Merchant banking & Investment banking, Lecture-03

Lecture -03
Merchant Banking & Investment Banking
Support Activities:
1. Research activities
2. Consulting activities
3. Professional Fund Management
4. Provide information

These all are discussed below:

01. Research Activities:
Invest banker acts as an outdoor vendor who sells the researched data. They research
on how a company can raise capital, how long it can sustain, how sustainable the
company in future etc. Larger investment banks have large teams that gather
information about companies and offer recommendations on whether to buy or sell
their stock. They may use these reports internally but can also generate revenue by
selling them to hedge funds and mutual fund managers.The sells the findings of
research to the concern company.

02. Consulting activities:

Investment banking acts as a consultant also. Investment banker helps company in
taking proficient decision making. If a company wants to use/run a long term
asset/fixed asset or purchase a fixed asset they should have been asked how
appropriate the asset for future. Investment banker advices about the fruitfulness of
purchase or utilizing asset. In another example if a company has several projects but
limited resource for investment Invest banker advice what project should they invest?
Investment banker do so by Identifying, analysis & evaluation the projects.

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Merchant banking & Investment banking, Lecture-03

Identifying

Identifying from different sources.

Analysis

Cost benefit analysis

Evaluation

Ultimate decision making.

Investment banker helps in capital budgeting for particular company because Investment banker
has expertise for this field.

03.Professional Fund Management:

Investment banker is given fund by Business Company for better management and
utilization of funds. Invest banker who has Merchant banking license can do it by
some fees. Investment bank daily research the market and they know how to utilize
the deposit fund. They invest portfolio for no or less loss consideration. There are two
types of fund management. One is Investor discretionary account and another is
Portfolio Managers Discretionary Account.

IDA

Plain Vanilla Product, investors wealth can be maximized through availing margin
loans as per BSEC directives. Merchant Banker cannot use the fund without the
permission of the owner.

PMDA

Merchant Banker can use the fund without the permission of the owner. Here
Merchant bank is risk taker. One chief manager exists here. Practice is rare in our
country.

*PMDA can be said also BDA (Banker discretionary account)

04.Information Service:
Investment Banker provides wide information services regarding the market.

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Merchant banking & Investment banking, Lecture-03

Classification of Investment Bank

A. On the basis of technical position/status/professionalism:
01. Bulge Brackets:
The "bulge bracket" is a slang term to describe the largest and most profitable multinational investment in the world whose banking clients are normally huge institutions,
corporations, and governments.

The tombstone - an advertisement of a new issue - usually has the bulge bracket
listed as the first group. Lead Investment banker they deal the underwriting
procedure.
The name "bulge bracket" originates from the manner in which investment
banks are listed on the public notification of a financial deal or transaction - or the
"tombstone."

The book running manager or bank with control of security allocation to

investors, is listed above all others and on the prospectus cover. The printing size
of the font for this bank is larger than the others.

02. Major brackets:

-They will follow the bulge bracket.
-Their activities are not diversified
-They are not as profitable as bulge bracket

03. Regional (Sub majors):

-Small investment banking firm with a small geographic focus is called regional.
-They form their business with diversified workers at a bulge bracket.
-It is not practiced in our country.

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Merchant banking & Investment banking, Lecture-03

B. On the basis of areas of activities

01. Fully fledged/Full service shop:
They offer wide range of product under one roof.
02. Boutique:
A boutique investment bank is a non-full service investment bank that specializes in
some aspect of investment banking, generally corporate finance,
Rolodex:
A Rolodex is a rotating file device used to store business contact information currently
manufactured by Newell Rubbermaid. The Rolodex holds specially shaped index cards;
the user writes or types the contact information for one person or company onto each
card. The cards are notched to be able to be snapped in and out of the rotating spindle.
Some users tape the contact's business card directly to the Rolodex index card, or a
plastic or vinyl sleeve in the shape of a Rolodex card to place the business card within.
Some companies have produced business cards in the shape of Rolodex cards, as a
marketing idea.
RSA Capital:
RSA capital is a unique private capital firm whose principals have over 50 years
of experience in direct equity investment and corporate growth. With its roots dating to
the mid-1980s, RSA offers highly specialized expertise focused in two areas.
Dhaka Bank, one of the leading private sector banks in Bangladesh has mandated RSA
Capital to raise BDT 2.00 billion in the form of Subordinated Convertible Bonds as Tier
2 Capital (subject to regulatory approval) from onshore and offshore institutional and
local retail investors. The issue is expected to be listed in the stock exchanges of
Bangladesh. This is the first time that a private sector commercial bank is expecting to
raise Tier 2 capital in the form of subordinated convertible bonds in Bangladesh. RSA
Capital was the sole lead arranger for the worlds first local currency micro credit
securitization. Both RSA Capital and Dhaka Bank expect that this landmark transaction
will further accelerate the process of deepening the nascent fixed income capital market
of Bangladesh.

