive stock or cash

Strategic alliances - working closely with other companies to pursue a mutual advantage

Joint ventures - forming a new company with other parties. However, unlike a merger, this new company is a separate entity, with the parent companies still retaining their original identities

When increasing competitive pressures are placed on businesses and with the trend to globalization, companies engage in M&A activity.

Many companies looking to expand, or streamline, their business will use investment banks for advice on potential targets and/or buyers. This will normally include a full valuation and recommended tactics. Each party to a transaction will have their own M&A advisor.

Such advice is particularly necessary for M&A deals that involve uniting companies from different countries. These types of deals, that involve more than one country, are known as cross border deals. As you can imagine, cross border deals often involve working with different countries’ accounting, tax and company laws. These types of deals can then become extremely complex.

Many large international companies have, therefore, set up internal M&A teams. These teams have developed substantial experience in planning and executing deals and tend to carry out the search for potential targets and threats themselves. However, these companies are still open to investment banks bringing forward potential deals and will still generally need an investment bank to advise on valuations and tactics / negotiations.

In an ideal world In an ideal world M&AM&A transactions would simply involve the matching of a seller and a buyer, or in transactions would simply involve the matching of a seller and a buyer, or in the case of a merger, the bringing together of two interested parties. However, this is not always the the case of a merger, the bringing together of two interested parties. However, this is not always the case and sometimes one company will be threatened by another. In these types of deals one company case and sometimes one company will be threatened by another. In these types of deals one company will try and buy or merge with another without that company’s consent. This is better known as a will try and buy or merge with another without that company’s consent. This is better known as a hostile takeover.hostile takeover.

M&AM&A transactions can occur through an acquisition of stock, an acquisition of assets or a merger. A transactions can occur through an acquisition of stock, an acquisition of assets or a merger. A merger is a legal arrangement whereby all shareholders of the acquired company automatically merger is a legal arrangement whereby all shareholders of the acquired company automatically receive stock in the acquiring company as consideration in return for their stock in the acquired receive stock in the acquiring company as consideration in return for their stock in the acquired company. A merger often requires a shareholder vote and board approval. company. A merger often requires a shareholder vote and board approval.

The Investment bank’s role, in both these types of deals, falls into one of either two buckets: seller representation or buyer representation (also called target representation and acquirer representation).

For an investment bank, For an investment bank, M&A advising is highly profitable, and the possibilities of types of transactions are virtually unlimited. Perhaps a small private company's owner/manager wishes to sell out for cash and retire. Or perhaps a big public firm aims to buy a competitor through a stock swap.

Also, remember that investment banks do not just rely on buyers and sellers approaching them, they will also study the market themselves and have been known to approach companies with their own strategic ideas (i.e. they might suggest that two companies merge, or that one company acquires, or sells, to another).

Let us look in more detail at the role of the investment bank in representing either the seller or the buyer.

An investment bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an investment bank that represents a potential acquirer.

This seller representation, also known as sell-side work, is the type of advisory assignment that is generated by a company when it approaches an investment bank and asks it to find a buyer of either the entire company or part of its assets.

Generally speaking, the work involved in finding a buyer includes writing a "Selling Memorandum"

(a detailed sales document) and then contacting potential strategic or financial buyers.

If the client hopes to sell a high tech factory, for instance, then the investment bank will contact firms in the same industry, as well as "buyout" firms that focus on purchasing technology or high-tech manufacturing operations.

In advising sellers, the investment bank's work is complete once another party purchases the business up for sale (i.e. once another party buys the client's company or assets).

However, representing a buyer is not always as straight forward.

The advisory work itself is simple enough: the investment bank contacts the firm their client wishes to purchase, attempts to structure an acceptable offer for all parties, and make the deal a reality.

However, many of these proposals do not work out; few firms or owners are willing to readily sell their business. Because the investment banks primarily collect fees based on completed transactions, their work often goes unpaid.

Consequently, when advising clients looking to buy a business, an investment bank's work often drags on for months.

In many cases a firm will, therefore, pay a non-refundable retainer fee to hire an investment bank and say, "find us a target company to buy." These acquisition searches can also last for months and produce nothing except associate and analyst fatigue as they repeatedly build merger models and work through the night.

However, these types of deals are still very attractive to investment banks because when the deals do "get done" the fees that are generated can be enormous.

Typical fees depend on the size of the deal, but generally fall in the 1 percent range. A $500 million deal, would in effect result in an investment bank taking home $5 million in fees.

Of course, buying a company will require funds; indeed as we have read in the section on Capital Structuring any type of company investment requires cash.

One of the options available to a company wishing to raise funds, as we know, is to sell shares in itself or raise debt financing. The investment banks can, yet again, play a role in making this happen.

New Issues (Debt And Equity)New Issues of securities may be used by a business to raise funds. They typically fall into two main types, those being debt and equity.

Debt covers offerings of securities which must be repaid by the company.

