From the course: Finance Foundations

Investment banks

From the course: Finance Foundations

Start my 1-month free trial Buy for my team

Investment banks

“

- An investment bank is not really a bank at all. An investment bank is a deal facilitator and an investment advisor. Investment banks have two primary functions. One, assisting companies in mergers, acquisitions, and major financing events such as going public, and two, engaging in investment trading and investment advising. So first, investment banks help companies do big deals. For example, let's say I'm a company and I want to go out and find new investors. I want to go public. I want to issue new shares of stock. Well, let's say this is my first company. I don't know how to go public. I need an expert to walk me through that process. That's called underwriting, and investment banks are underwriters. So investment banks help walk companies, new companies through the process of making themselves public companies through issuing public shares. Also, when one company wants to buy another, both the buying company and the target company typically hire an investment bank to walk them through the process. Another important function of an investment bank is to engage in investment trading. In essence, investment banks are investment advisors for very large clients, such as for pension funds or for other large investment funds. For example, let's say I'm the state of Illinois and I need to invest my pension fund money. I'm going to have an investment bank lead me through that process. So investment banks help in investment trading for both their clients and also for themselves, because as investment banks study the market ebbs and flows and identify good investments for their clients, they also take some of their own money, some of their own investment bank money and invest it as well. Remember, investment banks have two primary functions, one, to lead companies through deals, and two, to engage in investment trading, both as an aid to clients and also for themselves. Here are two examples of investment banks helping companies through a deal. First, helping a company go public by serving as an underwriter. Facebook went public in May 2012 as a huge initial public offering with a lot of interest. Facebook hired 33 different investment bankers who split a fee of over $170 million. These underwriters helped Facebook through this process because, of course, Facebook had never before done an initial public offering. The lead underwriters were names that you've heard of, Morgan Stanley, JP Morgan Chase and Goldman Sachs. These investment banks walked Facebook through this IPO process. Second, helping companies with mergers and acquisitions. For example, Facebook purchased WhatsApp for $22 billion in 2014. Both the target, WhatsApp, and the buyer, Facebook, had never done a deal this big before. They needed advisors to walk them through this acquisition process. The investment bankers on each side of this transaction earned about $40 million in fees in helping Facebook and WhatsApp make this large deal happen. Credit Suisse is an international investment bank based in Switzerland. Of course, Credit Suisse helps companies in putting deals together. Also along with other investment banks, Credit Suisse offers investment advisory services. If you are a serious investor, such as a pension fund, Credit Suisse offers you expert advice on many different types of investments. The analysts at Credit Suisse can make recommendations about traditional stock and bond investments. Credit Suisse also gives investment advice for real estate, gold, industrial metals, agricultural products, and other commodity investments. Or Credit Suisse can help you invest in non-public companies, often called a private equity fund, or do some mathematical reduction in your overall risk through hedge fund investing, or even through helping you act as an insurance company for the risks faced by other companies. Remember, an investment bank is not really a bank at all. An investment bank is a deal facilitator and an investment advisor.

Contents