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Financial Markets (in brief)
Transcript of Financial Markets (in brief)
Investment Banks are middlemen between a company that wants to issue new securities and the buying public.
The investment bank determines the value and riskiness of the business in order to price, underwrite, and then sell the
What They Do
M&A bankers are some of the highest paid and highest profile bankers in the industry.
Sales & Trading and Equity Research
UBS AG is a Swiss global financial services company that is headquartered in Switzerland.
The company provides investment banking, asset management, and wealth management services for private, corporate, and institutional clients worldwide.
UBS is the biggest bank in Switzerland, operating in more than 50 countries with about 63,500 employees globally, as of 2012. It is considered the world's largest manager of private wealth assets; with over CHF 2.2 trillion in invested assets, a leading provider of retail banking and commercial banking services in Switzerland
Institutional investors such as pension funds, mutual funds, university endowments, as well as hedge funds use investment banks in order to trade securities.
In addition, the sales & trading arm at an investment bank facilitates the trading of securities underwritten by the bank into the secondary market. Revisiting our Gillette example, once the new securities are priced and underwritten, JP Morgan has to find buyers for the newly issued shares. Remember, JP Morgan has guaranteed to Gillette the price and quantity of the new shares issued, so JP Morgan better be confident that they can sell these shares.
The average junior investment banker salary is ...
The average senior investment banker salary is...
Not including Bonuses
They oversee positions in various sectors and buy and sell securities to improve those positions.
Traders are the final link in the chain, buying and selling securities on behalf of these institutional clients and for their own firm in anticipation of changing market conditions and upon any customer request.
1. Traditionally, investment banks have attracted equity trading business from institutional investors by providing them with access to equity research analysts and the potential of being first in line for “hot” IPO shares that the investment bank underwrote.
2. As such, research has traditionally been an essential supporting function to equity sales and trading (and represents a significant cost of the sales & trading business).
Stock & Shares
When an investment bank underwrites stock or bond issues, it also ensures that the buying public – primarily institutional investors, such as mutual funds or pension funds, commit to purchasing the issue of stocks or bonds before it actually hits the market.
In practice, several investment banks will buy the new issue of securities from the issuing company for a negotiated price and promotes the securities to investors in a process called a roadshow.
The company walks away with this new supply of capital, while the investment banks form a syndicate (group of banks) and resell the issue to their customer base (mainly institutional investors) and the investing public.
As a result of much corporate consolidation throughout the 1990’s M&A advisory became an increasingly profitable line of business for investment banks.
2008 - 09
In any event, M&A will likely to continue being an important focus for investment banks.
The scope of the M&A advisory services offered by investment banks usually relates to various aspects of the acquisition and sale of companies and assets such as business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation.
Gillette wants to raise some money for a new project. One option is to issue more stock. They’ll go to an investment bank like JPMorgan, which will price the new shares. JPMorgan will then underwrite the offering, meaning it guarantees that Gillette receives proceeds at
Sample Merger Process
Week 1-4: Strategic Assessment of Possible Transaction
The Investment Bank will identify potential merger partners and confidentially contact them to discuss the transaction. As potential partners respond, the Investment Bank will meet with potential partners to determine if transaction makes sense. Follow-up management meetings with serious potential partners to establish terms.
Weeks 5-6: Negotiation and Documentation
Negotiate Definitive Merger and Reorganization Agreement
Negotiate Pro Forma Composition of Board of Directors and Management
Negotiate Employment Agreements, as required
Ensure Transaction Meets Requirements for a Tax-Free Reorganization
Prepare Legal Documentation Reflecting Results of Negotiations.
Sample Merger Process
Week 21: Shareholder Approval
Both companies hold Shareholder Meeting to approve transaction.
Sample Merger Process
Week 7: Board of Directors Approval
The Client’s and Merger Partner’s Board of Directors Meet to approve the transaction, while the Investment Bank (and the investment bank advising the Merger Partner) both deliver a Fairness Opinion attesting to the “fairness” of the transaction (i.e., nobody overpaid or underpaid, the deal is fair). All definitive agreements are signed.
