Investment Banks

Question 1

Who assists companies in raising capital and provide strategic advisory services for M&A and other financial market transactions

Answer 1

Investment Banking

Question 2

Why do I employ an Investment Bank?

Answer 2

Connections [they know people]
Experts at raising capital [M&A advisory]
Reputation [usually trusted] - repeat players

Question 3

How do Investment Banks function in the role of Corporate Finance

Answer 3

M&A advisory: merger negotiation and structuring

Underwriting: assist companies with capital raising

Question 4

Describe the 1933 Securities Act

Answer 4

• Required investors to receive financial and other significant information concerning securities being offered for public sale
• Prohibited deceit, misrepresentation, and other fraud in the sale of securities

Question 5

Describe the Glass- Steagall Banking Act of 1933

Answer 5

Effectively barred commercial banks from operating IB businesses
Created by the FDIC

Question 6

Describe the Securities Act of 1934

Answer 6

Supervision of new security offerings
Ongoing reporting requirements (10-k, 10-Q, 8-K)
Created the SEC

Question 7

Describe the Gramm-Leach-Bliley Act 1999

Answer 7

Overturned Glass-Steagall
-Provide more stable and coutercyclical business models for these banks
-Allow US banks to better compete with international couterparts (UBS, Credit Suisse, Deutsche Bank)
Led to formation of the US based universal investment banks (JPM, Citigroup and Bank of America)

Question 8

Describe the implications of the Sarbanes-Oxley Act

Answer 8

Corporate governance, disclosure, and conflicts of interest
-Executives must “certify” company financial statements
-Criminal penalties for fraud
Separated stock analysis from underwriting activities
Created Public Company Accounting Oversight Board

Question 9

Describe the Dodd-Frank Act of 2010

Answer 9

Created Financial Stability Oversight Council to oversee financial institutions
Also created Office of Financial Research, Bureau of Consumer Financial Protection, Office of National Insurance, and Office of Credit Rating Agencies
Securitization reform
Risk retention required of securitizers
Asset- or data-level disclosure required
Derivatives regulation
“Wall Street Transparency and Accountability Act of 2010”
Investor protection & rating agency reforms
The Volker Rule:
Prohibition on most proprietary trading by U.S. banks and their affiliates
Restricts institutions from owning, sponsoring, or investing in hedge- and PE-funds
Compensation and Corporate Governance Reform
Shareholder say on pay (non-binding)
Compensation committee independence, enhanced disclosure

Question 10

Name the 5 ways companies raise cash:

Answer 10

Debt issuance [public/private bonds, loans, or securitization]
Equity-related issuance [public/private share issuance, convertibles or preferred shares]
Selling assets (M&A)
Decrease capital expenditures
Cut dividends or eliminate share repurchase

Question 11

Three ways corporate finance deals reverse and break up companies

Answer 11

spinoffs, carve-outs or trading stocks

Question 12

What is the key principle behind buying a company?

Answer 12

To create shareholder value over and above that of the sum of the two companies.

(because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone)

Question 13

How do Investment Banks function in the role of Sales

Answer 13

Classic retail brokers
Institutional salespeople
Private client service representation

Question 14

How do Investment Banks function in the role of Trading

Answer 14

Facilitate security trading by either carrying an inventory of securities for sale or by executing a given trade for a client
Proprietary trading and principal investing

Question 15

How do Investment Banks function in the role of Research

Answer 15

Follow stocks and bonds and make buy, sell, or hold recommendations
Equity analysts typically focus on one industry
Fixed income analysts tend to cover segments (e.g., high yield bonds or Treasury bonds)

Question 16

How do investment banks function in the role of Syndicate

Answer 16

Link between salespeople and corporate finance
Facilitate the placing of securities in a public offering
Determine allocations

Question 17

Goldman Sachs makes most of its profit in which business sector?

Answer 17

Institutional client services

Question 18

Name the 5 ways companies reduce cash?

Answer 18

Share repurchase (open market, auctions, or derivatives)
Asset Acquisitions (M&A)
Retire debt, convertibles, or preferred shares
Increase capital expenditures
Dividend payments (quarterly small payments or one time large special dividend

Question 19

What is the role of an Investment Bank in an M&A?

Answer 19

Identify companies or divisions to be bought, sold, merged, or joint ventured
Create scenarios for successful transactions, including pro-forma projections and analysis of benefits and disadvantages
Provide extensive financial analysis, deal structure recommendations, tactical advice, and sometimes financing
Work with corporate development group to manage transaction
Assist senior management in negotiating terms
Deliver a fairness opinion

Question 20

Describe M&A Fees

Answer 20

Bankers are paid different fees for advising and for providing a fairness opinion
Bulk of advisory fee is usually only paid if transaction is successfully closed

Advisory fee is normally a percentage of total consideration
Varies from 2% for relatively small transactions (e.g., $100M) to 1% for very large transactions (e.g., $10B or greater)

Question 21

What is a 10k?

Answer 21

A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC), that gives a comprehensive summary of a public company's performance. The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.
Companies with more than $10 million in assets and a class of equity securities that is held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded. Up until March 16, 2009, smaller companies could use Form 10-KSB. If a shareholder requests a company’s Form 10-K, the company must provide a copy. In addition, most large companies must disclose on Form 10-K whether the company makes its periodic and current reports available, free of charge, on its website. Form 10-K, as well as other SEC filings may be searched at the EDGAR database on the SEC's website.
In addition to the 10-K, which is filed annually, a company is also required to file quarterly reports on Form 10-Q. Information for the final quarter of a firm's fiscal year is included in the annual 10-K, so only three 10-Q filings are made each year. In the period between these filings, and in case of a significant event, such as a CEO departing or bankruptcy, a Form 8-K must be filed in order to provide up to date information.
The name of the Form 10-K comes from the Code of Federal Regulations (CFR) designation of the form pursuant to sections 13 and 15(d) of the Securities Exchange Act of 1934 as amended.