Professional Documents
Culture Documents
Project report
On
Investment Banking
Submitted by
Kalpesh.K.Mehta
PGDBM
Batch: 2010 – 2012.
1
ACKNOWLEDGEMENT
Also I would like to thank our director Dr. Kalim Khan who has provided the
necessary infrastructure and guidance in the course of the project. Also I would like to
take this opportunity to thank all the teaching as well as non-teaching staff for their
continuous help and support.
______________
Kalpesh Metha
PG Finance
Roll No. 36
CERTIFICATE
“Investment Banking”
under the guidance of Prof. Nijai. K. Gupta in partial fulfillment of the requirement of
Post Graduate Diploma in Business Management by Rizvi Academy of Management
for the academic year 2010 – 2012.
_______________
Prof. Nijai. K. Gupta
Project Guide
_______________ ____________
Prof. Umar Farooq Dr.KalimKhan
Academic Coordinator Director
Executive Summary
Promoters of and news sources that report on speculative financial transactions such
as stocks, mutual finds, real estate, oil and gas leases, commodities, and futures often
inaccurately or misleadingly describe speculative schemes as investment.
Investment: thorough analysis and security Speculation: analysis and some risk
Gambling: lack of analysis and lack of safety.
Investment banks help companies and governments raise money by issuing and
selling securities in the capital markets (both equity and debt). A majority of
investment banks also offer strategic advisory services for mergers, acquisitions,
divestiture or other financial services for clients, such as the trading of derivatives,
fixed income, foreign exchange, commodity, and equity securities. Trading securities
for cash or securities (i.e., facilitating transactions, market-making), or the promotion
of securities (i.e underwriting, research, etc.) is referred to as the "sell side". The "buy
side" constitutes the pension funds, mutual funds, hedge funds, and the investing
public who consume the products and services of the sell-side in order to maximize
their return on investment. Many firms have both buy and sell side components.
INDEX
Rizvi Sr.
Academy of Management
No. Particulars Kalpesh
Pg. No. Mehta
2 Organizational Structure 2
8.3 Citibank 62
9 JP Morgan Chase 64
12 Bibliography 74
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Organizational structure
An investment bank is split into the so-called front office, middle office, and back
office. While large service investment banks offer all of the lines of businesses, both
sell side and buy side, smaller ones sell side investment firms such as boutique
investment banks and small broker-dealers focus on investment banking and
sales/trading/research, respectively. Investment banks offer services to both
corporations issuing securities and investors buying securities. For corporations,
investment bankers offer information on when and how to place their to an investment
bank's reputation, and hence loss of business. Therefore, investment bankers play a
very important role in issuing new security offerings.
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Front office
Investment banking is the traditional aspect of investment banks which also involves
helping customers raise funds in capital markets and giving advice on mergers and
acquisitions (M&A). This may involve subscribing investors to a security issuance,
coordinating with bidders, or negotiating with a merger target. Another term for the
investment banking division is corporate finance, and its advisory group is often
termed mergers and acquisitions. A pitch book of financial information is generated to
market the bank to a potential M&A client; if the pitch is successful, the bank
arranges the deal for the client. The investment banking division (IBD) is generally
divided into industry coverage and product coverage groups. Industry coverage
groups focus on a specific industry, such as healthcare, industrials, or technology, and
maintain relationships with corporations within the industry to bring in business for a
bank. Product coverage groups focus on financial products, such as mergers and
acquisitions, leveraged finance, project finance, asset finance and leasing, structured
finance, restructuring, equity, and high-grade debt and generally work and collaborate
with industry groups on the more intricate and specialized needs of a client.
Sales and trading on behalf of the bank and its clients, a large investment bank's
primary function is buying and selling products. In market making, traders will buy
and sell financial products with the goal of making money on each trade. Sales is the
term for the investment bank's sales force, whose primary job is to call on institutional
and high-net-worth investors to suggest trading ideas and take orders. Sales desks
then communicate their clients' orders to the appropriate trading desks, which can
price and execute trades, or structure new products that fit a specific need. Structuring
has been a relatively recent activity as derivatives have come into play, with highly
technical and numerate employees working on creating complex structured products
which typically offer much greater margins and returns than underlying cash
securities. Strategists advise external as well as internal clients on the strategies that
can be adopted in various market. Banks also undertake risk through proprietary
trading , performed by a special set of traders who do not interface with clients and
through "principal risk"—risk undertaken by a trader after he buys or sells a product
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to a client and does not hedge his total exposure. Banks seek to maximize profitability
for a given amount of risk on their balance sheet.
Research is the division which reviews companies and writes reports about their
prospects, often with "buy" or "sell" ratings. While the research division may or may
not generate 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.
Research also serves outside clients with investment advice in the hopes that these
clients will execute suggested trade ideas through the sales and trading division of the
bank, and thereby generate revenue for the firm.
Middle office
Risk management involves analyzing the market and credit risk that traders are
taking onto the balance sheet in conducting their daily trades, and setting limits on the
amount of capital that they are able to trade in order to prevent "bad" trades having a
detrimental effect on a desk overall. Another key Middle Office role is to ensure that
the economic risks are captured accurately, correctly and on time (typically within 30
minutes of trade execution). In recent years the risk of errors has become known as
"operational risk" and the assurance Middle Offices provide now includes measures to
address this risk. When this assurance is not in place, market and credit risk analysis
can be unreliable and open to deliberate manipulation.
Financial control tracks and analyzes the capital flows of the firm, the Finance
division is the principal adviser to senior management on essential areas such as
controlling the firm's global risk exposure and the profitability and structure of the
firm's various businesses.
Corporate strategy along with risk, treasury, and controllers, also often falls under
the finance division.
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Back office
Operations involve data-checking trades that have been conducted, ensuring that they
are not erroneous, and transacting the required transfers. While some believe that
operations provide the greatest job security and the bleakest career prospects of any
division within an investment bank, many banks have outsourced operations. It is,
however, a critical part of the bank. Due to increased competition in finance related
careers, college degrees are now mandatory at most Tier 1 investment banks. A
finance degree has proved significant in understanding the depth of the deals and
transactions that occur across all the divisions of the bank.
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Banking in India originated in the last decades of the 18th century. The first banks
were The General Bank of India, which started in 1786, and Bank of Hindustan,
which started in 1790; both are now defunct. The oldest bank in existence in India is
the State Bank of India, which originated in the Bank of Calcutta in June 1806, which
almost immediately became the Bank of Bengal. This was one of the three presidency
banks, the other two being the Bank of Bombay and the Bank of Madras, all three of
which were established under charters from the British East India Company. For
many years the Presidency banks acted as quasi-central banks, as did their successors.
The three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India.
The banking scenario in India is itself huge, covering the different facets of the
economy. By and large, investment banks in India are itself an institution which
generates funds in two different ways. The first manner in which it works is by
drawing public funds via the capital market by way of selling stock in their company.
The other way in which it operates is to seek for venture capital or private equity, as a
substitute for a stake in their company.
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The major work of investment banks includes a lot of consulting. For instance, they
offer advices on mergers and acquisitions to companies. The other arena where they
give advice are tracking the market and determining when should a company come
out with a public offering and what is the best possible way to manage the public
assets of businesses. The role that an investment bank plays sometimes gets
overlapped with that of a private brokerage house. The usual advice of buying and
selling is also given by investment banks.
There is no demarcating line between the investment banking and other forms of
banking in India. This has been observed majorly of late. All banks nowadays want to
provide their customers the best of services and create a niche for themselves and that
is why apart from investment banks, all other banks too are aiming at making it big.
At the macro level, investment banking is related with the primary function of
assisting the capital market in its function of capital intermediation, i.e., the
movement of financial resources from those who have them (the investors), to those
who need to make use of them for producing GDP (the issuers). Over the decades,
investment banks have always suited the needs of the finance community and thus
become one of the most vibrant and exciting segment of financial services.
Globally investment banks handle significant fund-based business of their own in the
capital market along with their non-fund service portfolio which is offered to the
clients. All these activities are broadly segmented across three platforms - equity
market activity, debt market activity and merger and acquisitions (M&A) activity. In
addition, given the structure of the market, there is also a segmentation based on
whether a particular investment bank belongs to a banking parent or is a stand-alone
pure investment bank.
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Issuer of currency
•Investment banking differs from commercial banking in the sense that they
don't accept deposits and grant retail loans. However the dividing lines
between the two fraternal twins have become flimsy with loans and securities
becoming almost substitutable ways of raising funds.