A bond is, put simply, a lending agreement between the bond issuer (in this case the company) and the lender (i.e. the person who ‘buys’ the bond).

A bond is just like a loan in that the bond issuer will pay back the price of the bond (i.e. the amount of money borrowed) at the end of an agreed fixed period of time (say 10 years). Also, like a loan, the bond will yield an amount of interest over that period. The rate of interest and the way in which that interest will be paid is set when the bond is first issued. The rate of interest is used to attract investors and is usually set higher than other, more traditional saving rates – such as those that a bank would offer.

Bonds can also be exchanged amongst lenders and are traded on the financial markets. As you will appreciate, a bond that has a high rate of interest is more popular in an economy that has low interest rates and is less popular when that economy has interest rates that are high.

The other way in which a company can raise money is through the use of its equity. Unlike debt, this does not involve the borrowing of funds from lenders.

Equity is where a company raises funds by selling shares in itself. The shareholders exchange funds for a stake in the company and become part owners. They do not expect those funds to be repaid, as a loan would be, rather they are “banking” on the company being successful and that their investment (i.e. the shares) will provide a profit by growing in value.

However this success, and hence profit, is not guaranteed.

A shareholder is not a lender but rather an investor in a company. Unlike secured lending, (where the money lent is secured by assets of an equal value) holding shares in a company does not guarantee the holder anything. It can be a risky business because not all companies do well and so the value of shares can go down as well as up. In other words, as a shareholder, you could lose all or part of the money that you have invested in shares.

A company that is issuing shares becomes answerable to those shareholders. For example, if the company managers are not operating to the shareholders liking then they can sell those shares or, if they have a big enough stock of shares, they can get those managers replaced with people more to their own choosing.

The price of the shares is normally a good indicator of how a business is being managed. If the share price is going up the signs are good, however if the price is dropping it could mean that the company is in trouble. Along with the price many shares will also pay a dividend – this is in simplistic terms a share of the profit that the company has made. Many people hold shares for the income that the dividends yield. Again a high dividend is a good indicator that the company is doing well.

How the value of shares will change is really dependant on basic economics. There are only a finite number of shares (in other words the company, like a cake, can only be divided up so many times). If the shares are popular – i.e. that company is expected to, or is doing, well then a lot of investors will want to buy those shares.

However, the people who already own the shares will not be in a hurry to sell them because, just as the potential investors have noticed, all the indicators are indicating that their shares will increase in value.

Therefore, there would be a lot of demand and very little supply. This lack of supply will drive up the price of the shares. People will be willing to pay more for them because they believe they are worth it

and if the price goes high enough, then some of those people holding the shares will be willing to sell.

Likewise the opposite can be true and if the indicators are not good for a company then there may be more sellers than there are buyers. This lack of demand will cause the price to fall, until the price is attractive enough to pull in more buyers.

Shares are usually sold via stock markets. A market in which the majority of share prices are rising is known as a bull market. When the opposite is true, and the majority of share prices are falling, it is called a bear market

Companies are most interested in the scope for new issues, be they debt or equity, when they have a requirement to raise funds for normal business activities, major new investments or M&A transactions.

However, they may also consider taking advantage of attractive conditions in the financial markets to make an issue at a time when they have not earmarked the funds for new investment.

This is particularly true of the debt markets (where a company is raising funds) when timing can be critical to obtaining attractive terms. For example, it may be a good time to issue bonds when the economy’s interest rates are low because the cost of that debt over the long term will be less than if a company were to try and sell bonds in an economy that has high interest rates.

As we know, the new issue will either be equity or debt based and, thus, within investment banks, you normally have two areas of expertise. Namely, those that focus on the debt capital markets (DCM) and those that focus on the equity capital markets (ECM).

In both markets an investment bank and its expertise is critical.

Not only can an investment bank determine the best price for new issues, be they equity or debt, by valuing the company and examining the market, but they can also find buyers for those new issues.

Those buyers are found either in the public or private domain. Issues sold in the public domain (i.e. direct to anyone in the public via the markets) are known as public offerings or underwriting, while those sold to private investors are known as private placements.

Firms wishing to raise capital often discover that they are unable to go public for a number of reasons. The company may not be big enough; the markets may not have an appetite for their issues or the company may simply prefer not to have its stock be publicly traded.

Such firms with solidly growing businesses make excellent private placement candidates. Private placements, then, are usually the province of small companies aiming ultimately to go public. The process of raising private equity, or debt, changes only slightly from a public deal.

Often, one firm will be the sole investor in a private placement. In other words, if a company sells stock through a private placement, usually only one firm or a small number of firms will buy the stock offered.

Conversely, in a public offering, shares of stock fall into the hands of literally thousands of buyers immediately after the deal is completed.

From an M&A point of view, a private placement is thus similar to a merger because it usually involves an institution (rather than numerous public investors) acquiring a stake (assets) in a company.

Indeed the investment banker's work involved in a private placement is quite similar to sell-side M&A representation. The bankers attempt to find a buyer by writing the Private Placement Memorandum and then contacting potential strategic or financial buyers of the client.

