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1. Introduction to Investment Banking
1. What is investment banking? The investment banker is the link between a ____(Critical Concept). The investment banker designs and packages an offering of the firms stock to investors. Consolidation has happened in the industry. The top 10 underwriters control 83 percent of the U.S. market for stocks and bonds and 74 percent of the global market. See Slide 3 (39.0K) . The market for new issues is divided in to many segments and this table does not really give information on the leaders in each segment. See What is Investment Banking? (51.0K)
2. Gramm-Leach-Billey Act. The ____, passed after the market crash of 1929, required that U.S. banks separate their commercial and investment banking operations(Key Term). This Act was repealed in 1999 by the Gramm-Leach-Billey Act and now, within limits, banks can engage in both commercial banking and investment banking operations.
2. Functions of the Investment Banker
1. Underwriter. The investment banker is a risk-taker and actually purchases the new securities from the issuing company to sell to the public.
2. Market Maker. During the initial distribution of the security to the public, the investment banker can buy and sell the security and provide research to the investor.
3. Advisor. The investment banker advises the issuing company on the types of securities to be sold, the number of shares or units for distribution and the timing of the sale.
4. Agency Function. The investment banker acts as an agent for a corporation who wishes to place its securities privately. See Functions of the Investment Banker (61.0K) . For a discussion about making a career as an investment banker, check this website .
3. The Distribution Process
1. Underwriting Syndicate. The investment banker calls on other investment banking houses to share the risk and aid in distribution of a new issue of securities. These investment banking houses form an underwriting syndicate. See Slide 2 (35.0K)
2. Underwriting Spread. The underwriting spread is the ____(Key Term). The smaller the issue, the higher the fees, due to risk. See Slide 4 (42.0K) . See Slide Underwriting Spread (47.0K)
4. Pricing the Security
1. Setting the Price. A detailed valuation will be performed for the firm issuing the securities. The initial price will be determined based on its valuation.
2. Dilution. Issuing new stock causes dilution of the value of existing shares of stock. The proceeds from the sale of the new shares will be expected to bring the price back up. Any temporary weakness in stock price is usually overcome with time.
3. Market Stabilization. The lead investment banker is responsible for stabilizing the price and market during the initial public offering.
4. Aftermarket. After the distribution period has ended, the investment banker is still concerned with how the stock performs.
5. Shelf Registration.Shelf Registration ________. Then, every time the firm issues stock, they do not have to file another registration with the SEC.
5. Public versus Private Financing

1. A. Going Public. If a company issues its stock to the general public, a greater amount of capital is available to it. A disadvantage of going public is____(Critical Concept). There is also pressure for performance by analysts and investors. The cost of going public is also high. See Slide Public vs Private Companies (49.0K) . See Slide Advantages and Disadvantages of a Public Company (67.0K) . For a good discussion on going public and IPOs, check out this Motley Fool website.
2. Private Placement. Securities may be sold directly to pension funds, insurance companies and individuals rather than through the securities markets. Debt instruments, like bonds, are often privately placed. Private placement is, in general, cheaper than public offerings.
3. Going Private. Sometimes, companies go private. In other words, the repurchase their existing shares of outstanding stock. Usually, this is accomplished through a leveraged buyout. These are based on large amounts of debt and a shortfall in a company's performance after a leveraged buyout can be disastrous. Privatization has happened increasingly often in the decade of the 1990s. See Slide Initial Public Offering and Leveraged Buyout (63.0K)