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Mergers
Mergers can be described from a legal perspective and from an economic perspective.
This distinction is relevant to discussions concerning deal structuring, regulatory
issues, and strategic planning.
Legal Perspective
This perspective refers to the legal structure used to consummate the transaction. Such
structures may take on many forms depending on the nature of the transaction.
A merger is a combination of two or more firms in which all but one legally cease to
exist, and the combined organization continues under the original name of the
surviving firm. In a typical merger, shareholders of the target firm exchange their
shares for those of the acquiring firm, after a shareholder vote approving the merger.
Minority shareholders, those not voting in favor of the merger, are required to accept
the merger and exchange their shares for those of the acquirer. If the parent firm is the
primary shareholder in the subsidiary, the merger does not require approval of the
parent’s shareholders in the majority of states. Such a merger is called a short form
merger. The principal requirement is that the parent’s ownership exceeds the
minimum threshold set by the state. For example, Delaware allows a parent
corporation to merge without a shareholder vote with a subsidiary if the parent owns
at least 90 percent of the outstanding voting shares. A statutory merger is one in which
the acquiring company assumes the assets and liabilities of the target in accordance
with the statutes of the state in which the combined companies will be incorporated. A
subsidiary merger involves the target becoming a subsidiary of the parent. To the
public, the target firm may be operated under its brand name, but it will be owned and
controlled by the acquirer.
Although the terms mergers and consolidations often are used interchangeably, a
statutory consolidation, which involves two or more companies joining to form a new
company, is technically not a merger. All legal entities that are consolidated are
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dissolved during the formation of the new company, which usually has a new name.
In a merger, either the acquirer or the target survives. The 1999 combination of
Daimler-Benz and Chrysler to form DaimlerChrysler is an example of a
consolidation. The new corporate entity created as a result of consolidation or the
surviving entity following a merger usually assumes ownership of the assets and
liabilities of the merged or consolidated organizations. Stockholders in merged
companies typically exchange their shares for shares in the new company.
An Economic Perspective
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Types of Mergers
Horizontal merger
Horizontal merger occurs between two firms within the same industry. Examples of
horizontal acquisitions include Proctor & Gamble and Gillette (2006) in household
products, Oracle and PeopleSoft in business application software (2004), oil giants
Exxon and Mobil (1999), SBC Communications and Ameritech (1998) in
telecommunications, and NationsBank and BankAmerica (1998) in commercial
banking.
Conglomerate mergers
Conglomerate mergers are those in which the acquiring company purchases firms in
largely unrelated industries. An example would be U.S. Steel’s acquisition of
Marathon Oil to form USX in the mid-1980s.
Vertical mergers
Vertical mergers are those in which the two firms participate at different stages of the
production or value chain. A simple value chain in the basic steel industry may
distinguish between raw materials, such as coal or iron ore; steel making, such as “hot
metal” and rolling operations; and metals distribution. Similarly, a value chain in the
oil and gas industry would separate exploration activities from production, refining,
and marketing. An Internet value chain might distinguish between infrastructure
providers, such as Cisco; content providers, such as Dow Jones; and portals, such as
Yahoo and Google. In the context of the value chain, a vertical merger is one in
which companies that do not own operations in each major segment of the value chain
choose to “backward integrate” by acquiring a supplier or to “forward integrate” by
acquiring a distributor. An example of forward integration includes paper
manufacturer Boise Cascade’s acquisition of office products distributor, Office Max,
for $1.1 billion in 2003. An example of backward integration in the technology
industry is America Online’s purchase of media and content provider Time Warner in
2000. In 2008, American steel company, Nucor Corporation, announced the
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acquisition of the North American scrap metal operations of privately held Dutch
conglomerate SHV Holdings NV. The acquisition further secures Nucor’s supply of
scrap metal used to fire its electric arc furnaces.
In finance, valuation is the process of estimating what something is worth. Items that
are usually valued are a financial asset or liability. Valuations can be done on assets
(for example, investments in marketable securities such as stocks, options, business
enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g.,
bonds issued by a company). Valuations are needed for many reasons such as
investment analysis, capital budgeting, merger and acquisition transactions, financial
reporting, taxable events to determine the proper tax liability, and in litigation.
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current market values. For instance, a firm's balance sheet will usually show the value
of land it owns at what the firm paid for it rather than at its current market value. But
under GAAP requirements, a firm must show the fair values (which usually
approximates market value) of some types of assets such as financial instruments that
are held for sale rather than at their original cost. When a firm is required to show
some of its assets at fair value, some call this process "mark-to-market" But reporting
asset values on financial statements at fair values gives managers ample opportunity
to slant asset values upward to artificially increase profits and their stock prices.
Managers may be motivated to alter earnings upward so they can earn bonuses.
Despite the risk of manager bias, equity investors and creditors prefer to know the
market values of a firm's assets—rather than their historical costs—because current
values give them better information to make decisions.
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Acquisition
Acquisition in general sense is acquiring the ownership in the property. In the context
of business combinations, an acquisition is the purchase by one company of a
controlling interest in the share capital of another existing company.
It is the purchase of one corporation by another, through either the purchase of its
shares, or the purchase of its assets.
There's only one real way to achieve massive growth literally overnight, and that's by
buying somebody else's company. Acquisition has become one of the most popular
ways to grow today.
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Deal
Country
Acquirer Target Company value ($ Industry
targeted
ml)
Daewoo
Videocon Korea 729 Electronics
Electronics Corp.
Dr. Reddy’s
Betapharm Germany 597 Pharmaceutical
Labs
Suzlon
Hansen Group Belgium 565 Energy
Energy
Kenya Petroleum
HPCL Kenya 500 Oil and Gas
Refinery Ltd.
Ranbaxy
Terapia SA Romania 324 Pharmaceutical
Labs
Types of Acquisitions
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1. Friendly Takeovers
It is the acquisition of one firm by another where the owners of both firms agree to the
terms of the takeover transaction.
2. Hostile Takeovers
Hostile Takeovers is the one which goes against the wishes of the target company’s
management and Board of Directors. It is the opposite of Friendly Takeover. It is a
takeover attempt that is strongly resisted by the target firm.
Hostile takeovers only work with publicly traded companies. That is, they have issued
stock that can be bought and sold on public stock markets. A stock confers a share of
ownership in the company that issued it. If a company issued 1,000 shares, and you
own 100 of them, you own a tenth of that company. If you own more than 500 shares,
you own a majority or controlling interest in that company. When the company makes
major decisions, the shareholders must vote on them. The more shares you have, the
more votes you get. If you own more than half of the shares, you always have a
majority of the votes. In many respects, you can control the company. So a hostile
takeover boils down to this. The buyer has to gain control of the target company and
force them to agree to the sale.
There are several reasons why a company might want or need a hostile takeover. They
may think the target company can generate more profit in the future than the selling
price. If a company can make $100 million in profits each year, then buying the
company for $200 million makes sense. That’s why so many corporations have
subsidiaries that don’t have anything in common – they were bought purely for
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financial reasons. Currently, strategic mergers and acquisitions are more common. In
a strategic acquisition, the buyer acquires the target company because it wants access
to its distribution channels, customer base, brand name, or technology.
In some cases, purchasers use a hostile takeover because they can do it quickly, and
they can make the acquisition with better terms than if they had to negotiate a deal
with the target’s shareholders and board of directors.
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This method estimates the value of an asset based on its expected future cash flows,
which are discounted to the present (i.e., the present value). This concept of
discounting future money is commonly known as the time value of money. For
instance, an asset that matures and pays $1 in one year is worth less than $1 today.
The size of the discount is based on an opportunity cost of capital and it is expressed
as a percentage. Some people call this percentage a discount rate.
The idea of opportunity cost can be illustrated in an example. A person with only $100
to invest can make just one $100 investment even when presented with two or more
investment choices. If this person is later offered an alternative investment choice, the
investor has lost the opportunity to make that second investment since the $100 is
spent to buy the first opportunity. This example illustrates that money is limited and
people make choices in how to spend it. By making a choice, they give up other
opportunities.
In finance theory, the amount of the opportunity cost is based on a relation between
the risk and return of some sort of investment. Classic economic theory maintains that
people are rational and averse to risk. They, therefore, need an incentive to accept
risk. The incentive in finance comes in the form of higher expected returns after
buying a risky asset. In other words, the more risky the investment, the more return
investors want from that investment. Using the same example as above, assume the
first investment opportunity is a government bond that will pay interest of 5% per
year and the principal and interest payments are guaranteed by the government.