Because private placements involve selling equity and debt to a single buyer or a small number of buyers, the investor(s) and the seller (the company) typically negotiate the terms of the deal. Investment bankers function as negotiators for the company, helping to convince the investor(s) of the value of the firm.

Fees involved in private placements, like those in public offerings, are usually a fixed percentage of the size of the transaction. (Of course, as with all sell-side transactions, the payment of the fees depends on whether the deal is completed or not.)

Financial EngineeringCompanies are interested in innovative “first ever” products. These products are tailored to meet certain needs and are thus more attractive to both the clients concerned and the potential investors required.

Many investment banks, therefore, obtain a competitive edge through constant product innovations. In other words they attract business by developing new products that best match the needs of their clients and investors.

Many investment banks will thus commit additional resources to this activity.

They will have a “financial engineering” or “structured products” group that is dedicated to creating solutions for a number of different client needs.

As well as creating solutions to individual client needs, these teams will also look at developing new structures for executing a transaction / deal as well as how best to cross sell in-house products and expertise.

SummaryToday’s investment bank needs to be a client driven organization. It must be able to tailor its expertise and product offerings so that it can best meet and accomplish the financial and investment needs of the client.

A term that is often used to describe the level of service offered by an investment bank to a client is “Trusted Advisor”.

An investment bank also needs to provide a wide range of product and service offerings while

maintaining an in-depth sector and regional expertise. This combination will allow an investment bank to establish strong long–term relationships with its clients, relationships that are, in terms of usage and fees, both broad and deep.

Investment BankingReference Charts

Investment Bank Organization

Provide financial products and services

Debt & Equity

Distribution and execution arm of the bank

Products to investors

Manage risk and exposure

Principal positions

Institutional and retail client transactions

Investment Banking Sales & Trading

Investment Bank Organization

Provide financial products and services

M&A transactions, including advisory services for takeovers, defense and restructuring

Distribution and execution arm of the bank

Products to investors

Manage risk and exposure

Institutional and retail client transactions

Investment Banking Sales & Trading

Investment Bank Organization

Provide financial products and services

Debt & Equity

Distribution and execution arm of the bank

Products to investors

Manage risk and exposure

Principal positions

Institutional and retail client transactions

Investment Banking Sales & Trading

Investment Bank Organization

Provide financial products and services

M&A transactions, including advisory services for takeovers, defense and restructuring

Distribution and execution arm of the bank

Products to investors

Manage risk and exposure

Institutional and retail client transactions

Investment Banking Sales & Trading

Structure of an Investment Bank -Conduit to the Corporate Client

CLIENTCLIENT

INVESTMENT BANKINGINVESTMENT BANKING

COVERAGE COVERAGE GROUPSGROUPS

PRODUCT PRODUCT GROUPSGROUPS

CAPITAL MARKETSCAPITAL MARKETS

Bank LoansBank Loans

Inv. Grade DebtInv. Grade Debt

High YieldHigh Yield

EquityEquity

SALES & SALES & TRADINGTRADING

RESEARCHRESEARCH

“Ch

inese W

all”

Products and Services

Balance Sheet Management

Hedging

Share and Debt Repurchases

Debt Exchanges

Consent Solicitations

Capital Raising Equity

Investment Grade Debt

High Yield Debt

Syndicated Loans

Bridge Commitments

Advisory M&A

Restructuring

Financial Strategy

An investment bank provides numerous corporate finance functions.

IBD Overview

Global Industrials Group

Franchises / Sectors

Financial Institutions Group Banks and Financial

Services

Student Loans

Insurance and Asset Management

Electronic Financial Services

FIG M&A

FIG Latin America

Consumer & Healthcare Biotechnology

Medical Technology

Large Cap Pharmaceuticals

Consumer Products

Retail

Specialty Pharmaceuticals

Hospitals & Services

Managed Care

Homebuilding &Building Products

Real Estate / Lodging

Automotive

Basic Industries

Defense &Aerospace

Diversified Industrials

Multi-Sector

Transportation

Technology, Media & Telecom

Financial Entrepreneurs Group

Sponsor Coverage

Private Placement Directs

Funds Raising

Energy, Power & Chemicals

Technology

Media

Telecom

Energy

Power

Chemicals

CAREER PATH

First Year Analyst Second Year Analyst Third Year Analyst First Year Associate Second Year Associate Third Year Associate Assistant Vice President 2-4 Years Vice President 3-6 years Associate Director 3-8 years Director / Principal 5-10 years Managing Director / Partner 7-10 years

Investment BankingA Glossary of Terms

Glossary of TermsABANDONMENT COSTS - The costs involved in withdrawing from a project.

ACQUISITION – A joining of two or more corporations in which one company takes control of the other. Generally, the newly formed company will retain the name of the acquirer and with few exceptions, the management team of the acquirer will survive. Two types of acquisitions are: hostile takeover and friendly takeover.

