Investment Banking 2

8/2/2019 Investment Banking 2

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Merchant Banking (MB) Vs.Investment Banking (IB)

MB & IB are the function ofintermediation in the capital market.

But

There is thin line between the two.



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MB consists ofAssisting issuers (Companies) to raise capital by

placement of securities issued by them with theinvestors.

The MBer has an onerous responsibility towardsthe investor who invest in such securities.

MB is a fee based service for management ofpublic offers, popularly known as „Issue

Management‟ and for private placement of securities in the CM.In India MBer is also called as the „Lead Manager‟



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IB encompasses not merely MB but other related capitalmarket activities such as –

Stock Trading

Market Making

Underwriting

Broking

Asset Management.

Besides above IBers also provide

Specialized corporate advisory services

Business and financial advisory

M & A.



Evolution of American Investment Banks

At the end of World War I CB in USA were readyfor economic recovery. American companiesstarted reducing their dependence on CB andconcentrate on stock and bond market becauseof cheap availability of funds.

CB started acquiring stock broking business – National City Bank of New York acquired HalseyStuart and Company in 1916.

The stock and bond market boom of the 1920swas an opportunity that banks could not miss.They did through affiliates that is Holding co.



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While the boom lasted, IB affiliates made hugeprofits as Underwriting fee. National City Bank,Chase Bank, Morgan and Bank of America werethe most aggressive banks.

In order to restore confidence in the banking andfinancial system, several legislative measureswere proposed, led to the passing of theBanking Act 1933 ( popularly known as theGlass – Steagall Act ). It restricts CB fromengaging in securities underwriting or acting asagents for others in securities transactions.



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on the other hand, Investment Banks wereBARRED FROM DEPOSIT TAKING ANDCORPORATE LENDING WHICH WERE

CONSIDERED THE EXCLUSIVE BUSINESSOF CB.

Since the passing of the Act, IB becamenarrowly defined as creating PRIMARY

MARKET FOR SECURITIES ANDSECONDARY MARKET MAKING THROUGHSECURITIES DEALING.



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By 1935, IB became one of the most heavily regulatedindustries in USA.

After the passing of the Glass-Steagall Act of the 1930suntil the beginning of the 21st century IB had beenthrough several phases of transformation.

In 1973, world economy was under pressure andinflation (due to high oil prices), IB and CB operationswere relaxed. Securities Acts Amendments, 1975 whichhad CB to have subsidiaries (called section 20subsidiaries )that were allowed to underwrite and trade

in securities. In 1990, J.P. Morgan was the first bank to open a section

20 subsidiary.



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During the economic growth and globalization of the1980s , IB expanded to several new areas and serviceswhich included

Currency trading

Real estateFinancial futuresDue to the technological advancements in 1990s and the

availability of global access through communicationtechnology, IB is no more restricted to underwriting and

security dealing. The shift is more towards advisory services, M & A,providing expertise in new products and sophisticatedtechniques for structured financial deal making.



European Investment Banks

In continental Europe (excluding UK), theconcept „Universal Bank‟ has been

operational. “universal Bank” meant that

co-existence of commercial banking(lending activity) along with investmentbanking (investment and distribution

activity )



European Investment Banks.

The UK – considered as Europe‟s largestinvestment banking market. The oldest merchantbank in London was „Barings Brothers‟ whichhad played a prominent role in the 19th century.

Security distribution was the function of stock-brokers, secondary market trading was held by

jobbers and advisory services were provided bymerchant banks.

in 1986, The US investment banks with theirintegrated global business entered UK andEurope and later into Japan.



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Post 1986, there was a sale of SGWarburg, the leading merchant bank, toSwiss Bank Corporation.

Morgan Grenfell, a merchant bank wassold to Deutsche Bank in 1990.

In 1997, Natwest Bank and Barclays Bank

exited investment banking business.Then Deutsche Bank acquired BankersTrust.



Global Industry Structure

The investment bankingindustry on a global scaleis oligopolistic in natureranging from the global

leaders ( known as„Global Bulge Group‟) to

„pure‟ investment banks.

The top ten global firms

of their fee billings as in2001 :

1. MerrillLynch

2. Goldma

n Sachs3. Credit

SuisseFirstBoston

4. SalmonSmith

Barney

9%

7.5%

7.2%

6.7%



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5. Morgan Stanley

6. J.P. Morgan

7. UBS Warburg

8. Lehman Brothers

6.3%

5.5%

4.6%

3.6%

9. Deutsche Bank

10. Bank of America

3.5%

2.4%



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Within the listing given in the table are thetop „pure‟ investment banks which do not

have commercial banking connections,

which are Merrill Lynch, Goldman Sachsand Morgan Stanley. Listed therein arealso the leading „European Universal

Banks‟ that are called so due to their rolein both commercial and investmentbanking.



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The five leading universal banks in the world are :

1. Citigroup (US) : Citibank, Salomon Smith Barney(investment bank), Schroders.

2. CSFB (Swiss) : CSFB, Donaldson, Lufkin&Jenrette,

Pershing3. Deutsche (German) : Deutsche Bank, Morgan

Grenfell, Alex Brown, Bankers Trust

4. J.P. Morgan (US) : J.P. Morgan Chase, Chemical

Bank, Beacon Group, Robert & Fleming, Hambrecht &Quist

5. UBS Warburg (Swiss) : UBS Warburg, Dillion Read,Paine Webber, Philips & Drew, Swiss Bank (merged).

Investment Banking 2

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