Alternatively, the second investment opportunity is a bond issued by small company
and that bond also pays annual interest of 5%. If given a choice between the two
bonds, virtually all investors would buy the government bond rather than the small-
firm bond because the first is less risky while paying the same interest rate as the
riskier second bond. In this case, an investor has no incentive to buy the riskier second
bond. Furthermore, in order to attract capital from investors, the small firm issuing the
second bond must pay an interest rate higher than 5% that the government bond pays.
Otherwise, no investor is likely to buy that bond and, therefore, the firm will be
unable to raise capital. But by offering to pay an interest rate more than 5% the firm
gives investors an incentive to buy a riskier bond.
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For a valuation using the discounted cash flow method, one first estimates the future
cash flows from the investment and then estimates a reasonable discount rate after
considering the riskiness of those cash flows and interest rates in the capital markets.
Next, one makes a calculation to compute the present value of the future cash flows.
This method determines the value of a firm by observing the prices of similar
companies (guideline companies) that sold in the market. Those sales could be shares
of stock or sales of entire firms. The observed prices serve as valuation benchmarks.
From the prices, one calculates price multiples such as the price-to-earnings or price-
to-book value ratios. Next, one or more price multiples are used to value the firm. For
example, the average price-to-earnings multiple of the guideline companies is applied
to the subject firm's earnings to estimate its value.
Many price multiples can be calculated. Most are based on a financial statement
element such as a firm's earnings (price-to-earnings) or book value (price-to-book
value) but multiples can be based on other factors such as price-per-subscriber.
The third common method of estimating the value of a company looks to the assets
and liabilities of the business. At a minimum, a solvent company could shut down
operations, sell off the assets, and pay the creditors. Any cash that would remain
establishes a floor value for the company. This method is known as the net asset value
or cost method. Normally, the discounted cash flows of a well-performing exceed this
floor value. However, some companies are "worth more dead than alive", such as
weakly performing companies that own many tangible assets. This method can also be
used to value heterogeneous portfolios of investments, as well as non-profit
companies for which discounted cash flow analysis is not relevant. The valuation
premise normally used is that of an orderly liquidation of the assets, although some
valuation scenarios (e.g. purchase price allocation) imply an "in-use" valuation such
as depreciated replacement cost new.
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An alternative approach to the net asset value method is the excess earnings method.
This method was first described in ARM34, and later refined by the U.S. Internal
Revenue Service's Revenue Ruling 68-609. The excess earnings method has the
appraiser identify the value of tangible assets, estimate an appropriate return on those
tangible assets, and subtract that return from the total return for the business, leaving
the "excess" return, which is presumed to come from the intangible assets. An
appropriate capitalization rate is applied to the excess return, resulting in the value of
those intangible assets. That value is added to the value of the tangible assets and any
non-operating assets, and the total is the value estimate for the business as a whole.
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The Formula
The CAPM is a model for pricing an individual security or a portfolio. For individual
securities, we make use of the security market line (SML) and its relation to expected
return and systematic risk (beta) to show how the market must price individual
securities in relation to their security risk class. The SML enables us to calculate the
reward-to-risk ratio for any security in relation to that of the overall market.
Therefore, when the expected rate of return for any security is deflated by its beta
coefficient, the reward-to-risk ratio for any individual security in the market is equal
to the market reward-to-risk ratio, thus:
The market reward-to-risk ratio is effectively the market risk premium and by
rearranging the above equation and solving for E (Ri), we obtain the Capital Asset
Pricing Model (CAPM).
where:
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(the beta) is the sensitivity of the expected excess asset returns to the
which states that the individual risk premium equals the market premium times β.
Note 1: the expected market rate of return is usually estimated by measuring the
Geometric Average of the historical returns on a market portfolio (e.g. S&P 500).
Note 2: the risk free rate of return used for determining the risk premium is usually
the arithmetic average of historical risk free rates of return and not the current risk
free rate of return.
The SML essentially graphs the results from the capital asset pricing model (CAPM)
formula. The x-axis represents the risk (beta), and the y-axis represents the expected
return. The market risk premium is determined from the slope of the SML.
The relationship between β and required return is plotted on the securities market line
(SML) which shows expected return as a function of β. The intercept is the nominal
risk-free rate available for the market, while the slope is the market premium, E (Rm)
− Rf. The securities market line can be regarded as representing a single-factor model
of the asset price, where Beta is exposure to changes in value of the Market. The
equation of the SML is thus:
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Asset pricing
Once the expected/required rate of return, E(Ri), is calculated using CAPM, we can
compare this required rate of return to the asset's estimated rate of return over a
specific investment horizon to determine whether it would be an appropriate
investment. To make this comparison, you need an independent estimate of the return
outlook for the security based on either fundamental or technical analysis techniques,
including P/E, M/B etc.
Assuming that the CAPM is correct, an asset is correctly priced when its estimated
price is the same as the present value of future cash flows of the asset, discounted at
the rate suggested by CAPM. If the observed price is higher than the CAPM
valuation, then the asset is overvalued (and undervalued when the estimated price is
below the CAPM valuation).When the asset does not lie on the SML, this could also
suggest mis-pricing. Since the expected return of the asset at time t is
Business valuation is a process and a set of procedures used to estimate the economic
value of an owner’s interest in a business. Valuation is used by financial market
participants to determine the price they are willing to pay or receive to consummate a
sale of a business. In addition to estimating the selling price of a business, the same
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valuation tools are often used by business appraisers to resolve disputes related to
estate and gift taxation, divorce litigation, allocate business purchase price among
business assets, establish a formula for estimating the value of partners' ownership
interest for buy-sell agreements, and many other business and legal purposes.
Before the value of a business can be measured, the valuation assignment must
specify the reason for and circumstances surrounding the business valuation. These
are formally known as the business value standard and premise of value ]The standard
of value is the hypothetical conditions under which the business will be valued. The
premise of value relates to the assumptions, such as assuming that the business will
continue forever in its current form (going concern), or that the value of the business
lies in the proceeds from the sale of all of its assets minus the related debt (sum of the
parts or assemblage of business assets).
Business valuation results can vary considerably depending upon the choice of both
the standard and premise of value. In an actual business sale, it would be expected
that the buyer and seller, each with an incentive to achieve an optimal outcome, would
determine the fair market value of a business asset that would compete in the market
for such an acquisition. If the synergies are specific to the company being valued, they
may not be considered. Fair value also does not incorporate discounts for lack of
control or marketability.
Note, however, that it is possible to achieve the fair market value for a business asset
that is being liquidated in its secondary market. This underscores the difference
between the standard and premise of value.
These assumptions might not, and probably do not, reflect the actual conditions of the
market in which the subject business might be sold. However, these conditions are
assumed because they yield a uniform standard of value, after applying generally-
accepted valuation techniques, which allows meaningful comparison between
businesses which are similarly situated.
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Leveraged buyout
Companies of all sizes and industries have been the target of leveraged buyout
transactions, although because of the importance of debt and the ability of the
acquired firm to make regular loan payments after the completion of a leveraged
buyout, some features of potential target firms make for more attractive leverage
buyout candidates, including:
Hard assets (property, plant and equipment, inventory, receivables) that may be used
as collateral for lower cost secured debt.
The potential for new management to make operational or other improvements to the
firm to boost cash flows.
Market conditions and perceptions that depress the valuation or stock price.
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Characteristics
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This kind of acquisition brings leverage benefits to an LBO's financial sponsor in two
ways:
(1) The investor itself only needs to provide a fraction of the capital for the
acquisition, and
(2) Assuming the economic internal rate of return on the investment (taking into
account expected exit proceeds) exceeds the weighted average interest rate on the
acquisition debt, returns to the financial sponsor will be significantly enhanced.
As transaction sizes grow, the equity component of the purchase price can be provided
by multiple financial sponsors "co-investing" to come up with the needed equity for a
purchase. Likewise, multiple lenders may band together in a "syndicate" to jointly
provide the debt required to fund the transaction. Today, larger transactions are
dominated by dedicated private equity firms and a limited number of large banks with
"financial sponsors" groups.