Weeks 22-24: Closing
Close merger and reorganization and Effect share issuance.
UBS Trading Floor
We will not REST...
Investment banks match up buyers and sellers as well as buy and sell securities out of their own account to facilitate the trading of securities, thus making a market in the particular security which provides liquidity and prices for investors. In return for these services, investment banks charge commission fees.
The sales and trading function at an investment bank exists in part for that very purpose. Sell the guaranteed securities.
The investment bank’s institutional sales force is in place to build relationships with buyers in order to convince them to buy these securities (Sales) and to efficiently execute the trades (Trading).
A firm’s sales force is responsible for conveying information about particular securities to institutional investors.
So, for example, when a stock is moving unexpectedly, or when a company makes an earnings announcement, the investment bank’s sales force communicates these developments to the portfolio managers (“PM”) covering that particular stock on the “buy-side” (the institutional investor).
The sales force also are in constant communication with the firm’s traders and research analysts to provide timely, relevant market information and liquidity to the firm’s clients.
What is M&A
When an investment bank takes on the role of an advisor to a potential seller (target), this is called a sell-side engagement.
When an investment bank acts as an advisor to the buyer (acquirer), this is called a buy-side assignment.
Trading responsibilities include: position trading, risk management, sector analysis & capital management.
Traders trade with other traders at commercial banks, investment banks and large institutional investors.
Other services include advising clients on joint ventures, hostile takeovers, buyouts, and takeover defense.
When investment banks advise a buyer (acquirer) on a potential acquisition, they also often help to perform what’s called due diligence to minimize risk and exposure to an acquiring company, and focuses on a
target’s true financial picture.
Due diligence basically involves gathering, analyzing and interpreting the target’s financial information, analyzing historical and projected financial results, evaluating potential synergies and assessing operations to identify opportunities and areas of concern.
Retail and Commercial Banking
From 1932 until 1999 there was a law called The Glass-Steagall Act, which said that commercial banks can lend money, extend lines of credit, and open checking and savings accounts, while investment banks can underwrite securities, advice on M&A, and provide institutional brokerage services.
The Glass Stegall Act, commercial banks and investment banks had to limit their respective activities to that which traditionally fell under those respective labels.
Late 1999 saw the repeal of the Depression-era Glass-Steagall Act, marking the deregulation of the financial services industry. This now allowed commercial banks, investment banks, insurers, and securities brokerages to offer one another’s services.
As such, many investment banks now offer retail brokerage (retail meaning the customers are individual investors rather than institutional investors) as well as commercial lending.
For example, today you can open a checking account with JP Morgan via its Chase brand, while JP Morgan offers investment banking services and asset management. Until 1999, one financial institution providing all of these services under one roof was technically not allowed (although many post-enactment loopholes basically neutered the law long before 1999).
It is not an understatement to say that deregulation has transformed the financial services industry, with the repeal paving the way for mega-mergers and consolidation in the financial services industry.
In fact, many blame the repeal of the Glass-Steagall as a contributing factor to the financial crisis in 2008-9.
Prior to the great depression, investment banking was in its golden era, with the industry in a prolonged bull market. JP Morgan and National City Bank were the market leaders, often stepping in to influence and sustain the financial system. JP Morgan (the man) is personally credited with saving the country from a calamitous panic in 1907. Excess market speculation, especially by banks using Federal Reserve loans to bolster the markets, resulted in the market crash of 1929, sparking the great depression.
During the Great Depression, the nation’s banking system was in shambles, with 40% of banks either failing or forced to merge. The Glass-Steagall Act (or more specifically, the Bank Act of 1933) was enacted by the government with the intent of rehabilitating the banking industry by erecting a wall between commercial banking and investment banking. Additionally, the government sought to provide the separation between investment bankers and brokerage services in order to avoid the conflict of interest between the desire to win investment banking business and duty to provide fair and objective brokerage services (i.e., to prevent the temptation by an investment bank to knowingly peddle a client company’s overvalued securities to the investing public in order to ensure that the client company uses the investment bank for its future underwriting and advisory needs). The regulations against such behavior became known as the “Chinese Wall.”
