An Introduction to

Investment Banking
By Prof. Samie
 Prof. Samie’s profile
• 8 years of work experience
• Started career as a Mechanical Engineer.
• Graduated from the City University of New York with a
specialization in Marketing. Followed it up with an MBA
in Finance.
• Joined Royal Bank of Scotland (ABN AMRO) in 2004.
Worked across various departments of the offshoring
division of RBS including Credit Analytics, Strategy and
Planning, Project Management.
• Currently, working for the Corporate Finance Analytics
Group of RBS. Major activities involve working on ECM
deals of RBS Investment Banking Division in Australia
and analyzing performance of global financial markets.
 Origins of IB
• The NYSE traces its origins to a small group of New
York brokers who traded in a handful of securities and
commodities.
• A historical 1792 agreement called as a Buttonwood
Agreement was signed among 24 New York brokers to
band the brokers into an investment group.
• The name stemmed from the buttonwood tree that
served as the Wall Street meeting place for members of
the group. The tree was located at 68 Wall Street.
• The agreement allowed brokers to trade with each other
for a commission.
• In the early 1800’s, the US government regularly issued
bonds to finance wars, banks and infrastructure which
were sold by merchants along with other commodities.
 History of IB
• By the middle of 1800’s, professional investment banks had
sprung up in the US to help government raise funds for
infrastructure projects and the civil war.
• In the 1830’s, commercial banks started adding investment
banking services to their regular banking activities in the US.
• Investment Banking hit a milestone in the 1870’s when a
syndicate of banks from Europe and US teamed up to buy
$50 million worth of US Treasury Bonds for resale to public.
• The syndicate sold billion dollars' worth of government bonds
to large numbers of individual investors through the use of
thousands of salesmen and an extensive advertising
campaign. This venture marked the first mass securities-
selling operation carried out in the United States.
 History of IB
• In Great Britain, since 1600’s, merchant banks or acceptance
houses had been in existence.
• These concerns financed foreign trade and later the acceptance
houses also floated foreign issues in London and accumulated
funds for long-term investment abroad.
• Also important in the evolution of investment banking were
private banks, many of which were family enterprises, and
finance companies.
• One of the former, the House of Rothschild, attained a dominant
position in the financial centers of Europe during the 1800s and
was still influential in the 1900s.
• European Investment banks (excluding UK) stuck with the
universal banking concept and they remained active primarily in
their local markets through the 1900’s.
 History of IB
• In the early 1900’s, JP Morgan and Company put together
another syndicate to reorganize US Steel from an array of
affiliated companies into the first billion dollar corporation
by trading shares of its smaller affiliates for the merged
entity.
• The Great Depression in the 1920’s and World War 2 was
a bad phase for the investment banking industry.
• Investment Banks were accused of excessive speculation
and the US government stepped in to curtail the same.
• The Glass-Steagall Act, passed on June 16, 1933, and
officially named the Banking Act of 1933, introduced the
separation of bank types according to their business
(commercial and investment banking), and it founded the
Federal Deposit Insurance Corporation for insuring bank
deposits.
 History of IB
• In the mid-20th century, large investment banks were
dominated by the dealmakers.
• Advising clients on mergers and acquisitions and public
offerings was the main focus of major Wall Street
partnerships.
• These firms included Goldman Sachs, Morgan Stanley,
Lehman Brothers, First Boston and others.
• That trend began to change in the 1980s as a new focus
on trading propelled firms such as Salomon Brothers,
Merrill Lynch and Drexel Burnham Lambert into the
limelight.
Did you know that Morgan Stanley is an offshoot of JP Morgan ?
 History of IB
• Investment banks earned an increasing amount of their
profits from proprietary trading.
• Advances in computing technology also enabled banks
to use more sophisticated model driven software to
execute trades and generate a profit on small changes in
market conditions.
• In the 1980’s, leveraged buyouts and hostile takeovers
drove the investment banking business.
• Investment banks profited handsomely during the boom
years of the 1990s and into the tech boom and bubble.
• IPO’s of tech companies was the key investment
banking activity through the 1990’s.
 Current Scenario
• Two collapses of the stock market – the tech bubble and
the sub-prime crisis have taken their toll on the
investment banking industry.
• Landmark companies including Bear Stearns, Lehman
Brothers and Merrill Lynch have been destroyed in the
sub-prime crisis.
• Goldman Sachs and Morgan Stanley have moved from
pure play investment banks to become commercial
banks after the repealing of the Glass-Steagall Act.
• But still, investment banking remains a key element of
our capital markets.
• Goldman Sachs, UBS, Credit Suisse are the major
players in the global investment banking industry.
 So what is IB?
• In a very broad perspective, Investment Banking as the
term suggests, is concerned with the primary function of
assisting capital market in the movement of financial