As a percentage of the purchase price for a leverage buyout target, the amount of debt
used to finance a transaction varies according to the financial condition and history of
the acquisition target, market conditions, the willingness of lenders to extend credit
(both to the LBO's financial sponsors and the company to be acquired) as well as the
interest costs and the ability of the company to cover those costs. Typically the debt
portion of a LBO ranges from 50%-85% of the purchase price, but in some cases debt
may represent upwards of 95% of purchase price. Between 2000-2005 debt averaged
between 59.4% and 67.9% of total purchase price for LBOs in the United States.
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(LIBOR). They are typically pre-payable at the option of the issuer, though in some
cases modest prepayment fees apply. High-yield bonds, meanwhile, are also
underwritten by investment banks but are financed by a combination of retail and
institutional credit investors, including high-yield mutual funds, hedge funds, credit
opportunities and other institutional accounts. High-yield bonds tend to be fixed-rate
instruments. Most are unsecured, though in some cases issuers will sell senior secured
notes. The bonds usually have no-call periods of 3–5 years and then high prepayment
fees thereafter. Issuers, however, will in many cases have a "claw-back option" that
allows them to repay some percentage during the no-call period (usually 35%) with
equity proceeds.
Another source of financing for LBO's is seller's notes, which are provided in some
cases by the entity as a way to facilitate the transaction.
Management buyouts
Of course, the incentive to artificially reduce share price extends beyond management
buyouts.
It is fairly easy for a top executive to reduce the price of his/her company's stock - due
to information asymmetry. The executive can accelerate accounting of expected
expenses, delay accounting of expected revenue, engage in off balance sheet
transactions to make the company's profitability appear temporarily poorer, or simply
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A reduced share price makes a company an easier takeover target. When the company
gets bought out (or taken private) - at a dramatically lower price - the takeover artist
gains a windfall from the former top executive's actions to surreptitiously reduce
share price. This can represent tens of billions of dollars (questionably) transferred
from previous shareholders to the takeover artist. The former top executive is then
rewarded with a golden parachute for presiding over the firesale that can sometimes
be in the hundreds of millions of dollars for one or two years of work. (This is
nevertheless an excellent bargain for the takeover artist, who will tend to benefit from
developing a reputation of being very generous to parting top executives).
Similar issues occur when a publicly held asset or non-profit organization undergoes
privatization. Top executives often reap tremendous monetary benefits when a
government owned or non-profit entity is sold to private hands. Just as in the example
above, they can facilitate this process by making the entity appear to be in financial
crisis - this reduces the sale price (to the profit of the purchaser), and makes non-
profits and governments more likely to sell. Ironically, it can also contribute to a
public perception that private entities are more efficiently run reinforcing the political
will to sell of public assets.
Again, due to asymmetric information, policy makers and the general public see a
government owned firm that was a financial 'disaster' - miraculously turned around by
the private sector (and typically resold) within a few years.
Nevertheless, the incentive to artificially reduce the share price of a firm is higher for
management buyouts, than for other forms of takeovers or LBOs.
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In this first step of Merger and Acquisition Process, the market value of the target
company is assessed. In this process of assessment not only the current financial
performance of the company is examined but also the estimated future market value is
considered. The company which intends to acquire the target firm engages itself in an
thorough analysis of the target firm's business history. The products of the firm, its'
capital requirement, organizational structure, brand value everything are reviewed
strictly.
Phase of Proposal
After complete analysis and review of the target firm's market performance, in the
second step, the proposal for merger or acquisition is given. The total price the
acquiring company is ready to pay for the target company and its assets is worked out
with assistance from investment bankers as well as the financial advisors. Thereafter
the tender offer is published informing the shareholders about the offer price as well
as deadlines for either rejecting the offer or accepting it.
The target company responds to the above course of action in any one of the
following ways:
(i) Agree with the Offer terms: In the event it is felt by the top level executives and
managers that the offer price may be accepted, the deal of merger or acquisition is
struck.
(ii) Try to negotiate: If the terms offered by the acquiring company are not acceptable,
then the shareholders of the target company will try to negotiate the deal of merger or
acquisition. The shareholders and the top level management of the subject company
will try to work out issues so that they do not lose their jobs and simultaneously see
the interest of the target company.
(iii) Looking for a White Knight: A White Knight is referred to another company,
which would like to go for a friendly take over of the subject company, thereby saving
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the target or the subject company from falling prey to that company, which is
intending for a hostile takeover of the target company.
(iv) Using a Poison Pill: The target company uses a Poison pill wherein it attempts to
make its assets or shares less appealing to the company, which is attempting the tale
over. The target company may do it by two methods:
(a) By using a "flip in": Permits the prevailing shareholders of the target company to
buy shares at a discounted rate.
(b) By using a "flip over": Permits the shareholders to buy stakes of the acquiring
company at a discounted rate after the merger has taken place.
When the tender offer has been finally agreed upon by the target company and after
fulfilling certain regulatory criteria, the deal of merger or acquisition is executed
wherein some kind of transaction takes place. During the course of the transaction, the
company, which buys the target company makes payment with stock, cash or with
both.
Exit Plan
When a company decides to buy out the target firm and the target firm agrees, then
the latter involves in Exit Planning. The target firm plans the right time for exit. It
considers all the alternatives like Full Sale, Partial Sale and others. The firm also does
the tax planning and evaluates the options of reinvestment.
Structured Marketing
After finalizing the Exit Plan, the target firm involves in the marketing process and
tries to achieve highest selling price. In this step, the target firm concentrates on
structuring the business deal.
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In this step, the purchase agreement is made in case of an acquisition deal. In case of
Merger also, the final agreement papers are generated in this stage.
Stage of Integration
In this final stage, the two firms are integrated through Merger or Acquisition. In this
stage, it is ensured that the new joint company carries same rules and regulations
through out the organization.
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M&A has become a daily transaction now-a-days. Mergers and acquisitions are an
important area of capital market activity in restructuring a corporation and had lately
become one of the favoured routes for growth and consolidation. The reasons to
merge, amalgamate and acquire are varied, ranging from acquiring market share to
restructuring the corporation to meet global competition. One of the largest and most
difficult parts of a business merger is the successful integration of the enterprise
networks of the merger partners. The main objective of each firm is to gain profits.
M&A has a great scope in sectors like steel, aluminium, cement, auto, banking &
finance, computer software, pharmaceuticals, consumer durable food products,
textiles etc.
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Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can
generate cost efficiency through economies of scale, can enhance the revenue through
gain in market share and can even generate tax gains. The principal benefits from
mergers and acquisitions can be listed as increased value generation, increase in cost
efficiency and increase in market share.
Benefits of Mergers and Acquisitions are the main reasons for which the companies
enter into these deals. Mergers and Acquisitions may generate tax gains, can increase
revenue and can reduce the cost of capital. The main benefits of Mergers and
Acquisitions are the following:
Mergers and acquisitions often lead to an increased value generation for the company.
It is expected that the shareholder value of a firm after mergers or acquisitions would
be greater than the sum of the shareholder values of the parent companies. Mergers
and acquisitions generally succeed in generating cost efficiency through the
implementation of economies of scale.
Merger & Acquisition also leads to tax gains and can even lead to a revenue
enhancement through market share gain. Companies go for Mergers and Acquisition
from the idea that, the joint company will be able to generate more value than the
separate firms. When a company buys out another, it expects that the newly generated
shareholder value will be higher than the value of the sum of the shares of the two
separate companies.
Mergers and Acquisitions can prove to be really beneficial to the companies when
they are weathering through the tough times. If the company which is suffering from
various problems in the market and is not able to overcome the difficulties, it can go
for an acquisition deal. If a company, which has a strong market presence, buys out
the weak firm, then a more competitive and cost efficient company can be generated.
Here, the target company benefits as it gets out of the difficult situation and after
being acquired by the large firm, the joint company accumulates larger market share.
This is because of these benefits that the small and less powerful firms agree to be
acquired by the large firms.
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When two companies come together by merger or acquisition, the joint company
benefits in terms of cost efficiency. A merger or acquisition is able to create
economies of scale which in turn generates cost efficiency. As the two firms form a
new and bigger company, the production is done on a much larger scale and when the
output production increases, there are strong chances that the cost of production per
unit of output gets reduced. An increase in cost efficiency is affected through the
procedure of mergers and acquisitions. This is because mergers and acquisitions lead
to economies of scale. This in turn promotes cost efficiency. As the parent firms
amalgamate to form a bigger new firm the scale of operations of the new firm
increases. As output production rises there are chances that the cost per unit of
production will come down.