In light of the repeal of negotiated rates in 1975, trading commissions collapsed and trading profitability declined. Research-focused boutiques were squeezed out and the trend of an integrated investment bank, providing sales, trading, research, and investment banking under one roof began to take root. In the late 70’s and early 80’s saw the rise of a number of financial products such as derivatives, high yield and structured products, which provided lucrative returns for investment banks. Also in the late 1970s, the facilitation of corporate mergers was being hailed as the last gold mine by investment bankers who assumed that Glass-Steagall would some day collapse and lead to a securities business overrun by commercial banks. Eventually, Glass-Steagall did crumble, but not until 1999. And the results weren’t nearly as disastrous as once speculated.
In the 1980s, investment bankers had shed their stodgy image. In its place was a reputation for power and flair, which was enhanced by a torrent of mega-deals during wildly prosperous times. The exploits of investment bankers lived large even in the popular media, where author Tom Wolfe in “Bonfire of the Vanities” and movie-maker Oliver Stone in “Wall Street” focused on investment banking for their social commentary.
Finally, as the 1990s wound down, an IPO boom dominated the perception of investment bankers. In 1999, an eye-popping 548 IPO deals were done – among the most ever in a single year — with most going public in the internet sector.
The enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the long-standing prohibitions on the mixing of banking with securities or insurance businesses under the Glass-Steagall Act and thus permitted “broad banking.”
Investment Banking After the
2008 Financial Crisis
Great Depression triggered in 2008
by multiple factors
Collapse of the Sub prime mortgage market
Poor Underwriting Practices
Overly Complex financial instruments
Dodd-Frank Act, July 21, 2010
The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010 at the Ronald Reagan Building in Washington, DC.
Passed as a response to the Great Recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.
Dodd-Frank Act, July 21, 2010
A bill that sought to improve the regulatory blind spots that contributed to the crisis, by increasing capital requirements as well as bringing hedge funds, private equity firms, and other investment firms considered to be part of a minimally regulated “shadow banking system.”
INVESTMENT BANKS LIKE GOLDMAN CONVERTED TO BHC's
“Pure” investment banks like Goldman Sachs and Morgan Stanley traditionally benefited from less government regulation and no capital requirement than their full service peers like UBS, Credit Suisse, and Citi.
During the financial crisis, however, the pure investment banks had to transform themselves to bank holding companies (BHC) to get government bailout money. The flip-side is that the BHC status now subjects them to the additional oversight.
Industry Prospects After the Crisis
Investment banking advisory fees in 2010 were $84 billion globally, the highest level since 2007, while 2011 saw a significant decline in fees.
Weeks 8-20: Shareholder Disclosure and Regulatory Filings
Both companies prepare and file appropriate documents (Registration Statement: S-4), Schedule Shareholder Meeting. Prepare filings in accordance with antitrust laws (HSR) and begin preparing integration plans
Many banks had near-death experiences in 2008 and 2009, and remain hobbled. 2011 saw much lower profitability for many of the largest financial institutions.
The term Ivy League has connotations of academic excellence, selectivity in admissions, and social elitism.
Top Global (Bulge Bracket) Investment Banks
Bank of America Merrill Lynch
Match up buyers and sellers buy and sell securities out of their own account
Facilitates trading of securities, thus providing liquidity and prices for investors.
In return for these services, investment banks charge commission fees.
Investment Banking Career Paths
Associate (glorified grunt)
VP (account manager)
Director (senior account manager rainmaker in training)
Managing Director (rainmaker)
If you are an undergraduate, you are applying to banks with the aim of landing an investment banking analyst position.
The Investment Banking Analyst
Investment banking analysts spend a lot of time putting together PowerPoint presentations called pitch books (browse online to know more about pitch book of IB).
These pitch books get printed in color and are bound with professional looking covers (usually in-house at the bulge brackets) for meetings with clients and prospective clients.