ANNUITY - A series of equal, periodic cash flows.

ARBITRAGEUR - A market participant who earns low risk profits by buying a financial instrument in one market and selling it simultaneously in another, taking advantage of the price difference.

Buying at the Chicago Board of Trade (CBOT)/Selling at the New York Mercantile Exchange (NYMEX).

ASSET MANAGEMENT - The business of managing institutional clients’ money for them. Asset managers generally have a stated risk initiative and use a variety of investment options (stocks, bonds, options, forwards, futures, swaps…) to achieve their goals.

ASSET STRIPPING - The disposal of a target company’s assets by the raider following the acquisition. Asset stripping can occur as part of a corporate turnaround strategy or harmonization of activities between the two groups. Asset stripping also occurs when the raider’s projections indicate that the proceeds realized by the sale of various components of the group will be in excess of the price paid to acquire the target. This often can be the rationale of a takeover. Asset stripping often results in considerable loss of jobs.

AUTHORIZED SHARE CAPITAL - The maximum share capital a company can issue, as authorized by its shareholders.

BALANCE SHEET - A statement, generated at a specific point in time, which reflects all of a company’s assets and liabilities and lists the sources of funding for each item. Funding can come from either debt or equity.

Assets - All of a company’s possessions including, but not limited to property, cash, equipment and financial investments

Debt - Money borrowed through loans or the sale of bonds

Equity - Money borrowed through the sale of stocks

BEARER BOND - A bond whose title (ownership) belongs to the person holding it.

BEST EFFORTS - A type of underwriting agreement in which the underwriter attempts to sell as much of the new issue as possible, with the understanding that the unsold portion may be returned to

the issuer for a full refund.

BID-ASK SPREAD - The difference between the highest price a trader is willing to pay for a stock and the lowest price the trader is willing to accept for selling the same stock.

BIG BANG - The deregulation of the UK stock market in October 1986.

BLUE SKY LAWS - Laws that have been enacted to prevent securities fraud. These laws, which vary from state to state, require issuers to provide detailed financial information on all newly issued securities so that investors may make educated decisions based on factual data.

BOND - A debt instrument issued by a corporation or government office. Generally, the issuer agrees to pay the creditor, or bondholder, a predetermined interest rate for a specified length of time and promises to repay the bond in full on the maturity date. After issuance, bonds are typically traded in the Secondary Market.

BOOK RUNNER - An Investment Bank which polls potential investors to get an indication of the demand for a new stock prior to an issuance. Book runners may also help the issuer decide what price to issue the stock at.

BOOK VALUE - The value of an asset as it appears on the balance sheet

BROKER - Registered representative who earns a commission for executing trades on behalf of buyers and sellers in the marketplace (a.k.a. Financial Consultant).

BROKER-DEALER - Firms or individuals that trade for their own account, as well as on behalf of investors.

CAPITAL STRUCTURE - Mix of different securities (shares and debt) issued by a firm.

CAPITAL BUDGET - Financial plan for investment projects.

CENTRAL BANK - The principal bank of a country whose primary functions include printing money, regulating the money supply, controlling interest rates and handling the government’s borrowing needs. (Examples: the U.S. Treasury in America, the Bank of England in England, the Bundesbank in Germany and the Ministry of Finance (MOF) in Japan).

CHINESE WALL - The legal barrier that exists to prevent the flow of non-public information from the Investment Banking side of a firm to the Sales and Trading side. Violation of this divide is termed Insider Trading and is punishable by fine, jail sentence, or most commonly, suspension.

CITY CODE ON TAKE-OVERS AND MERGERS - A code of practice drawn up by the Panel on Take-overs and Mergers in the UK to control the activities of all parties in a take-over bid involving a listed company. The code does not have the force of law but the stock exchange has a clause binding companies to abide by the code written into its listing agreement.

CLEARING HOUSE - The organization responsible for comparing the trade details submitted by both parties involved in a transaction. If the details match, the trade is settled and if not, the

parties must follow procedures for clarifying discrepancies. Clearing houses are usually part of an exchange and confirm all trades executed at that exchange.

COMMERCIAL PAPER - Unsecured debt typically maturing in less than a year.

COMMODITIES - Tangible goods which may be physically delivered following settlement. Commodities are traded at specialized commodities exchanges and are typically one of three principal types: food products (live cattle, pork bellies, orange juice), grains (wheat, corn, soy), and metals (gold, silver, platinum).

COMPLIANCE - Self-policing by securities firms to ensure that all applicable rules are being obeyed. Compliance officers within firms act as “internal deputies” to the outside regulatory authorities.

CONFIRMATION - A physical or electronic document which confirms the trade details, including: stock traded, buying price, selling price, quantity and settlement date. Two types of confirmations are sent following each transaction: client confirmations and counterparty confirmations.

CLIENT CONFIRMATION - The document sent by the broker to the client, the investor, to confirm that the trade has been executed as requested.