Economy of scale
This refers to the fact that the combined company can often reduce its fixed costs by
removing duplicate departments or operations, lowering the costs of the company
relative to the same revenue stream, thus increasing profit margins.
Economy of scope
This refers to the efficiencies primarily associated with demand-side changes, such as
increasing or decreasing the scope of marketing and distribution, of different types of
products.
Market share
This assumes that the buyer will be absorbing a major competitor and thus increase its
market power (by capturing increased market share) to set prices.
Cross-selling
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For example, a bank buying a stock broker could then sell its banking products to the
stock broker's customers, while the broker can sign up the bank's customers for
brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
Synergy
Taxation
A profitable company can buy a loss maker to use the target's loss as their advantage
by reducing their tax liability. In the United States and many other countries, rules are
in place to limit the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company. Tax minimization
strategies include purchasing assets of a non-performing company and reducing
current tax liability under the Tanner-White PLLC Troubled Asset Recovery Plan.
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De-merged firms are likely to be substantially smaller than their parents, possibly
making it harder to tap credit markets and costlier finance that may be affordable only
for larger companies. And the smaller size of the firm may mean it has less
representation on major indexes, making it more difficult to attract interest from
institutional investors.
Meanwhile, there are the extra costs that the parts of the business face if separated.
When a firm divides itself into smaller units, it may be losing the synergy that it had
as a larger entity. For instance, the division of expenses such as marketing,
administration and research and development (R&D) into different business units may
cause redundant costs without increasing overall revenues.
Restructuring Methods
There are several restructuring methods: doing an outright sell-off, doing an equity
carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each
has advantages and disadvantages for companies and investors. All of these deals are
quite complex.
Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary.
Normally, sell-offs are done because the subsidiary doesn't fit into the parent
company's core strategy. The market may be undervaluing the combined businesses
due to a lack of synergy between the parent and subsidiary. As a result, management
and the board decide that the subsidiary is better off under different ownership.
Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be
used to pay off debt. In the late 1980s and early 1990s, corporate raiders would use
debt to finance acquisitions. Then, after making a purchase they would sell-off its
subsidiaries to raise cash to service the debt. The raiders' method certainly makes
sense if the sum of the parts is greater than the whole. When it isn't, deals are
unsuccessful.
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Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A
parent firm makes a subsidiary public through an initial public offering (IPO) of
shares, amounting to a partial sell-off. A new publicly-listed company is created, but
the parent keeps a controlling stake in the newly traded subsidiary.
A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is
growing faster and carrying higher valuations than other businesses owned by the
parent. A carve-out generates cash because shares in the subsidiary are sold to the
public, but the issue also unlocks the value of the subsidiary unit and enhances the
parent's shareholder value.
The new legal entity of a carve-out has a separate board, but in most carve-outs, the
parent retains some control. In these cases, some portion of the parent firm's board of
directors may be shared. Since the parent has a controlling stake, meaning both firms
have common shareholders, the connection between the two will likely be strong.
That said, sometimes companies carve-out a subsidiary not because it's doing well,
but because it is a burden. Such an intention won't lead to a successful result,
especially if a carved-out subsidiary is too loaded with debt, or had trouble even when
it was a part of the parent and is lacking an established track record for growing
revenues and profits.
Carve-outs can also create unexpected friction between the parent and subsidiary.
Problems can arise as managers of the carved-out company must be accountable to
their public shareholders as well as the owners of the parent company. This can create
divided loyalties.
Spinoffs
A spinoff occurs when a subsidiary becomes an independent entity. The parent firm
distributes shares of the subsidiary to its shareholders through a stock dividend. Since
this transaction is a dividend distribution, no cash is generated. Thus, spinoffs are
unlikely to be used when a firm needs to finance growth or deals. Like the carve-out,
the subsidiary becomes a separate legal entity with a distinct management and board.
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Like carve-outs, spinoffs are usually about separating a healthy operation. In most
cases, spinoffs unlock hidden shareholder value. For the parent company, it sharpens
management focus. For the spinoff company, management doesn't have to compete
for the parent's attention and capital. Once they are set free, managers can explore
new opportunities.
Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track
the value of one segment of that company. The stock allows the different segments of
the company to be valued differently by investors.
Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio)
happens to have a fast growing business unit. The company might issue a tracking
stock so the market can value the new business separately from the old one and at a
significantly higher P/E rating.
Why would a firm issue a tracking stock rather than spinning-off or carving-out its
fast growth business for shareholders? The company retains control over the
subsidiary; the two businesses can continue to enjoy synergies and share marketing,
administrative support functions, a headquarters and so on. Finally, and most
importantly, if the tracking stock climbs in value, the parent company can use the
tracking stock it owns to make acquisitions.
Still, shareholders need to remember that tracking stocks are class B, meaning they
don't grant shareholders the same voting rights as those of the main stock. Each share
of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of
tracking stock have no vote at all.
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This programme takes you through the ten essential steps to successful mergers and
acquisitions:
Formulating a strategy
Defining acquisition criteria
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IPO Definition
An initial public offer, as the name indicates, is the first (initial) instance of a
company (called the issuer) offering its commons stock (or shares) to the general
public for subscription.
In addition to IPO, an already listed and publicly traded company may issue an FPO –
a Follow on Public Offer – to raise further capital for the company. At any given time,
there are a number of IPO and FPO issues floating around in the market, therefore, it
is essential to understand the difference between the two.
Shares issued in an IPO are bought in the primary market, while shares brought from
another investor are exchanged in the secondary market. The distinct between primary
and secondary market is notional, there is no physical separation between the two. An
important distinction between shares purchased during an IPO and shares purchased
from the secondary market is that while in case of an IPO, the money goes directly
into the company coffers; in case of secondary market, the money is transferred from
one investor to another.
The issuance of an IPO is a process with distinctive stages. The life cycle of an IPO
can be understood to be spread over these steps or stages. The various stages in the
life cycle of an Initial Public Offering are as follows -
Initialization – In this stage, the company appoints various entities that are crucial in
the management of the IPO.These entities include the issue managers or book runners
(mostly investment banks) and registrars to the issue.
Pre Issue Activities – In this stage, the draft offer prospectus is prepared and
submitted to SEBI. The lead manager may conduct road shows which are basically
marketing activities to generate awareness about the issue.
Prospectus Review – SEBI reviews the prospectus submitted to it, and any changes
and revisions suggested by SEBI are incorporated at this stage. Once the draft is
approved by SEBI, it is termed as the Offer Prospectus.
Distribution of Red Herring Prospectus and IPO Forms – The prospectus and the
forms are distributed to retail investors through the syndicate members.
Public Issue – In this stage, the issue is thrown open to the public and the bids are
collected. The public issue closes at a predetermined date. This stage can be
considered to be the “public face” of the IPO.
Price Fixing – Once all the bids are collected, the lead managers decide the final
issue price, and inform the stock exchange and SEBI.
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Listing in the Stock Exchange – Once the date of listing is decided, the shares of the
issuer company are listed on the stock exchange shares.
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Advantages of IPO
IPO has a number of advantages. IPO helps the company to create a public awareness
about the company as these public offerings generate publicity by inducing their
products to various investors.
The increase in the capital: An IPO allows a company to raise funds for utilizing in
various corporate operational purposes like acquisitions, mergers, working capital,
research and development, expanding plant and equipment and marketing.
Liquidity: The shares once traded have an assigned market value and can be resold.
This is extremely helpful as the company provides the employees with stock incentive
packages and the investors are provided with the option of trading their shares for a
price.
Valuation: The public trading of the shares determines a value for the company and
sets a standard. This works in favor of the company as it is helpful in case the
company is looking for acquisition or merger. It also provides the share holders of the
company with the present value of the shares.
Increased wealth: The founders of the companies have an affinity towards IPO as it
can increase the wealth of the company, without dividing the authority as in case of
partnership.
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Disadvantages of IPO
Increased disclosure
When a company moves from private ownership to public, it vastly increases the
number of people who have access to its financial records. This can be a huge shock
to the existing owners, not just the reporting of the company’s results, but the
disclosure of management salaries and perks that often piques the interest of
newspaper editors on a slow day.
Disclosure requirements vary by country. Those countries with the largest stock
markets, relative to the economy, typically have the highest disclosure requirements
(e.g. Australia, Canada, UK, USA).
The development of efficient capital markets in Central and Eastern Europe has been
hindered partially by the reticence of corporate executives to disclose information
about their firm’s operations and performance.