The process is very formatting intensive, attention to detail is critical, and many analysts find this part of the job to be the most mundane and frustrating.
The second task of an analyst is analytical work. Pretty much anything done in Excel is considered “analytical work.” Examples include entering historic company data from public documents, financial statement modeling, valuation, credit analysis, etc.
The third main task is administrative work. Such a task involves scheduling, setting up conference calls and meetings, making travel arrangements and keeping an up-to-date working group list of deal team members.
Lastly, if you are the sole analyst on the deal and it is sell-side (you’re advising a client on selling its business), you may have control of the virtual data room and will need to keep it organized so all parties of access to the information.
It is an interesting experience in that there are several data room providers and many times they will try to win business by offering free sports tickets, etc.
It gives you a chance to feel how your clients feel as you try to win their business.
The Investment Banking Associate
Investment banking associates are usually recruited directly out of MBA programs or analysts that have been promoted.
Typically, bankers will be at the associate level for three and a half years before they are promoted to Vice President.
Associates are also categorized into class years (i.e. First Year, Second Year and Third Year or say, Class of ‘05, ‘06 and ‘07). The number of years it takes for Associates to get promoted actually depends on the bank.
Sometimes it could be more than three and a half years if there is not a need for another Vice President.
At that point, an associate should evaluate whether it makes sense to stay at the bank or try to move elsewhere to receive a promotion.
The investment banking associate’s role is similar to the analyst’s role, with the additional responsibility of serving as a liaison between junior and senior bankers, and in some instances, to work directly with clients.
How Analysts and Associates Work Together
Analysts and associates work very closely together. Associates check the work of analysts and assign them tasks.
Checks could be in-depth where the Associate literally looks through models and checks inputs with filings or it could be much more high level where the Associate looks at an output and determines whether the numbers make sense.
The Senior Bankers (VPs and MDs)
Senior bankers primarily source deals and maintain relationships. Senior bankers have a wide variety of past backgrounds ranging from investment banking to corporate executive management.
Aside from relationships, senior bankers often understand their industry landscape at a very detailed level and can anticipate deals in the sector.
As economic environments shift, they anticipate when companies will need to raise capital or when strategic discussions (M&A, LBO) are necessary.
Typical Investment Banking: Analyst Day In The Life
9:30am – Arrive to work and check email and voicemail
10am – Continue working on a buy-side client presentation (“pitchbook”) from yesterday.Since you already finished with the “Public Market Overview” pages last night, you now begin inserting a graphical representation of possible exchange ratios.
11:25am – An associate calls to tell you that you have been staffed on another deal and you’ll need to put together a PIB (public information book) about the target.
12pm – You finish putting together the PIB and get back to work on the original pitch
1pm – You grab lunch with your friends at the cafeteria
1:45pm – Back at your desk, you open up a Merger Model you need to have done for another deal team by the end of the night. Since you pretty much finished the model last night, you’re now checking your work for bugs, mistakes, formatting, and analyzing various accretion/dilution results based on different scenarios (sensitivity analysis).
3:45pm – Your associate from the buy-side pitch calls and tells you that the VP wants to meet in a conference room to look at what we’ve got so far and discuss how to go forward.
4pm – You meet with the VP and your associate. The MD is traveling on another pitch so he’s conferenced in. Basically, since the 40% of the target company is owned by an investment company, their consent is vital for the success of the acquisition. As such, we need to put in a few pages on this investment company into the pitch so that our client (the potential acquirer) understands what he’s up against.
5pm – Back at your desk, you incorporate some of the changes into the pitchbook from your meeting. You include a profile on the investment company and a page on stock ownership.
7pm – You order dinner with your friends from a big book full of menus that everyone uses on the floor and eat it in an empty conference room.
8pm – Around 8:00pm things usually start to settle down and you can really start focusing on catching up on all the work ou were getting distracted from during the day.
10pm – Off to the gym for a quick workout.
11pm – Back in the office you pull up the merger model you were working on but had to stop because of the meeting in the afternoon. You’re putting the final finishing touches on it and send an email off to your associate letting him know it’s ready.
