Investment Banking

Investment Bankers provide underwriting, mergers and acquisitions and advisory services. They are intermediaries between investors and corporations that require capital to grow and run their businesses.  They work for governments, corporations, and institutions.

To get a better understanding of what investment bankers do, we will explore their roles in a little detail.

Underwriting

Investment bankers raise capital by selling stocks or bonds.  They do this by buying the entire issue thus taking responsibility for any unsold shares (full commitment), selling the issue at the offering price but returning unsold shares (Best effort) or all-or-none that happens when they cannot sell the issue and the issuing company receives nothing.

Underwriting occurs in 3 phases. The first is planning; where the investment banker strives to understand the investment rationale as well as the interest in the offering the company is issuing.

The second phase is determining whether the time is right and if there is demand for the issue. Is the market receptive, how investors are reacting to the risk, is there a company that has made an offering of the same nature for benchmarking purposes.

The third is the structure of the issue.  How wide is the scope; domestic or international, who is it targeting; institutions or investors amongst other considerations.

Mergers and acquisitions (M&A)

Investment bankers can help companies acquire businesses. It involves combining two companies into one, usually with an aim of achieving synergy.  They will find and evaluate the viability of the merger through use of their extensive networks, find opportunities, recommend whether the client should pursue the acquisition and negotiate best deals.

Mergers combine two businesses into one while an acquisition occurs when one company absorbs the other.  They both work with the intention of increasing efficiency. The two companies mutually agree to become equal partners.

The two businesses should offer advantages to each other. For instance, increased efficiency, profitability and a stronger market position. The partnership will increase market share because each will bring their resources together. Two companies coming together will enhance the financial resources thus more investment capabilities of the newly formed company. They are also able to develop and launch new technologies faster.

The expertise and ability to attract talent will increase, unfortunately, not everyone will celebrate the merger. One of the major disadvantages is that some roles become redundant leading to job losses. The merging of the different roles could also lead to friction and competition. Loyalties may align to the individual companies; the management should ensure that they walk the employees through the merger process to make the transition easier.

Acquiring a company can be expensive with high legal costs. During the merger process, some there may be loss of business opportunities due to a negative public reaction leading to lower stock prices. Many investors may adopt a wait-and-see attitude if they are not sure about the success of the merger, because, some mergers do fail.

Investment banking is an exciting area of the financial markets. Understanding how it works can open many doors for individuals including investment and career paths.