resources from those who have them (investors) to those
who want them (issuers).
• It can be inferred that investment banks are the
counterparts of banks in the capital markets in
discharging the critical function of pooling and allocation
of capital.
• Over the decades, Investment Banking has transformed
itself to suit the technological needs of the world of
finance. Investment bankers have always enjoyed
celebrity status, but at times have paid the price for
excessive flamboyance as well.
 IB Defined
• The Dictionary of Banking and Finance defines
‘investment bank’ as a term used in the US to mean ‘ a
bank which deals with the underwriting of new issues
and advises corporations on their financial affairs.
• Bloomberg provides a more consolidated definition for an
investment bank – a financial intermediary that performs
a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate re-
organizations, acting as brokers to both the individual
and the institutional clients and trading in its own
account.
• Much of the investment banking in its present form owes
its origins to the financial markets in USA, due to which
American investment banks have been leaders in the
world. Therefore, the term Investment Banking can
arguably be said to be of American origin.
 Goldman Sachs – A global
investment bank
• Goldman Sachs is a bank holding company and a
leading global investment banking, securities and
investment management firm that provides a wide range
of services worldwide to a substantial and diversified
client base that includes corporations, financial
institutions, governments and high-net-worth individuals.
• Goldman Sachs is the successor to a commercial paper
business founded in 1869 by Marcus Goldman. On May
7, 1999, the Company converted from a partnership to a
corporation and completed an initial public offering of its
common stock.
• On September 21, 2008, the Group became a bank
holding company regulated by the Board of Governors of
the Federal Reserve System under the U.S. Bank
Holding Company Act of 1956 (BHC Act).
 Goldman Sachs Businesses
• Goldman Sachs primarily offers services in three major
categories
– Investment Banking
– Trading and Principal Investments
– Asset Management and Securities Services
• The Group offers two major services as an investment
bank:
– Financial Advisory which includes M&A Advisory and
Financial Restructuring Advisory
– Equity and Debt Underwriting
• Investment Banking represented 23% of 2008 net
revenues for GS.
 Financial Advisory at GS
• Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures,
corporate defense activities, restructurings and spin-offs.
• Its mergers and acquisitions capabilities are evidenced
by its significant share of assignments in large, complex
transactions for which the bank provides multiple
services, including “one-stop” acquisition financing and
cross-border structuring expertise, as well as services in
other areas of the firm, such as interest rate and
currency hedging.
• In particular, a significant number of the loan
commitments and bank and bridge loan facilities that the
group enters into arise in connection with its advisory
assignments.
 Underwriting at GS
• Underwriting services offered by GS includes public
offerings and private placements of a wide range of
securities and other financial instruments, including:
– common and preferred stock,
– convertible and exchangeable securities,
– investment-grade debt,
– high-yield debt,
– sovereign and emerging market debt, municipal debt,
– bank loans,
– asset-backed securities and real estate-related
securities, such as mortgage-related securities and
the securities of real estate investment trusts.
 League Tables – M&A YTD Sep09
Adviser Rank Market Share(%) USD Volume (m) Deal Count
Goldman Sachs & Co
1 38.8 330229.19 114
Morgan Stanley 2 33.1 281013.66 118
Citi 3 31.3 266066.75 111
Bank of America Merrill Lynch
4 29.4 250244.47 88
JP Morgan 5 25.5 216443.58 125
Deutsche Bank AG 6 20.2 171453.34 84
UBS 7 20.1 171264.05 114
BNP Paribas Group 8 14.8 125673.1 45
Lazard LLC 9 13.8 117245.29 95
Rothschild 10 10.7 90695.63 97
RBS 11 9.3 79131.64 41
Barclays Capital 12 8.7 74380.74 32
Credit Suisse 13 8.6 72751.23 80
Wachovia Corp 14 8.2 69381.93 6
Greenhill & Co 15 8.0 68129.19 11
 League Tables – ECM YTD Sep09
Underwriter Rank Mkt Share(%) Amount USD (m) Fees(%) Issues
JP Morgan 1 13.7 48,625.98 3.195 229
Morgan Stanley 2 11.1 39,263.16 3.027 156
Goldman Sachs & Co 3 10.3 36,499.05 3.385 135
Bank of America Merrill Lynch 4 7.4 26,285.65 3.943 188
UBS 5 7 24,663.47 2.899 146
Credit Suisse 6 6.3 22,456.36 3.214 106
Citi 7 5 17,833.39 3.344 154
Deutsche Bank AG 8 4.2 14,840.51 3.793 106
Nomura Holdings Inc 9 3.7 13,267.96 4.187 26
Barclays Capital 10 2.7 9,576.30 3.442 64
China International Capital Corp 11 2.1 7,494.57 1.34 2
Wells Fargo Bank NA 12 2 7,260.87 3.027 51
RBS 13 1.6 5,705.02 1.96 48
Daiwa Securities Group Inc 14 1.3 4,447.62 4.184 6
Calyon 15 1.1 4,035.13 n/a 15
 League Tables – DCM YTDSep09
Mkt
Share(%
Underwriter Rank ) Amount USD (Mln) Fees(%) Issues
JP Morgan 1 7.4 402,203.28 0.25 2,231
Barclays Capital 2 6.5 356,142.53 0.171 2,345
Deutsche Bank AG 3 5.4 294,913.56 0.214 2,231
Citi 4 5.3 288,965.42 0.351 1,519
Bank of America Merrill Lynch 5 5.1 277,447.56 0.339 1,331
HSBC 6 4.3 235,858.02 0.26 2,543
RBS 7 4.2 228,119.87 0.3 1,322
Morgan Stanley 8 4 218,563.45 0.267 3,485
UBS 9 3.8 208,923.57 0.179 1,936
Goldman Sachs & Co 10 3.7 199,953.88 0.234 695
BNP Paribas Group 11 3.6 195,787.70 0.326 1,018
Credit Suisse 12 3.5 192,471.46 0.211 1,001