COUNTERPARTY CONFIRMATION - The document sent from one party of a transaction to the other, to confirm that the trade has been executed as agreed upon.

CONVERTIBLE BOND - A financial instrument which is purchased as a bond, but may be exchanged for the company’s stock at the bond holders discretion. Conversion rates are pre-specified. Most U.S. Corporate Bonds are convertible bonds.

COST OF CAPITAL – Average minimum rate of return holders of debt and equity expect on their investment in the firm.

COST OF DEBT - The rate of interest required by Debt holders.

COST OF EQUITY - Minimum rate of return shareholders expect on their investment in an all-equity financed firm.

COUNTER ACCUMULATION - A target’s purchase of raider’s shares on the open market.

COUNTER TENDER OFFER - A tender offer by a target for some portion of the shares of a company, which is simultaneously trying to acquire it.

COVENANTS - Conditions in a loan agreement signed by the bank and the borrower, which the borrower must respect.

DEALER - A professional who executes trades on his own behalf, receiving profits and assuming risk by buying at a low price and selling at a high price. Dealers hold their securities in the firm’s inventory.

DELIST - The process by which a company requests permission from the exchange where their stocks are traded, to cease trading of their stocks at that exchange. Following a delisting, a company may decide to trade their stocks in the OTC market or to take them out of circulation and hold them privately.

DEPOSITORY - The institution which holds, in either electronic or physical form, the securities which are traded among market participants and records ownership of individual stocks.

DERIVATIVES - Any financial instrument whose value is determined by the price of another instrument or commodity. (Example: The value of a pork belly future is calculated based on the price of pork bellies in the market today).

DISCLOSURE - The concept of disclosure is based on the view that the more information is required to be made publicly available, the harder it is for any company to be dishonest. Companies must for example disclose in their annual report and accounts the names of the directors and details of their shareholdings, important events affecting the company which have occurred since the end of the year etc.

DIVIDEND PER SHARE - Total amount paid out in dividends divided by the number of shares that the dividend is paid on.

DUE DILIGENCE - Responsibility of the underwriter of a new issue to thoroughly investigate the background and financial prospects of the issuer of a new stock. The underwriter is legally obligated by the Securities Act of 1933 to disclose any findings that could potentially threaten or impact the issuer’s future earnings capability.

EBIT - Earnings before interest and taxes.

EPS - Earnings per share, calculated by the firm’s total post-tax earnings divided by the number of shares outstanding.

EQUITY - A company’s share capital. It is permanently employed in the business and does not have to be repaid, unless the company is liquidated. The term is most commonly used to mean shareholders’ equity.

ESOP - Employee Stock Ownership Plan. Often, the target company’s ESOP is used to purchase its own securities when it is attacked by a hostile raider.

EUROBOND - A bond which, when issued, borrows eurocurrency.

EVENT OF DEFAULT - A covenant in a loan agreement, which the borrower failed to meet, enabling the bank to call the loan in for repayment.

EXCHANGE - A centralized public location where buyers and sellers of securities and commodities go to transact their trades.

FINANCIAL CONSULTANT (FC) - Registered representative who earns a commission for executing trades on behalf of buyers and sellers in the marketplace (a.k.a. Broker).

FINANCIAL RISK - The additional risk that a firm’s equity holders face because of the amount of debt in the firm’s capital structure.

FIRM COMMITMENT - An understanding that the underwriter will assume financial responsibility for any part of the new issue which they are not able to sell during the issuance.

FLOTATION - The process by which companies obtain a public quotation. In the US, this is called an initial public offering.

FORWARD CONTRACT - One type of derivative, defined as an agreement to buy or sell a predetermined amount of a security or commodity in the future at a price agreed upon today, despite interim market fluctuations. Forward contracts are entered into in the OTC market, they are not executed at an exchange. (Example: A cattle farmer agrees to sell 65 cows to a deli on March 20, 1999 for a price of $100 each.)

FREE CASH FLOW - The amount of a firm’s operating cash flow that is not required to fund the ongoing operations of the firm and can be used at management’s discretion.

FRIENDLY TAKEOVER - A type of acquisition in which the management of the target company agrees to be taken over by the acquirer.

FUND MANAGER - The person responsible for investing a large pool of money contributed by multiple investors. Fund managers are generally guided by the objectives of the fund (Example: high risk/high yield, low risk/slow growth.)

FUTURES CONTRACT - A forward contract entered into at an exchange and regulated by the guidelines of that exchange (Example: quality, quantity and settlement date are all standardized in a futures contract.) Futures contracts are more common than forward contracts.

FUTURE VALUE (V) - The value of an investment at the end of a specified time period after interest has been earned and added to the initial investment.

GEARING - The relationship of borrowing funds to shareholders funds of a company. The higher the proportion of borrowed funds to shareholders funds, the higher the gearing. (Sometimes referred to as Financial Leverage.)

GREENSHOE - A type of underwriting agreement in which the underwriter reserves the right to request that the issuing company put additional shares of their stock into circulation. Utilized if demand for the newly issued stock is greater than the amount the issuer intended to supply.

