Chapter 15

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

1515Chapt

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Investment Banking: Public and Private

Investment Banking: Public and Private

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 15 - Outline LT 15-1

What is Investment Banking? Functions of the Investment Banker Underwriting Spread Public vs. Private Companies Advantages and Disadvantages of a Public Company Initial Public Offering and Leveraged Buyout

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

What is Investment Banking? LT 15-2

Investment Banking deals with primary offerings of new securities

The Investment Banker serves as the intermediary or link between the corporation and the investor

Brings the two parties together by channeling money from one to the other

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Functions of the Investment Banker LT 15-3

Underwriter:

–buying the security and reselling it to the public– the risk-taking function

Market Maker:

– ensuring an available market by buying and selling the security

Advisor:

– providing advice on the issue

Agency Functions:– negotiating the best possible deal for the corporation

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

PPT 15-1

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Underwriting Spread LT 15-4

Spread represents the compensation for those participating in the distribution

Spread = Public Price - Issue Price It is shared by all the participants Spread on common stocks is greater than the spread on

bonds

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Public vs. Private Companies LT 15-5

Public company:

– when shares of a company are offered to the public

– anyone can buy shares of the stockPrivate company:

– privately owned or held by an individual or family

– not available to the general public

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

PPT 15-2

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

PPT 15-3

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Advantages and Disadvantages of a Public Company LT 15-6

Advantages of being public:

– greater availability of funds (easier to grow and raise money)

– prestigeDisadvantages of being public:

– company information must be made available to the public (opening the company up to public scrutiny and criticism)

– high costs of going public (expensive)

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Initial Public Offering and Leveraged Buyout

LT 15-7

Initial Public Offering (IPO):

– when a company sells its stock to the public for the first time

– the company becomes publicly tradedLeveraged Buyout (LBO):

– money is borrowed to repurchase all the shares of the company resulting in a great deal of debt

– when a company “goes private”