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Understanding Investment Banking


Investment Banks aren't like regular banks. They provide a whole other range of services and products. This article tries to explain that and give some sort of understanding as to investment banks. Typically investment bank sell and issue securities such as derivatives and commodities as well as provide advice for situations such as mergers. An investment bank has three types of offices and these are known as the front office, middle office and back office. The frort offices concerns the products and dealing with the public. The middle office looks at risk management, compliance and due diligence. It tries to make sure that everything is as it should be as the bank isn't at too much risk. It is the link between the front office and back office. The back office looks after the operations side of things. An investment bank can range in size from tiny little things to huge multi national entities that are worth trillions of dollars. An investment banker sometimes has a conflict of interest as he or she bests wants to serve the client but they also want to have the banks best interests at heart. Sometimes the two aren't one and the same and because of that a client should always be a little be wary of the advice given to them and take it with a grain of salt.

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									                                                            Mergers and Acquisitions

                                                                      Investment Banking
                                                                      by the Numbers

                                                                      by Tom Spence

                                                 elling a company is tough. Raising money
                                                 for a company is even tougher, given the
                                                 current economic climate. Sometimes
                             situations develop outside of the financial advisor’s control
   that impair the perceived worth of a particular enterprise. While some transactions
   derail due to external market forces, others often go bad because the client’s perspectives
   weren’t fully explored and understood at the onset of the engagement. Understanding
   each client’s unique perspectives increases both the likelihood of closing the    early stage entrepreneur. Baby Boomers are likelier to be
   transaction and gaining the client’s satisfaction with its advisor’s performance. more conservative in securing funding for their new venture,
      Our investment banking practice consists of traditional merger and             while the Generation X crowd tends to be more willing to
   acquisition services as well as raising private equity for emerging growth        look at creative financing options that can entail more risk.
   companies. The process of selling a business is somewhat similar to raising       The process of securing growth funding is relatively
   money for a startup: each involves a great deal of due diligence to gain          straightforward—get enough capital to run the business
   intimate knowledge of the company and its industry; each involves a highly        smoothly while giving up the least amount of equity owner-
   passionate owner or entrepreneur who places the good of the company               ship. Sounds simple, right? Enter the perspective equation.
   above personal desires; and each engagement entails a great deal of ups and       An early stage entrepreneur often thinks that his or her sheer
   downs that present the owner/entrepreneur with a roller-coaster of emotions.      passion and the novelty of the concept alone are enough to
   Though the processes are similar for these separate investment banking            sell the opportunity to an investor. In funding early stage
   activities, the owner/entrepreneur’s perspectives in each arena can often         deals, investors often back their money with people they
   differ significantly.                                                             have worked successfully with in the past. Finding the right
      Merger and acquisition transactions                                                                               mix of people to go with the
   usually center on a more mature company,                                                                             money can be extremely
   with the owner typically selling as a means                                                                          difficult and frustrating, but
   of providing for retirement income. The              The process of selling a business                               the entrepreneur that is
   business owner frequently has a tough time                                                                           prepared for this addition
   separating his or her persona from the                   is somewhat similar to raising                              of a new personality in
   business. Due to the emotional and social                        money for a startup.                                advance is likelier to be
   issues an owner encounters upon a sale                                                                               more receptive to it when
   transaction, receiving the highest price is                                                                          the time comes.
   not always the primary consideration that                                                                               In the end, the role of the
   drives a successful outcome. The advisor has to be keenly aware of what is        advisor can be more of a coach or psychologist at times than
   most important to the owner before commencing any formal auction                  strictly a banker trying to strike a deal. The people side of the
   process. The social implications of a transaction are often more complex          business is highly complex, and often overlooked during the
   than the mechanics of the transaction itself. Knowing exactly what is most        course of making a deal. Our clients have different expectations
   important to the owner eases the client’s mind during a long and sometimes        from one another on what should constitute a successful
   arduous process of finding a buyer.                                               transaction. By understanding and recognizing each one’s
      The perspective of the entrepreneur starting a company from scratch is         unique perspective at the forefront of an engagement, we are
   obviously very different than that of a long-standing business owner.             likelier to do a better job in the end of getting the deal done
   Emotions being tied to the business are less of an issue at this early stage, due and achieving the client’s objectives.
   to a lack of company history. While certainly passionate about the unfolding
   venture, the early-stage entrepreneur does not have 20 to 30 years of business    Tom Spence is a registered representative with LarsonAllen
   memories to contend with in the quest for receiving growth capital. One’s         Financial, LLC, member NASD & SIPC. Contact Tom at
   influence of generation also plays a key role in dictating perspective of the or 612/376-4715.

                                                                                                                   LarsonAllen EFFECT / Spring/Summer 2002 29

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