GROSS SPREAD - The monetary difference between the low price at which an underwriter buys issuance stocks from an issuer and the higher price at which they sell those stocks in the marketplace.

HEDGER - A market participant who uses a financial instrument to reduce price risk. (Example: A pig farmer can enter into a forward agreement to sell his pigs at $100 each in three weeks, this protects, or hedges, him against the possibility of losing money if the price of pigs falls in the market.)

HOSTILE TAKEOVER - a type of acquisition in which the acquirer takes over controlling power of another company despite the objections of the target company. The following terms are types of defenses that target companies may deploy in order to protect themselves against a hostile takeover:

Poison Pills – A redeemable legal right granted to a targets’ shareholders that allows them to buy more stock cheaper. It makes a takeover too expensive for a hostile party.

Golden Parachute - The method by which executives of the target company write themselves severance packages so large that it would negatively impact the financials of the company if they were acquired and the executives were dismissed.

Recap - The method by which the target company strives to increase its debt by taking on loans and issuing bonds, making themselves financially unappealing

Scorched Earth - The method by which the target company sells off its most profitable assets, taking away the acquirer’s incentive.

White Knight - The method by which the target company locates and secures a friendly company to acquire them, eliminating the threat of being taken over by a hostile party.

HOSTILE TENDER OFFER - A tender offer that the target company’s board has decided is unfriendly.

INITIAL PUBLIC OFFERING - (IPO) the first time a company offers its stock to the public. Prior to the IPO, a company that does not offer shares to the investing public is referred to as a privately held company.

INTRODUCTION - A method of listing shares on a stock exchange for the first time, when the shares are already quite widely held by shareholders other than directors and no new money is being raised either by the company itself or by the directors from sales of their shareholdings. The two main purposes are to:

(i) Provide a wider market for the shares.

(ii) Enhance value by becoming listed.

INVESTOR - An individual (a.k.a. Retail) or corporation (a.k.a. Institutional) which uses its existing capital to purchase a security in order to earn additional money in the long term.

INVESTOR/CREDITOR COMMUNITY - Entities, which provide funds to companies. Investors buy shares in the company (Equity), while Creditors lend money to companies (Debt).

ISSUANCE - When a company enters its own stocks or bonds into circulation through an underwriting syndicate.

ISSUER - The company which puts its stocks or bonds into the marketplace.

LEAD MANAGER - the Investment Bank chosen by the issuer to head up the Underwriting Syndicate. They are generally responsible for selling the greatest number of shares during an Issuance. The Lead Manager also has the most direct contact and interaction with the issuer and plays

an integral role in the decision making process surrounding the issuance.

LEVERAGED BUYOUT (LBO) - Occurs when an individual or corporation intends to takeover a target company but doesn’t possess the necessary funds. The acquirer attempts to borrow the money through loans and by issuing bonds, frequently using the target company’s asset as collateral. This type of acquisition creates a large amount of debt on the balance sheet of the combined company, rendering the company highly leveraged.

LIQUIDITY - The ease with which buying and selling can take place in a market.

MANDATE - The contract by which the issuer grants a specific Investment Bank the right to be the lead manager on an issuance. The mandate also allows the Investment Bank to select the members of the Underwriting Syndicate and provides that Bank with the largest portion of the shares being issued for resale. It also places on them the responsibility of carrying out the required Due Diligence investigations on an Initial Public Offering.

MANAGEMENT BUYOUT - The purchase of a part of a large company by its managers. That part of the company is then established by the management as an independent company.

MARKET MAKER - A securities firm which declares that it will maintain shares of a particular stock in its inventory so that a buyer may deal directly with their company, as opposed to the original issuer. There may be multiple market makers for one security.

MERGER – A legal arrangement whereby all the shareholders of one company give up their shares in that company in exchange for stock of the acquirer or cash.

MORTGAGE BACKED SECURITY - A bond whose repayments to the investor are derived from the payment of interest and principal on a mortgage debt.

MUTUAL FUND - A type of investment vehicle in which investors purchase partial ownership in a collective pool of securities. The fund specifies a predetermined investment strategy, limiting their investments to specific types of investment vehicles (Example: automobile stocks, municipal bonds, technology stocks.) The return on a mutual fund is based on the returns yielded by its investments and is divided among the owners based on their percentage of ownership in the fund.

NASDAQ - National Association of Securities Dealers Automated Quotation System.

NET ASSET VALUE - Total net assets divided by the number of issued shares.

NET PRESENT VALUE - An investment’s contribution to creating wealth for the company (i.e. the discounting value of its future cash flows minus the initial cost of investment).

OFFER FOR SALE - The most common method of making a new issue of shares to investors. The shares are bought from the company by the issuing house and then sold to the investing public. The issue is usually fully underwritten (see underwritten).

OPEN OFFER (UK specific) - An offer to existing shareholders to apply for new shares in a company. There are no “rights” attached, and the amount raised must be less than 5% of the

company’s total equity capital.