It’s not all bad though. Botosan (1997) has found that increased disclosure on the part
of the company can reduce its cost of equity. By reducing its cost of equity, a
company is able to invest in more projects, raise capital more cheaply, and enhance its
valuation.
Costs of IPOs
Initial public offerings aren’t cheap. Investment bankers take commissions of between
2 and 7 per cent of the total amount raised; lawyers and accountants bill by the hour,
and many hours are required. The ancillary costs, such as public relations, printing,
corporate advertising and others can add several hundred thousand more dollars, euros
or pounds.
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In addition to the upfront costs of the IPO, there are the costs of maintaining a quote
on the stock exchange (stock exchange fees, management time, more extensive audits
and reporting, reconciliation of accounts to US GAAP if listed on a US exchange,
etc.).
However, the direct costs of an IPO can pale beside the indirect cost of underpricing.
Because no cash is coming directly out of the issuer’s pocket, underpricing can
sometimes be ignored as a cost. It should not be. IPOs around the world are under
priced compared with their short-term performance. On average, an IPO will close at
a price that is 15 to 20 per cent above its issue price, although this varies by market
and industry and over time. This means that selling shareholders and the company are
leaving significant sums of money on the table when they go public.
The amount of money left on the table is calculated by subtracting the offer price from
the first day closing price and multiplying by the number of shares offered. For
example, many analysts believe Google left too much money on the table in its 2004
IPO.
In many private companies, the managers are the owners. Therefore there are few
restrictions on management action other than statutory and legal regulations and
common sense. However, this is not a problem as the linkage of ownership and
control should lead to little divergence of opinion about the appropriate course of
action for the company.
In public companies, the managers are the agents of the shareholders – they should be
acting on behalf of the shareholders and in the shareholders’ best interests. In order to
ensure that they do, public companies have boards of directors who are meant to
oversee management’s actions on behalf of shareholders. In some circumstances a
strong board of directors may limit the actions of management.
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Those funds can be allocated for either short term or long term purposes. The health
fund is a new way of funding private healthcare centers.
Credit
Credit is the trust which allows one party to provide resources to another party where
that second party does not reimburse the first party immediately (thereby generating
a debt), but instead arranges either to repay or return those resources (or other
materials of equal value) at a later date. The resources provided may be financial (e.g.
granting a loan), or they may consist of goods or services (e.g.consumer credit).
Credit encompasses any form of deferred payment. Credit is extended by a creditor,
also known as a lender, to a debtor, also known as a borrower.
Donation
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Grants
Grants are funds disbursed by one party (Grant Makers), often a Government
Department, Corporation, Foundation or Trust, to a recipient, often (but not always) a
nonprofit entity, educational institution, business or an individual. In order to receive
a grant, some form of "Grant Writing" often referred to as either a proposal or an
application is usually required. For more information regarding successful grant
submissions see Grant Writing. Most grants are made to fund a specific project and
require some level of compliance and reporting. The Grant Writing process involves
an applicant submitting a proposal (or submission) to a potential funder, either on the
applicant's own initiative or in response to a Request for Proposal from the funder.
Other grants can be given to individuals, such as victims of natural disasters or
individuals such as people who seek to open a small business. Sometimes Grant
Makers require Grant Seekers to have some form of tax-exempt status, be a registered
nonprofit organization or a local government.
Savings
"Saving" differs from "savings." The former refers to an increase in one's assets, an
increase in net worth, whereas the latter refers to one part of one's assets, usually
deposits in savings accounts, or to all of one's assets. Saving refers to an activity
occurring over time, a flow variable, whereas savings refers to something that exists
at any one time, a stock variable.
Saving is closely related to investment. By not using income to buy consumer goods
and services, it is possible for resources to instead be invested by being used to
produce fixed capital, such as factories and machinery. Saving can therefore be vital
to increase the amount of fixed capital available, which contributes to economic
growth.
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Subsidies
Taxes
Taxes are also imposed by many sub national entities. Taxes consist of direct
tax or indirect tax, and may be paid in money or as its labor equivalent (often but not
always unpaid labor). A tax may be defined as a "pecuniary burden laid upon
individuals or property owners to support the government a payment exacted by
legislative authority." A tax "is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority" and is "any contribution
imposed by government whether under the name of toll, tribute, tall age, gable,
impost, duty, custom, excise, subsidy, aid, supply, or other name."
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In finance, leverage is a general term for any technique to multiply gains and
losses. Common ways to attain leverage are borrowing money, buying fixed
assets and using derivatives. Important examples are:
A public corporation may leverage its equity by borrowing money. The more it
borrows, the less equity capital it needs, so any profits or losses are shared among a
smaller base and are proportionately larger as a result.
A business entity can leverage its revenue by buying fixed assets. This will
increase the proportion of fixed, as opposed to variable, costs, meaning that a change
in revenue will result in a larger change in operating income.
Hedge funds often leverage their assets by using derivatives. A fund might get
any gains or losses on $20 million worth of crude oil by posting $1 million of cash
as margin.
The most obvious risk of leverage is that it multiplies losses. A corporation that
borrows too much money might face bankruptcy during a business downturn, while a
less-levered corporation might survive. An investor who buys a stock on 50% margin
will lose 40% of his money if the stock declines 20%.There is an important implicit
assumption in that account, however, which is that the underlying levered asset is the
same as the unlevered one. If a company borrows money to modernize, or add to its
product line, or expand internationally, the additional diversification might more than
offset the additional risk from leverage. Or if an investor uses a fraction of his or her
portfolio to margin stock index futures and puts the rest in a money market fund, he or
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she might have the same volatility and expected return as an investor in an unlevered
equity index fund, with a limited downside. So while adding leverage to a given asset
always adds risk, it is not the case that a levered company or investment is always
riskier than an unlevered one. In fact, many highly-levered hedge funds have less
return volatility than unlevered bond funds, and public utilities with lots of debt are
usually less risky stocks than unlevered technology companies.
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Kotak Investment Banking, a pioneer and leader in the equity capital markets, has
worked on the development of some of the most path-breaking innovations in the
Indian capital markets including the introduction of book building in public offers and
the introduction of Qualified Institutional Placements (QIPs) in India. The firm has a
strong track record of managing several industry-defining deals and has been the book
runner for some landmark government disinvestments.
In FY2011, Kotak Investment Banking was the lead manager to twelve out of the
twenty six Initial /Follow on Public Equity Offerings (above Rs. 2.5 billion)
accounting for 62% of the total money raised in these offerings. We have helped
companies raise over Rs 350 billion in the domestic markets during FY2011.Some of
our recent transactions include:
IPOs
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Tech Mahindra: In 2009, Tech Mahindra acquired Satyam Computer Services for
US$ 591 mn. Kotak provided the entire suite of services from advisory and financing
to execution and open offer management.
Ispat Industries: In 2010, exclusive financial advisor to Ispat Industries for strategic
stake sale to JSW Steel through a preferential issue of shares, US$ 480 mn.
The Mobile Store: In 2010, Exclusive advisor for private placement of shares to
IL&FS Private Equity, US$ 22 mn.
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Mahindra & Mahindra: In 2008, Exclusive advisor for private placement of 3.68%
stake to Goldman Sachs, US$ 175 mn .
Punj Lloyd: In 2007, Joint Book Runner for QIP (subscription by blue-chip PE
investors), US$ 200 mn .
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Religare provides innovative, integrated and best fit solutions to our corporate
customers. It provides value enhancement through diverse financial solutions on an
ongoing basis. Division through which Religare operates in investment banking
operations.Corporate Finance Religare focuses on finding right and relevant partners
for our clients, who not only help in adding value but also improve the future
valuation of the organization. They also specialize in structured financing and
providing advisory services related to financial planning, modeling and advising on
financial requirements.
Placement of Debt
Overseas Acquisition
Merchant Banking
IPO/FPO/RIGHTS
ADR/GDR/FCCB
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At Edelweiss Client Advisory Services, our team is driven not just by the quality of
our ideas, but also professional ethics and integrity. We take pride in our philosophy
of offering advice which is in the best interest of our clients. Our emphasis on
building long term relationship ensures that we work closely with our clients
empowering them to gain from market opportunities.
Edelweiss’ M&A team provides insights into how companies can grow and enhance
their value. The M&A team is engaged in turnkey transaction management and
advises a diverse range of clients in medium to large transactions. Our key strengths
include independent advice, deep sector knowledge backed by professionals with a
range of training and experience that spans across multiple cross-border deals and our
relationships with large corporates.
