While huge company mergers, initial public offerings, and other big business transactions may make the headlines, most of them never could have happened with out the hard work and long hours of a solid investment bank behind them. When the law requiring the separation of commercial (what we traditionally call a “bank” from where you deposit and withdraw money) andinvestment banks (that work with companies and governments to raise and invest money) was repealed in 1999, it caused tremendous upheaval in the industry. Since shortly after the stock market crash of the 1920s, commercial banks and investment banks had needed to be separate companies, but today most financial institutions have their fingers in both pies.
Investment banks are experts at calculatingwhat a business is worth, usually for one of two purposes: to price a securities offering or to set the value of a merger or acquisition. Securities include stocks and bonds, and a stock offering may be an initial public offering (IPO) or any subsequent (or “secondary”) offering. In both cases, I-banks charge hefty fees for providing this valuation service, along with other kinds of financialand business advice.
When banks underwrite stock or bond issues, they ensure that institutional investors, such as mutual funds or pension funds, commit to purchasing the issue of stocks or bonds before it actually hits the market. In this sense, I-banks are intermediaries between the issuers of securities and the investing public. I-banks make markets to facilitate securities trading by buying andselling securities out of their own account and profiting from the spread between the bid and the ask price. In addition, many I-banks offer retail brokerage and asset management services. Retail brokerage services deal directly with the customers, allowing individuals and small organizations to purchase stocks, bonds and other financial service products directly. Asset management servicesinclude creating and overseeing a portfolio of products or services, generally for a wealthy individual or organization.
Not surprisingly, the center of this industry rests in the lofty aeries above Wall Street and Midtown in New York City. Other hot spots include London, San Francisco, and Silicon Valley. Firms also compete in Frankfurt, Tokyo, Hong Kong, and other foreign markets 24 hours a day.Trends
In recent years, investment banking has witnessed a rush of cross-industry mergers and acquisitions in recent times, largely due to the late-1999 repeal of the Depression-era Glass-Steagall Act. The repeal, which marked the deregulation of the financial services industry, now allows commercial banks, investment banks, insurers, and securities brokerages to offer oneanother’s services. As I-banks add retail brokerage and lending to their offerings and commercial banks try to build up their investment banking services, the industry is undergoing some serious global consolidation, allowing clients to invest, save, and protect their money all under one roof. These mergers have only added to the downward pressure on employment in the industry, as mergedinstitutions make an effort to eliminate redundancy.
Among the M&A activity in recent years: JPMorgan Chase bought Bank One; Bank of America bought Fleet Boston and MBNA; Wachovia swallowed Golden West and SouthTrust; Citizens Financial acquired Charter One; and SunTrust purchased National Commerce.
Meanwhile, foreign firms such as Deutsche Bank and UBS are moving aggressively into U.S. markets. Theresult: Firms in the United States and abroad are looking for partners or acquisitions to beef up their global presence. These changes are happening overseas as well. In October 2007, a consortium led by Royal Bank of Scotland acquired 183-year-old ABN Amro of the Netherlands in a $101 billion transaction that combined the two, making it the largest banking deal ever made.
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