OPTIMAL CAPITAL STRUCTURE - A capital structure at which a firm’s value is maximized.

OPTION - One type of derivative, there are two categories of options:

Call Option - The right to buy a security or commodity at a preset price and time in the future. These options yield a profit when the market price exceeds the price at which one may purchase the security or commodity.

A woman working for XYZ Corporation was given a stock option at the end of the year, which gave her the right to purchase one of XYZ Corporation’s stocks for $31 at any point during the next five years regardless of the selling price of the stock in the market.

Put Option - The right to sell a security or commodity at a preset price and time in the future. These options yield a profit when the market price is lower than the purchase price of the option.

A man purchases put options from ABC Corporation for $3 each which give him the right to sell his shares of ABC Corporation’s stocks for $82 at any point during the next seven years regardless of the selling price of the stock in the market.

OVER-THE-COUNTER - Any transactions involving previously issued securities which do not take place on an exchange are said to take place Over-The -Counter.

P/E RATIO - Price/earnings ratio. The company’s share price divided by its earnings per share.

PLACING - A method of making a new issue of shares to investors. The shares are placed with a group of large investing institutions rather than offered generally to the public.

PREFERENCE SHARES - Shares, which have a preferential right to receive a fixed dividend ahead of any ordinary shareholder.

PRIMARY MARKET - The first buyers of a security following an issuance are referred to as the primary market. Usually these are institutional investors. When the primary market resells these same securities, the new purchasers are said to be part of the secondary market.

PRIVATE PLACEMENTS - An issuance of stock that is not made available to the investing public; rather the shares are sold directly to a few sophisticated investors chosen by the issuer. Private placements do not involve an underwriter and are not required to be registered with the Securities & Exchange Commission (SEC).

PRIVATIZATION - 1) Occurs when a corporation decides to remove its previously issued stocks from circulation and offer them to a few selected investors or 2) The process of selling ownership in an asset which is privately owned by the government, thus turning it into a publicly held company.

PROSPECTUS - A marketing tool used by an Investment Bank during an issuance to make potential investors aware of the upcoming issuance and the details involved. The prospectus includes

the name of the company, the quantity of shares that will be available, the price of each share, the disclosure of any information uncovered in the Due Diligence investigations, specifics about the financials of the Issuer and a disclaimer stating that the issuance may not yet have been approved by the Securities Exchange Commission. The prospectus, once distributed to potential investors, is used to gauge public interest and demand.

PROXY CONTEST - An attempt by a shareholder or acquiring company to solicit the voting rights of another shareholder of the same stock. This technique is common during takeover attempts where the acquiring company can gain enough voting rights through proxy contest to change either the management or board of directors of the target company.

RATINGS - The assessment of a company’s financial standing by rating agencies (Moody’s, Standard & Poor’s).

REDEMPTION DATE - The date on which debt or redeemable shares can be redeemed.

RETAIL MARKET - Comprised of individual investors, as opposed to institutional clients.

RIGHTS ISSUE - An offering of newly issued stocks to existing shareholders before they become available to the public. Rights Issues are done on common stock to allow existing shareholders the opportunity to maintain their same percentage of company ownership and voting privileges following a new issue.

ROAD SHOW – A traveling sales effort by investment bankers and executives from the issuing company to promote a security which is about to be issued for the first time.

RISK PREMIUM - The additional compensation or return that an investor requires for taking on the risk of a specific investment.

SALESPERSON - A person specifically employed to approach either retail or institutional clients in an attempt to sell financial instruments based on what the salesperson knows of the company’s prospects and their clients’ needs coupled with their clients’ long term investment goals.

SCRIP ISSUE - The issue of shares, free of charge, by a company to its shareholders in proportion to their existing holdings, also known as a Capitalization Issue, Free Issue or a Bonus Issue. The purpose of a scrip issue is to bring the share capital of a company more into line with its business needs and to reduce the price of each share while increasing the number available in order to make the shares more marketable.

SECONDARY MARKET - When the primary market resells securities, the new purchasers are said to be part of the secondary market.

SECURITIES & EXCHANGE COMMISSION (SEC) - The United States regulatory body that was created to protect investors from securities market violations. All stocks must obtain SEC approval before they are made available to the general public.

SELF-TENDER - A tender offer by a company for its own shares. The purpose of the self-tender is to reduce the number of free-floating shares on the market, which are available to a potential raider.

SETTLEMENT DATE - Following a transaction on trade date (T), the date upon which securities and form of payment (frequently cash) actually change ownership. Prior to settlement, the trade must be confirmed by both parties. For United States equities, settlement date is trade date plus three days (T+3).

SHARE SPLIT - The issuing of an additional number of shares for every share already held in order to increase the number of shares of a company. This does not increase the capital of the company or involve a cash payment. There is a reduction in the nominal value of the shares. For example, under a 4 for 1 share split, a holder of A $1 or £1 share would become a holder of four 25¢ or 25p shares.