Edelweiss advises companies in the entire transaction process – this ranges from
target identification to deal closure. We provides both buy-side and sell-side advisory
services as part of our M&A advisory offering. Our services include identification and
short listing of target universe, strategic planning of an acquisition and arranging
finance for the transaction, if required.
We are in the vanguard of equity capital markets having brought to the market a large
number of successful and path breaking transactions. We advise leading Indian
companies, banks, institutions and businesses which are seeking to mobilize capital
from investors in India and overseas.
Infrastructure Advisory
A critical ingredient for sustainable development in India is the pressing need for
Infrastructure creation on a commercially viable basis. This signifies immense
opportunities and challenges for the sector. Recognizing this, Edelweiss’ new
Infrastructure practice has been formed to provide innovative solutions tailored to the
unique financing and advisory requirements of Indian infrastructure projects and
developers.
We provide Infrastructure project companies and developers the full range of capital
and advisory services.
Capital Raising
Private Equity
Project Equity
Structured Finance
Advisory Services
Mergers & Acquisitions – both Sell side and Buy side Divestitures, Corporate
Restructuring and Spin offs
Capital Raising of INR 5,800 million for MB Power (Madhya Pradesh) Limited.
Capital Raising of INR 13,500 million for Moser Baer Projects Private Limited.
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Investment banks refer to the banking institutions which offer specialized services
related to investment banking. Investment banks provide a wide variety of services
related to investment management, buying and selling, research, risk diversification,
and portfolio management.
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Goldman Sachs
Goldman Sachs is a global investment banking and securities firm which engages in
investment banking, securities services, investment management and other financial
services primarily with institutional clients.
Goldman Sachs is one of the leading investment banking service providers in the
world. Apart from collecting funds for the clients, this premier financial firm is
famous for rendering excellent advisory service on mergers and acquisitions.
The firm has gained extreme fame for advising the clients on how to avoid takeovers.
The task of investment banking in Goldman Sachs is divided into the following
segments:
Merchant Banking
Private Wealth Management
Securities Services
Execution Services
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The Merchant Banking Division of Goldman Sachs invests in the corporate and real
estate assets all across the world. The fund that it invests may be the firm's own
capital or fund collected from outside. The Principal Investment Area (PIA) of the
division pursues corporate investment while the Real Estate Principal Investment Area
(REPIA) of the division pursues proprietary capital investment.
The client list of the Private Wealth Management division of Goldman Sachs is
formed of the 45% of the Forbes 400 list of the wealthiest individuals worldwide. The
firm is committed to provide some of the best investment ideas to the clients.
Goldman Sachs Global Investment Research provides some of the highest quality
investment opinions and fundamental research data to the clients across the world.
Goldman Sachs' Equity Division has been providing advisory services in planning
investment strategies to the top corporations, companies and governments of the
world. It also offers services in raising capital in the private and public equity
markets.
The Securities Services offered by Goldman Sachs consist of the Global Securities
Services. This group is engaged in securities lending, prime brokerage, financing
services and futures services with the clients.
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Morgan Stanley
The company is an investment bank and retail broker provider. The company is
headquartered in New York. The subsidiaries and affiliates of the company provide
their services to individuals, financial institutions, governments and corporations. The
business segments of the company can be divided into four major segments:
Institutional Securities
This has in its purview capital raising; financial advisory services including advice on
mergers and acquisitions, real estate, project finance and restructuring. The company
also specializes in corporate lending, sales, trading, financing activities and market
making activities in equity and fixed income securities. Bench mark indices, risk
management analytics, research and investment activities can also be included in this
segment.
Management Group
Under this the company provides advices on brokerage and investment, credit
services, financial and wealth planning services, annuity and insurance products,
banking and cash management services and retirement services. They serve both
individual and small to medium size business concerns. The company also provides
financial solutions comprising of the company's as well as third party products and
services. There are a lot of investment alternatives like equities, options, mutual
funds, structured products, unit investment trusts, managed futures, mutual fund asset
allocation programs.
Asset Management
Morgan Stanley provides global asset management products in equity, fixed income
and alternative investments to retail and institutional clients through third party retail
distribution channels and the company's distribution channels. The activities of the
company carry on these actions through Morgan Stanley and Van Kampen brands.
The company offers open-end funds and separately managed accounts to individual
investors. The products and services provided by the company are as follows:
Investment banking services such as advising, securities underwriting.
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Citibank
Citibank, N.A. is the consumer banking arm of financial services giant Citigroup &
the fourth largest bank holding company in the United States by domestic deposits.
Citibank has retail banking operations in more than 100 countries and territories
around the world. More than half of its 1,400 offices are in the United States, mostly
in New York City, Chicago, Los Angeles, San Francisco/Silicon Valley, and Miami.
More recently, Citibank has expanded its operations in the Boston, Philadelphia,
Houston, Dallas, and Washington D.C. metropolitan areas, albeit with a mixed record
of success.
In addition to the standard banking transactions, Citibank offers insurance, credit card
and investment products. Their online services division is among the most successful
in the field, claiming about 15 million users. The Chairman of Citibank is William R.
Rhodes & the CEO is Vikram Pandit. The ownership of Citibank is as follows:
As a result of the Global financial crisis of 2008-2009 and huge losses in the value of
its sub prime mortgage assets, Citibank was rescued by the U.S. government under
plans agreed for Citigroup. On November 23, 2008, in addition to initial aid of $25
billion, a further $25 billion was invested in the corporation together with guarantees
for risky assets amounting to $306 billion.
As on July 17 2009, Citigroup Inc. reported net income for the second quarter of 2009
of $4.3 billion, or $0.49 per diluted share. Second quarter revenues were $30.0 billion.
These results include an $11.1 billion pre-tax ($6.7 billion after-tax) gain associated
with the Morgan Stanley Smith Barney joint venture transaction, which closed on
June 1, 2009.
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Bank of America
Bank of America Corporation is a financial services company, the largest bank
holding company in the United States, by assets, and the second largest bank by
market capitalization.
The bank's 2008 acquisition of Merrill Lynch made Bank of America the world's
largest wealth manager and a major player in the investment banking industry.
The company holds 12.2% of all U.S. deposits, as of August 2009, and is one of the
Big Four Banks of the United States, along with Citigroup, JP Morgan Chase and
Wells Fargo - its main competitors.
Products:
Finance & Banking
Consumer Banking
Corporate Banking
Investment Banking
Investment Management
Private Equity
Mortgage
Credit Cards
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The J.P. Morgan brand is used by the investment banking as well as the asset
management, private banking, private wealth management and treasury & securities
services divisions. Fiduciary activity within private banking and private wealth
management is done under the aegis of JPMorgan Chase Bank, N.A.—the actual
trustee. The Chase brand is used for credit card services in the United States and
Canada, the bank's retail banking activities in the United States, and commercial
banking. JPMorgan Chase is one of the Big Four banks of the United States with
Bank of America, Citigroup and Wells Fargo.
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History
JPMorgan Chase, in its current structure, is the result of the combination of several
large U.S. banking companies over the last decade including Chase Manhattan
Bank, J.P. Morgan & Co., Bank One, Bear Stearns and Washington
Mutual. Going back further, its predecessors include major banking firms
among which are Chemical Bank, Manufacturers Hanover, First Chicago
Bank, National Bank of Detroit, Texas Commerce Bank, Providian
Financial and Great Western Bank.
The New York Chemical Manufacturing Company was founded in 1823 as a maker of
various chemicals. In 1824, the company amended its charter to perform banking
activities and created the Chemical Bank of New York. After 1851, the bank was
separated from its parent and grew organically and through a series of mergers, most
notably with Corn Exchange Bank in 1954, Texas Commerce Bank (a large bank in
Texas) in 1986, and Manufacturer's Hanover Trust Company in 1991 (the first major
bank merger "among equals"). In the 1980s and early 1990s, Chemical emerged as
one of the leaders in the financing of leveraged buyout transactions. In 1984,
Chemical launched Chemical Venture Partners to invest in private equity transactions
alongside various financial sponsors. By the late 1980s, Chemical developed its
reputation for financing buyouts, building a syndicated leveraged finance business
and related advisory businesses under the auspices of pioneering investment banker,
Jimmy Lee. At many points throughout this history, Chemical Bank was the largest
bank in the United States (either in terms of assets or deposit market share).