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Merchant banking & Investment banking, Lecture-03

Public issue
Pre IPO activates/decisions
After getting green signal from BSEC there are three levels of Pre IPO decision.

a. Strategic dimension:
Strategic decisions are the decisions that are concerned with whole environment in which the
firm operates the entire resources and the people who form the company and the interface
between the two. This includes company corporate related issues. The strategy related to IPO is
the 1st step in pre IPO decision in considering with company strategy, objective etc. Such as
minimum 3 years in commercial exposure & at least 2 years profit is the pre requisite of IPO
floating in capital market.

b. Financial dimension:
After establishing strategic dimension company then concerns with financial aspect. Company
makes decision financial aspect such as how many share to be floated, how much Fund Company
wants to be raised, what is the target/aim for fund collection from public etc. To do so one has to
Justify the financing needs of company and uses of IPO proceeds. Such as, company can use
maximum one third portion of IPO fund for loan repayment.

c. Investment Banker dimension:

After establishing decision regarding above two issue third step is related to Investment bankers
activities/issue terms. Such as, Number of share, offer price etc.

Types of share issuing procedure:

01. Book building method
02. 02. Fixed pricing method.

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Merchant banking & Investment banking, Lecture-03

01.Book building method:

Book building is the process of price discovering by research the market if any revision
in price is needed or not.

Benefits:
a. Immanent offering.
b. Feedback from public.
c. Market feedback.

02.Fixed pricing method:

An issuer company is allowed to freely price the issue. The basis of issue Price is to be
disclosed in the offer document where the issuer discloses in detail about the qualitative
and quantitative factors justifying the issue price. There is only one price and issue will
be offered at that price. Such type of issue is known as Fixed Price Issue.

Application procedure and method of share issue (Book building method):

1. Formal agreement with Investment Banker
2. Filling of preliminary registration agreement. To highlight company prospect, justify the
companys eligibility along with all financial indicator. ( submit all the document)
3. BSEC scrutinize and assesses the submitted documents
4. BSEC confirms & comments on preliminary registration statement (draft prospectus).
BSEC comments (highlighted by red ink called Red Herring) if any correction is
needed. Unless BSEC approval company cannot issue share.
5. After approval an event named Road Show is being organized to create publicity/
collection of market feedback.
6. Formation & publication of prospectus.

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Merchant banking & Investment banking, Lecture-03

Application procedure and method of share issue (Fixed pricing method):

1. Formal agreement with Investment Banker
2. Filling of preliminary registration agreement. To highlight company prospect, justify the
companys eligibility along with all financial indicator. ( submit all the document)
3. BSEC scrutinize and assesses the submitted documents
4. BSEC confirms & comment on preliminary registration statement (draft prospectus).
BSEC comments (highlighted by red ink called Red Herring) if any correction is
needed. Unless BSEC approval company cannot issue share.
5. After approval prospectus is being published.

Difference between Book building & fixed pricing method:

Features

Fixed Price process

Price at which the securities are

Book Building process

Price at which securities will be offered/ allotted

Pricing offered/ allotted is known in advance is not known in advance to the investor. Only an
to the investor.
Demand for the securities offered is
Demand known only after the closure of the
issue.

indicative price range is known.

Demand for the securities offered can be known
everyday as the book is built.

Payment if made at the time of

Payment subscription wherein refund is given Payment only after allocation
after allocation.

Weblink: http://www.chittorgarh.com/faq/difference_between_book_building_fixed_price_issue/11/

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