SPECULATOR - A market participant who tries to profit by anticipating market price movements. Speculators assume a great deal of risk since their actions are based largely on conjecture and instinct.

SPECIALIST - An employee of an Investment Bank who is approved by the New York Stock Exchange (NYSE) to physically work at the exchange in a very specific capacity. The Specialist’s primary function is to remove any temporary excess in supply or demand for a stock. To insure this, specialists will buy stocks when there are no buyers for a particular stock and sell stocks when there are no sellers for a particular stock, minimizing extreme fluctuations in stock price.

SPLIT - A device used when share price has risen to the point that makes the stock unattainable to the average investor. A company will divide each one of their stocks into two, halving the value and making twice as many shares available to the public.

SPONSOR - The issuing house, stockbroker or investment bank that brings a company to the market.

STABILIZING BID - A type of underwriting agreement in which the Lead Manager guarantees investors that they, the Lead Manager, will re-purchase newly issued stocks for a certain period of time, at a fixed price. This tactic protects investors from possible decreases in share price, allowing them to gain confidence and encouraging them to buy the shares.

STANDBY UNDERWRITING - An agreement in which the underwriter commits to purchasing any unsold shares resulting from a rights issue, in which current shareholders are given the opportunity to buy any newly issued stocks before they are made available to the general public.

STOCK - Also known as shares or equities, stock signifies partial ownership of a corporation. Such securities entitle the shareholder to dividends, or a percentage of the company’s annual net earnings and may provide additional privileges, such as the right to vote. Two basic types of stock are common and preferred.

SUNK COSTS - Costs of a project that have been incurred and cannot be reversed and which should, therefore, be ignored in assessing the present value of the project.

SWAP - One type of derivative that is an agreement whereby two parties agree to exchange one series of payments for another for a predetermined period of time

Investor A agrees to pay Investor B a fixed price of $11 per barrel of oil each month for a period of two years. In return, Investor B agrees to pay Investor A the current market price per barrel of oil each month for a period of two years. Investor A will benefit from this scenario if oil prices in the market rise, whereas Investor B will benefit if oil prices in the market drop. NOTE: In this exchange, no physical oil is traded, the investors are only exchanging the price of oil.

TOMBSTONE – An official notice put in the newspaper by the underwriters of a new issue. The tombstone provides basic details about the issuance, lists the underwriters, in order of the importance of their role, and makes the public aware that the complete prospectus is available for review. The tombstone clearly states that it is not an ad to buy or sell, it is simply a notification that an issuance has occurred.

TRADE DATE - The actual day on which two parties enter into a trade agreement.

TRADER - A person employed by a Securities firm who executes trades on behalf of the firm’s brokers and clients. The trader’s goal is to buy securities at a low price and sell them at a high price, yielding profit from that price spread (a.k.a. the trading spread).

TREASURIES - Bonds issued by the United States Treasury in order to borrow money used to fund the government. Common types of treasuries are: Treasury Bills (T-Bills), Treasury Notes (T-Notes) and Treasury Bonds (T-Bonds).

UNDERWRITER - An institution that agrees to purchase the remaining balance of an issue of securities if investor demand is insufficient to take up the whole issue.

UNDERWRITING - Purchasing newly issued securities from the Issuer. The lead manager and other members of the underwriting syndicate are usually responsible for purchasing the entire issuance for resale in the market.

UNDERWRITING SYNDICATE - A group of investment banks chosen by the lead manager to help purchase the securities from the issuer. Each bank in the underwriting syndicate is responsible for selling a predetermined number of securities during the issuance.

VENTURE CAPITAL - The provision of finance to companies in the early stages of development, in the form of either loans or equity.

Resources and Guides:LINKS:

http://www.vault.com/hubs/501/channelhome_501.jsp?ch_id=240

http://www.vault.com/nr/newsmain.jsp?nr_page=3&ch_id=240&article_id=16012633

http://en.wikipedia.org/wiki/Investment_bank

http://en.wikipedia.org/wiki/Citigroup (Sorry guys, have to do some marketing for my beloved organisation)

INDIAN INVESTMENT BANKING:

http://www.businessworldindia.com/mar0804/indepth01.asp

http://www.financialexpress.com/latest_full_story.php?content_id=110921?headline=Merrill~Lynch~to~buyout~Kothari

http://economictimes.indiatimes.com/articleshow/1444722.cms

MUST READ BLOGS

http://dealbook.blogs.nytimes.com/

MUST READ BOOKS

Monkey Business: http://www.amazon.com/exec/obidos/ASIN/0446676950/ref=pd_sxp_elt_l1/104-6454371-4003155

Liar’s Poker: http://www.amazon.com/exec/obidos/ASIN/0140143459/ref=pd_sxp_elt_l1/104-6454371-4003155 (definite read)

Careers in Investment Banking: http://www.amazon.com/gp/product/1582075344/ref=pd_sxp_elt_l1/104-6454371-4003155?n=283155