Investment Banking - Introduction

Unlike retail banking, investment banking has only really been in existence since the early 1900s with many of the concepts that it employs today being first put into full practice as late as the 1950s.

Investment Banking is all about adding value to existing businesses. It aims to achieve this goal in a number of different ways, but Investment Banking is perhaps best described as the discipline that helps businesses make the right financial and investment choices.

Companies are usually managed to maximize the shareholder value of the company. Of course, each business may have different short, medium or long-term views on how to maximize shareholder value. For example, one company may wish to increase its market share of a sector, even at the expense of short-term profits, while another company may wish to streamline its operations or concentrate on increasing its profit margins.

If the company’s management are not achieving this then somebody else will – be it the competition (and the business goes under) or some other party in the form of a takeover or a merger.

Thus the role of the investment bank is clear – its role is to aid the management of a company to maximize the company’s shareholder value.

Therefore today’s investment bank has to be a client driven organization, tailoring its expertise and product offerings to best meet and accomplish whatever financial and investment needs clients may have.

For this reason investment banking is constantly evolving and creating a range of (and in today’s diverse and competitive market – increasingly complex) solutions. These solutions are more commonly known as transactions or deals.

Investment banks will thus operate in a number of different areas and sectors, offering an equally diverse range of expertise and products.

Although by no means totally inclusive, investment banking is generally considered to relate to one of the following activities. It is important to note that several of these activities could be part of any one transaction or deal.

o Valuation
o Capital Structuring
o Mergers and Acquisitions
o New Issues (Equities and Debt)
o Financial Engineering

We will now take a closer look at these activities and outline the role that investment banking plays in each.