INVESTMENT BANKS

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INVESTMENT BANKS
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Differences from Commercial Banks

• IBs focus on Primary Market Services
• Do not accept deposits or make commercial loans
• CBs focus on Secondary Market Services
• Universal Banks in most other Countries do both
  sides
• Boundaries fading

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Regulation

• SEC
• NASD
• Federal Reserve Board
• SIPC

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Primary Services

• Bringing New Issues to Market
• Private Placements
• Mergers and Acquisitions Activities
• Trading and Brokerage
• Real Estate Brokerage
• Financial Consulting Services

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New Issues to Market

• Giving Advice
• Filing Documents
• Underwriting
• Best-Efforts Placement

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Giving Advice

• Equity vs. Debt
• Number of Shares or Bonds to Issue
• market absorption Capacity
• valuation
• IPO--corps financial condition
• seasoned issue price
• terms of debt--coupon, term, restrictive
  covenants
• Timing

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the Nitty-Gritty

• Registration with SEC----- no
  endorsement implied
• registration statement
• financial condition, management, competition,
  industry, experience
• what funds will be used for
• Managements assessment of the risk
• prospectus, red Herring
• Required for both Debt and Equity Issues
• gt 1.5 million
• gt 270 days maturity

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The Nitty Gritty, cont

• Secure Credit Rating for Debt Issues
• Hire Bond Counsel to attest to Legality of Issue
• Secure Trustee for Bond Issues
• Stock Exchange Listing for Equity
• Print and Distribute Securities

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Firm Commitment Underwriting

• Spread Negotiated
• lower on debt, higher on equity
• Syndication
• tombstone ads list members
• debt often Privately Placed
• IB and Syndicate Own the Shares
• unsold shares held in inventory until sold

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Best-Efforts Placement

• Alternative to Firm Commitment Underwriting of an
  Issue
• No guarantee of price
• sold on commission basis
• unsold shares returned to the issuing company

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Selling the stock

• Advertising
• Distribution to Syndicate
• subscribed, under-subscribed, over-subscribed
• Flotation Costs Paid
• issuing costs fixed cost
• underwriting spread variable cost

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Private Placements

• New Bond Issues
• no SEC registration required
• no underwriting fees
• Price negotiated
• Terms Negotiated
• Reasons Used
• small size
• need for speed
• information asymmetry
• nonstandard terms desired

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Mergers and Acquisitions

• Locate Attractive Targets
• Giving Advice
• valuation
• divestiture
• leverage issues
• Financial Arrangements

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Leveraged Buyouts

• Market Valuation of Target Assessed for Accuracy
• Arrangement of Financing
• Advisory Function
• Participation in Financing

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Trading and Brokerage

• After-market Trading of Securities
• Facilitate Arbitrage Activities
• Asset Stripping

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Real Estate Brokerage
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Financial consulting Services

• Portfolio Management
• Fee-based
• Consultation to Mutual Fund Managers