In 1996, Chemical Bank acquired the Chase Manhattan Corporation taking the more
prominent Chase name. In 2000, the combined company acquired J.P. Morgan & Co.
and combined the two names to form what is today JPMorgan Chase & Co. JPMorgan
Chase retains Chemical Bank's headquarters at 270 Park Avenue and stock price
history.
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The Chase Manhattan Bank was formed upon the 1955 purchase of Chase National
Bank (established in 1877) by the Bank of the Manhattan Company (established in
1799), the company's oldest predecessor institution. The Bank of the Manhattan
Company was the creation of Aaron Burr, who transformed The Manhattan Company
from a water carrier into a bank.
Led by David Rockefeller during the 1970s and the 1980s, Chase Manhattan emerged
as one of the largest and most prestigious banking concerns, with leadership positions
in syndicated lending, treasury and securities services, credit cards, mortgages, and
retail financial services. Weakened by the real estate collapse in the early 1990s, it
was acquired by Chemical Bank in 1996 retaining the prominent Chase name. Prior to
its notable merger with J.P. Morgan & Co., the new Chase expanded the investment
and asset management groups through two acquisitions. In 1999, it acquired San
Francisco-based Hambrecht & Quist for $1.35 billion. In April 2000, UK-based
Robert Fleming & Co. was sold to the new Chase Manhattan Bank for $7.7 billion.
In 2004, JPMorgan Chase merged with Chicago based Bank One Corp., bringing on
board current chairman and CEO Jamie Dimon as president and COO and designating
him as CEO William B. Harrison, Jr.'s successor. Dimon's pay was pegged at 90% of
Harrison's. Dimon quickly made his influence felt by embarking on a cost-cutting
strategy, and replaced former JPMorgan Chase executives in key positions with Bank
One executives—many of whom were with Dimon at Citigroup. Dimon became CEO
in January 2006 and Chairman in December 2006.
Bank One Corporation was formed upon the 1998 merger between Banc One of
Columbus, Ohio and First Chicago NBD. These two large banking companies had
themselves been created through the merger of many banks. This merger was largely
considered a failure until Dimon—recently ousted as President of Citigroup—took
over and reformed the new firm's practices—especially its disastrous technology
mishmash inherited from the many mergers prior to this one. Dimon effected more
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than sufficient changes to make Bank One Corporation a viable merger partner for
JPMorgan Chase.
Bank One Corporation traced its roots to First Bancgroup of Ohio, founded as a
holding company for City National Bank of Columbus, Ohio and several other banks
in that state, all of which were renamed "Bank One" when the holding company was
renamed Banc One Corporation. With the beginning of interstate banking they spread
into other states, always renaming acquired banks "Bank One", though for a long time
they resisted combining them into one bank. After the First Chicago NBD merger,
adverse financial results led to the departure of CEO John B. McCoy, whose father
and grandfather had headed Banc One and predecessors. Dimon was brought in to
head the company. JPMorgan Chase completed the acquisition of Bank One in the
third quarter of 2004. The former Bank One and First Chicago headquarters in
Chicago serve as the headquarters of Chase, JPMorgan Chase's commercial and retail
banking subsidiary.
Bear Stearns
At the end of 2007, Bear Stearns & Co. Inc. was the fifth largest investment bank in
the United States but its market capitalization had deteriorated through the second half
of 2007. On Friday, March 14, 2008 Bear Stearns lost 47% of its equity market value
to close at $30.00 per share as rumors emerged that clients were withdrawing capital
from the bank. Over the following weekend it emerged that Bear Stearns might prove
insolvent and on or around March 15, 2008 the Federal Reserve engineered a deal to
prevent a wider systemic crisis from the collapse of Bear Stearns.
On March 16, 2008, after a weekend of intense negotiations between JPMorgan, Bear,
and the federal government, JPMorgan Chase announced that it had plans to acquire
Bear Stearns in a stock swap worth $2.00 per share or $240 million pending
shareholder approval scheduled within 90 days. In the interim, JPMorgan Chase
agreed to guarantee all Bear Stearns trades and business process flows. Two days
later, on March 18, 2008, JPMorgan Chase formally announced the acquisition of
Bear Stearns for $236 million. The stock swap agreement was signed in the late-night
hours of March 18, 2008, with JPMorgan agreeing to exchange 0.05473 of each of its
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shares upon closure of the merger for one Bear share, valuing the Bear shares at $2
each.
On March 24, 2008, after considerable public discontent by Bear Stearns shareholders
over the low acquisition price threatened the deal's closure, a revised offer was
announced at approximately $10 per share. Under the revised terms, JPMorgan also
immediately acquired a 39.5% stake in Bear Stearns (using newly issued shares) at the
new offer price and gained a commitment from the board (representing another 10%
of the share capital) that its members would vote in favor of the new deal. With
sufficient commitments thus in hand to ensure a successful shareholder vote, the
merger was completed on June 2, 2008.
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JPMorgan Chase’s activities are organized, for management reporting purposes, into
six business segments:
Investment Bank
Corporate lending
Principal investing
Prime services
Research
Retail banking: Consumer and business banking (including Business Banking Loans);
Consumer Lending: Loan originations and balances (including home lending, student,
auto and other loans); Mortgage production and servicing;
Card Services
Credit cards
Merchant acquiring
Commercial Banking
Middle-market banking
Mid-corporate banking
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Asset Management
Private Bank
Corporate - Includes the company's private equity; One Equity Partners, Treasury and
Corporate functions.
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With the current distribution agreement set to expire in June 2006, Robert Iger,
Eisner's replacement, moved to repair the relationship with Pixar. Consequently, a
deal that was unthinkable a few years earlier became possible. Disney announced the
acquisition of Pixar, one of the most successful moviemakers in Hollywood history,
on January 25, 2006. The move reflected Disney's desire to infuse the firm's internal
animation resources with those from a proven animation company. A key Disney
strategy is to use popular Disney movie characters across different venues (i.e., theme
parks, merchandise, and television). Disney exchanged its stock for Pixar shares in a
deal valued at $7.4 billion for the Pixar stock or $6.4 billion including $1 billion of
Pixar cash that Disney would receive.
Despite near-term dilution of Disney's earnings per share by as much as 10 percent,
investors seem focused on the long-term impact to growth in Disney's shares. Disney's
shares rose 1 percent on news of the announcement. Nevertheless, the risk associated
with the transaction can be measured in terms of what Disney could have done with
cash raised by issuing the same number of new shares to the public. At $6.4 billion,
Disney could make 64 sequels at $100 million each. Moreover, Disney was probably
paying top dollar for Pixar, as the filmmaker was coming off a string of six
consecutive movie blockbusters. Finally, revenue from DVD sales might have been
maturing.
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The long-term success of the combination hinges on the ability of the two firms to
meld their corporate cultures without losing Pixar's creative capabilities. Pixar
president, Ed Catmull would become president of the combined Pixar–Disney
animation business. John Lasseter, Pixar's creative director, would assume the role of
chief creative officer of the combined firms, helping to design attractions for the
theme parks and advising Disney's Imagineering division. In an effort to insulate the
Pixar culture from the Disney culture, Pixar would remain based in Emeryville,
California, far from Disney's Burbank, California, headquarters. As a condition of the
closing, all key Pixar employees would have to sign long-term employment contracts.
As part of the deal, Pixar chairman and chief executive Steve Jobs, holder of 50.6
percent of Pixar stock, would become Disney's largest individual shareholder, at about
6.5 percent of Disney stock, and a member of Disney's board of directors. Jobs's
advice was hoped to rejuvenate the Disney board at a time when the entertainment
industry was scrambling to reinvent itself in the digital age. Jobs, who is also the
chairman and CEO of Apple Computer Inc. (Apple), is in a position to apply Apple's
substantial technical skills to Disney's animation efforts.
It is unclear if Disney could not have achieved many of these benefits at a much
lower cost by partnering with Pixar and offering Steve Jobs a seat on the Disney
board. Ultimately, the opportunity to prevent Pixar's acquisition by a competitor may
have been the primary reason why Disney moved so aggressively to acquire the
animation powerhouse.
Conclusion
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Financial institutions (intermediaries) perform the vital role of bringing together those
economic agents with surplus funds who want to lend, with those with a shortage of
funds who want to borrow.
In doing this they offer the major benefits of maturity and risk transformation. It is
possible for this to be done by direct contact between the ultimate borrowers, but
there are major cost disadvantages of direct finance.
Bibliography
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www.wikipedia.com
Book
Investment Banking
Author-Subramanyam, Pratap
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