Hypo Real Estate Bank AG 13 2.2 117,572.04 n/a 22
Societe Generale 14 2 111,489.94 0.211 484
Landesbank Baden-Wuerttemberg 15 1.7 90,679.33 0.207 620
 Merchant Banking vs.
Investment Banking
• As a general rule, investment banks focus on initial public offerings
(IPOs) and large public and private share offerings. Merchant
banks tend to operate on small-scale companies and offer creative
equity financing, bridge financing, mezzanine financing and a
number of corporate credit products.
• While investment banks tend to focus on larger companies,
merchant banks offer their services to companies that are too big
for venture capital firms to serve properly, but are still too small to
make a compelling public share offering on a large exchange.
• In order to bridge the gap between venture capital and a public
offering, larger merchant banks tend to privately place equity with
other financial institutions, often taking on large portions of
ownership in companies that are believed to have strong growth
potential.
 Merchant Banking vs.
Investment Banking
• Merchant banks still offer trade financing products to
their clients. Investment banks rarely offer trade
financing because most investment banking clients have
already outgrown the need for trade financing and the
various credit products linked to it.
• Merchant banks can also be said as a British term for
investment banks.
• Merchant Banker has been defined under the Securities
& Exchange Board of India (Merchant Bankers) Rules,
1992 as "any person who is engaged in the business of
issue management either by making arrangements
regarding selling, buying or subscribing to securities as
manager, consultant, advisor or rendering corporate
advisory service in relation to such issue management".
 Merchant Banking vs.
Investment Banking
• To conclude the argument, merchant banking has
different connotations in the US and other markets.
• In the US it is primarily a fund based activity while in the
UK and in India it is implies intermediation and advisory
activity in connection with public floatation of securities.
• Investment Banking thus can be defined as a broader
term which covers both fund and fee based activities.
• Merchant banking can either be a fund based activity or
a fee based activity.
 The role of equity research
• Equity Research is the division which reviews companies
and writes reports about their prospects, often with "buy"
or "sell" ratings.
• While the research division generates no revenue, its
resources are used to assist traders in trading, the sales
force in suggesting ideas to customers, and investment
bankers by covering their clients.
• There is a potential conflict of interest between the
investment bank and its analysis in that published
analysis can affect the profits of the bank.
• Therefore in recent years the relationship between
investment banking and research has become highly
regulated requiring a Chinese wall between public and
private functions.
 Investment Banking in India
• Grindlays bank began Investment Banking (Merchant
Banking) in India in 1967 with RBI issuing the second
license to Citi in 1970.
• These two banks primarily provided services which
included loan syndication, equity raising and other
advisory services.
• In 1972, a Banking Commission report asserted the
need for Merchant Banking services in India by public
sector banks.
• The commission recommended the same structure as
American investment banks (Glass-Steagall Act).
• Merchant banks were meant to manage investments and
provide advisory services.
 Investment Banking in India
• SBI was the first Indian public sector bank to set up its
merchant banking division in 1972.
• This was followed by Bank of India, Central Bank of
India, Bank of Baroda and many more.
• SBI Caps and IDBI Caps are two prime examples of
merchant banks in India today.
• Currently, there are 136 merchant banks registered with
SEBI.
• Currently, without holding a certificate of registration
granted by the Securities and Exchange Board of India,
no person can act as a merchant banker.
 Investment Banking in India
• The categories for which merchant banking registration
may be granted by SEBI:
– Category I – to carry on the activity of issue
management and to act as adviser, consultant,
manager, underwriter, portfolio manager
– Category II - to act as adviser, consultant, co-
manager, underwriter, portfolio manager.
– Category III - to act as underwriter, adviser or
consultant to an issue
– Category IV – to act only as adviser or consultant to
an issue
• The capital requirement depends upon the category. The
minimum net worth requirement for acting as merchant
banker are Category I – Rs. 5 crores, Category II – Rs,
50 lakhs, Category III – Rs. 20 lakhs and Category IV –
Nil
 SBI Capital Markets
• SBI Caps is one of the leading merchant banks in India.
• SBI Caps has three major services to offer:
– Project Advisory & Structured Finance
– Capital Markets
– M&A Advisory
• Project Advisory and Structure Finance includes project
appraisals, debt and equity syndication, securitization.
• Capital Markets primarily includes IPO’s, Follow On
Offers, Rights Issues, Buybacks and other capital markets
related activities.
• M&A Advisory includes M&A, Private Equity and
Corporate Advisory.
 Conclusion
• Investment Banking could be termed as a relatively
American phenomenon.

• Indian Investment Banking industry has still a long way

to go before it catches up with its global peers.

• The sub-prime crisis of 2008 has been a hammer blow

for pure play investment banks.