Staple Investment Banking

Here’s a breakdown of staple investment banking services, formatted for HTML:

Investment banking provides a wide array of financial advisory and capital raising services for corporations, governments, and institutions. Certain core activities are considered “staple” services, fundamental to the industry and consistently in demand.

Underwriting

Underwriting is arguably the most recognized staple. It involves helping clients raise capital by issuing securities to investors. This comes in two primary forms:

• Equity Underwriting: Facilitating Initial Public Offerings (IPOs) when a private company first offers shares to the public, or managing follow-on offerings for existing public companies to raise additional capital. This involves significant due diligence, valuation analysis, structuring the offering (size, price), and marketing the securities to potential investors.
• Debt Underwriting: Assisting companies in issuing bonds (corporate bonds, municipal bonds, etc.) to raise debt capital. This also requires detailed analysis of the company’s financial health, determining appropriate interest rates and terms, and selling the bonds to investors.

Underwriters assume the risk of selling the securities, guaranteeing the issuer a certain amount of capital. They are compensated through fees or a spread between the purchase price from the issuer and the selling price to investors.

Mergers & Acquisitions (M&A) Advisory

Advising companies on mergers, acquisitions, divestitures, and other corporate restructuring activities is a crucial staple. Investment banks act as advisors to either the buyer (on the buy-side) or the seller (on the sell-side).

• Buy-Side Advisory: Helping a company identify potential acquisition targets, conducting due diligence on the target, structuring the transaction, negotiating terms, and securing financing.
• Sell-Side Advisory: Advising a company on selling all or part of its business. This includes preparing marketing materials (teaser, confidential information memorandum), identifying potential buyers, managing the auction process, negotiating terms, and closing the deal.

M&A advisors provide strategic advice, valuation expertise, negotiation skills, and project management to facilitate successful transactions. They earn fees based on the size of the deal, typically a percentage of the transaction value (Lehman formula).

Sales & Trading

Although sometimes considered separate, a robust sales and trading operation is fundamental to supporting underwriting and M&A activities. Investment banks facilitate the buying and selling of securities for institutional investors (pension funds, hedge funds, mutual funds, etc.).

• Sales: Salespeople build relationships with institutional clients and provide them with investment ideas, market commentary, and execution services.
• Trading: Traders execute trades on behalf of clients and for the bank’s own account (proprietary trading). They manage the bank’s inventory of securities and provide liquidity to the market.

Sales & trading desks generate revenue through commissions, trading profits, and by providing market-making services. The ability to efficiently distribute newly underwritten securities and provide liquidity in the secondary market is critical for the success of other investment banking activities.

Restructuring

When companies face financial distress, investment banks provide restructuring advisory services. This can involve advising companies on debt restructuring, bankruptcy proceedings, or other strategies to improve their financial health. Restructuring is a cyclical business, with demand increasing during economic downturns.