Tài liệu Thị trường tài chính và các định chế tài chính _ Chapter 24 doc

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Chapter 24
Securities Operations
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Investment banking services

Brokerage services

Sources of income

Regulation of securities firms

Risks of securities firms

Valuation of a securities firm

Interaction with other financial institutions

Participation in financial markets

Globalization of securities firms
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Investment Banking Services

One of the main functions of investment banking
firms (IBFs) is raising capital for corporations


IBFs originate, structure, and place securities in the
capital markets

They serve as an intermediary rather than a lender or
investor

Their compensation is typically in the form of fees
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Investment Banking Services
(cont’d)

How IBFs facilitate new stock offerings

An IBF acts as an intermediary between a corporation
and investors

Origination

IBFs recommend the appropriate amount of stock to issue

IBFs evaluate the corporation’s financial condition to
determine the appropriate stock price
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Investment Banking Services
(cont’d)

How IBFs facilitate new stock offerings (cont’d)

Origination (cont’d)


The issuing corporation registers with the SEC

The registration statement is intended to ensure that
accurate information is disclosed by the issuing corporation

Included in the registration information is the prospectus,
disclosing relevant financial data on the firm and provision
applicable to the security

The IBF and the issuing firm may engage in a road show to
meet with institutional investors
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Investment Banking Services
(cont’d)

How IBFs facilitate new stock offerings (cont’d)

Underwriting

The IBF may form an underwriting syndicate and ask other
IBFs to underwrite a portion of the stock

In a best-efforts agreement, the IBF does not guarantee a
price to the issuing corporation

During IPOs:

IBFs want to set the price high so that the issuing corporation
receives higher proceeds


IBFs do not want to set the price too high in order to place the
entire issue

IBFs tend to underprice IPOs
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Investment Banking Services
(cont’d)

How IBFs facilitate new stock offerings (cont’d)

Distribution of stock

The prospectus is distributed to all potential purchasers of the
stock

The issue is advertised to the public

Some IBFs have brokerage subsidiaries that can sell stock on
a retail level

The corporation incurs two types of flotation costs:

Fees paid to the underwriters

Issue costs, including printing, legal, registration, and
accounting expenses
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Investment Banking Services
(cont’d)


How IBFs facilitate new stock offerings (cont’d)

Advising

The IBF acts as an adviser during the origination stage and
may provide advice after the stock is issued

Private placement of stocks

IBFs may be able to place an entire offering with a small set
of institutional investors

Rule 144A allows firms to engage in private placement
without the registration statement

An underwriting syndicate may not be necessary

The issuing firm’s costs are lower
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Investment Banking Services
(cont’d)

How IBFs facilitate new bond offerings

Origination

The IBF may suggest a maximum amount of bonds based on
existing debt levels


The coupon rate, maturity, and other provisions are decided

The asking price on the bonds will be determined by
evaluating market prices of existing bonds

Issuers of bonds must register with the SEC and a
registration statement must be filed
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Investment Banking Services
(cont’d)

How IBFs facilitate new bond offerings (cont’d)

Underwriting bonds

Some issuers may solicit competitive bids on the price of bonds
from various IBFs

IBFs provide several services to the issuer

Underwriting spreads on newly issued bonds are normally lower
than on newly issued stock

The IBF may organize an underwriting syndicate to participate in
placing the bonds

Distribution of bonds

A prospectus is distributed to all potential purchasers


The issue is advertised to the public

The asking price is normally set to ensure a sale of the entire issue

Flotation costs range from 0.5 to 3 percent of the value of the
bonds
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Investment Banking Services
(cont’d)

How IBFs facilitate new bond offerings (cont’d)

Advising

IBFs may serve as advisers even after the placement is
completed

Private placement of bonds

In a private placement, the issuing corporation sells the
issue to a purchaser of the entire issue

Avoids underwriting fees

Private placements are more common for bonds than for
stocks
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Investment Banking Services
(cont’d)


How IBFs facilitate leveraged buyouts

IBFs assess the market value of the firm

IBFs arrange financing, which involves raising funds and
purchasing any common stock outstanding that is held by the
public

IBFs may be retained in an advisory capacity

IBFs may purchase a portion of the firm’s assets to provide
financial support

Exposes the IBF to a high degree of risk

Merrill Lynch has designed a mutual fund that finances LBOs

Purchase junk bonds of firms that went private

Provides bridge loans that offer temporary financing to firms until
junk bonds can be issued
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Investment Banking Services
(cont’d)

How IBFs facilitate arbitrage

Arbitrage activity involves the purchasing of
undervalued shares and the resale of those shares for
a higher profit


Arbitrage firms search for undervalued firms and
IBFs raise funds for these firms

Asset stripping involves acquiring the firm and selling
its individual divisions off

The sum of the parts is greater than the whole
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Investment Banking Services
(cont’d)

How IBFs facilitate arbitrage (cont’d)

IBFs generate fee income from advising arbitrage firms and
receive a commission on the bonds issued to support the
arbitrage activity

IBFs receive fees from divestitures of divisions

IBFs may provide bridge loans if additional financing is needed

IBFs may provide advise on defense takeover tactics and finance
takeovers

Some arbitrage firms take positions in hostile takeover targets to
benefit from the expected takeover by another group

Some attempts at arbitrage fail because target firms are successful
at defending against a takeover

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Investment Banking Services
(cont’d)

How IBFs facilitate arbitrage (cont’d)

History of arbitrage activity

Sometimes arbitrage firms have accumulated shares of
targets with the expectation that targets will buy back the
shares at a premium

Greenmail

Some IBFs helped to finance greenmail

Arbitrage activity has been criticized because:

It often results in excessive financial leverage and risk for
corporations

The restructuring of divisions after acquisitions results in
layoffs
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Investment Banking Services
(cont’d)

How IBFs facilitate corporate restructuring

IBFs provide advice on corporate restructuring


IBFs assess potential synergies that might result from the
combination of two businesses

The sum of the whole is greater than the sum of the parts

IBFs may suggest a carve-out in which the firm sells a unit of
the firm to new shareholders through an IPO by the unit

The sum of the parts is greater than the sum of the whole

The unit may also be spun off, where new shares of the unit
are created and distributed to existing shareholders
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Investment Banking Services
(cont’d)

How IBFs facilitate corporate restructuring
(cont’d)

IBFs provide advice on mergers and acquisitions

IBFs are critical in the valuation of the business

IBFs have loaned out their funds to companies involved in
mergers and acquisitions or even provided equity financing

The IBF can help finance an acquisition by:

Providing loans to the acquirer


Underwriting bonds or stock for the acquirer

Investing their own equity in the acquirer’s purchase of the
target
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Brokerage Services

Market orders are requests by customers to purchase or
sell securities at the market price existing when the order
reaches the exchange floor

Limit orders are requests by customers to purchase or
sell securities at a specified price or better

Specialists monitor limit orders and execute transactions in
accordance with the limits specified

If investors order a sale of securities when the price reaches a
specified minimum, it is a stop-loss order