2am – Call a car and go home
Investment Banking Interview – What to Expect & How to Prep
Investment banking interview questions - Quite broadly, there are two types of investment banking interview questions –
Qualitative “soft” questions
Quantitative ”technical” questions
Many of the technical questions you get will be on basic accounting and valuation.
They will ask you questions on discounted cash flow analysis, intrinsic valuation vs. relative valuation, etc. Interviewers may also give you challenging brainteasers to see how you think about problems on the spot.
A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products.
Retail banking is when a bank executes transactions directly with consumers, rather than corporations or other banks.
Glass Steagall Act
Arrive to work and check email and voicemail
You grab lunch with your friends at the cafeteria
You finish putting together the PIB and get back to work on the original pitch
Continue working on a buy-side client presentation (“
”) from yesterday. Since you already finished with the “Public Market Overview” pages last night, you now begin inserting a graphical representation of possible exchange ratios.
An associate calls to tell you that you have been staffed on another deal and you’ll need to put together a PIB (public information book) about the target.
Your associate from the buy-side pitch calls and tells you that the VP wants to meet in a conference room to look at what we’ve got so far and discuss how to go forward.
You meet with the VP and your associate. The MD is traveling on another pitch so he’s conferenced in. Basically, since the 40% of the target company is owned by an investment company, their consent is vital for the success of the acquisition. As such, we need to put in a few pages on this investment company into the pitch so that our client (the potential acquirer) understands what he’s up against.
Back at your desk, you incorporate some of the changes into the pitchbook from your meeting. You include a profile on the investment company and a page on stock ownership.
Call a car and go home
Back at your desk, you open up a Merger Model you need to have done for another deal team by the end of the night. Since you pretty much finished the model last night, you’re now checking your work for bugs, mistakes, formatting, and analyzing various accretion/dilution results based on different scenarios (sensitivity analysis).
Around 8:00pm things usually start to settle down and you can really start focusing on catching up on all the work ou were getting distracted from during the day.
Off to the gym for a quick workout.
By anticipating such needs, Managing Directors can start crafting appropriate pitches early-on to clients with the aim of turning these pitches into live deals.
Assuming you do well, have an interest in staying, and there is a need, some banks offer direct promotions from analyst to associate instead of requiring that you go back and get your MBA (typically called “A to A”).
If you are an MBA student, you are applying to banks with the aim of landing an investment banking associate position and aspire to work up the ranks to Managing Director one day.
An introductory glimpse through
You order dinner with your friends from a big book full of menus that everyone uses on the floor and eat it in an empty conference room.
Back in the office you pull up the merger model you were working on but had to stop because of the meeting in the afternoon. You’re putting the final finishing touches on it and send an email off to your associate letting him know it’s ready.
INVESTMENT BANKING STRUCTURE
Typically includes operations and technology. The back office provides the support so that the front office can do the jobs needed to make money for the investment bank.
Think you want to be an investment banker? Chances are the role you are imagining is a front office role. The front office generates the bank’s revenue and consists of three primary divisions: investment banking, sales & trading, and research.
Typically includes risk management, financial control, corporate treasury, corporate strategy, and compliance.
Ultimately, the goal of the middle office is to ensure that the investment bank doesn’t engage in certain activities that could be detrimental to the bank’s overall health as a firm.
Walk me through your resume?
Why investment banking?
Addressing a low GPA in an interview?
How comfortable do you feel working with numbers?
Tell me about a time when you showed leadership?
Degrees/Courses related to Financial Services Career Choice:
• BSC-Finance : Bachelor of Science in Finance
• Bachelor degree in Accounting and Finance (BAF)
• Bachelor degree in Financial Market (BFM)
• Chartered Accountancy (CA)
• BBA- Financial Service & Market
• Chartered Financial Analyst (CFA)
We are the creative force of our life, and through our own decisions rather than our conditions, if we carefully learn to do certain things, we can accomplish those goals.
If opportunity doesn't knock, build a door.
A dream doesn't become reality through magic; it takes sweat, determination and hard work.