play an interesting role in that they’re usually just the money people. The officials from the city or government are in charge of the project, be it building a bridge or building a power plant. But investment bankers are the critical financial players that make sure the project is adequately funded, but at the same time, generates adequate returns to make the investors happy.
This chapter isn’t designed to get into the nitty-gritty yet. The gory details of what investment bankers do comes in later chapters in this book. This chapter is more of a bird’s-eye view that shows you some of the ways investment bankers get involved in key financial transactions. You’ll read examples where investment banking plays a big role in making things happen with companies and investors. Perhaps one of the most high-profile ways investment bankers are seen in modern finance is in mergers and acquisitions (M&A), transactions where big companies decide to buy a rival or another company with advantages it would like to have. You also find out about leveraged buyouts (LBOs), which are unique transactions where buyers use large amounts of borrowed money to buy a company. Another primary driver of investment banking activity are initial public offerings (IPOs), where companies raise money by selling pieces of ownership to the public for the first time. Tying many aspects of investment banking together are the disciplines of research and valuation. Lastly, in this chapter, you get a sense of the importance of trading at many investment banking units, and appreciate the risks and potential rewards.
Putting the For-Sale Sign on Corporate America
Investment bankers are the ultimate corporate matchmakers. They’re like the friends you had when you were single, who were always trying to fix you up. When companies or investors are on the prowl to buy other companies, or put themselves up for sale, they often turn to investment bankers for a hand. We cover the M&A process in more detail in Chapter 3, but for now, know that investment bankers play several important roles in the M&A process, including the following:
Performing due-diligence services: Investment bankers can help the buyers and sellers determine a reasonable price for the company. The value is put on the company by comparing with other companies that trade on stock markets or based on the fundamental profitability of the company.
Matchmaking services: Investment bankers are only as good as their source list. When a company is looking to do a deal, investment bankers start working their personal relationships trying to find companies that may be in play or open to a bid.
Lining up investors: When a company is looking to raise money by selling securities, the deal hinges on being able to actually find buyers for those securities. Investment bankers are often looked to in order to find investors willing to buy the securities.
You discover the wide array of ways investment bankers help put companies on the market in the rest of this section. These deals range from everything including mergers and acquisitions to leveraged buyouts and private business sales.
Mergers and acquisitions
Typically when two people get married, there are two willing adults. From time to time, though, things may feel a little forced — a shotgun and an angry father may be involved.
The same goes when companies get together and combine. Usually, the terms of a deal are fairly straightforward. Typically, a larger company is looking to bolster a part of its business. The company could hire a team of people to build that company from scratch, pairing up researchers to design the product, finance people to price it right and control costs, marketing people to whet the consumers’ appetite, and operations people to get the product. But all that takes time and money. So instead, companies often buy already existing companies, saving themselves a lot of work.
Why companies buy other companies
Making widgets and selling them for a profit is why most companies exist. Microsoft, for instance, is in the business of making and selling computer software and hardware. So why do so many companies during the course of business wind up buying and selling businesses?
There are many reasons why companies may consider using M&A, including the following:
Getting big fast: Building a business takes time. There are people to hire, distribution to set up, and products to sell. Sometimes the time it takes to get up and running is too long, and the delay gives the rivals with the first-mover advantage an even bigger lead. A great example of a merger done for speed was Microsoft’s 2016 purchase of LinkedIn, a professional social media site. Microsoft bought the company for $29 billion. By buying LinkedIn, Microsoft was instantly a player in the online media business with an already established brand name.
Filling out a product line: Some companies may have been hugely successful in a narrow product line. But to find growth, which investors are always clamoring for, companies may need to fill in some gaps. An old but classic example of using M&A to fill in a product-line hole came in 2001. Leading jelly maker J.M. Smucker bought the Jif peanut butter brand (along with Crisco oil) from Procter & Gamble for $813 million in stock. The deal solved a problem for J.M. Smucker — now the company could sell all the ingredients for a tasty peanut-butter-and-jelly sandwich. Talk about synergy. But at the same time, Procter & Gamble also wanted to reduce its holdings in the food business.
Geographic expansion: Business is going global, and companies need to have a worldwide presence or risk getting beaten by rivals. M&A deals are a quick way to spread into other countries. The biggest proposed M&A deal of 2019 (see Table 2-1) was a great example of a company looking to M&A deals for a product expansion push. Pharmaceuticals firm, Bristol-Myers Squibb, made a nearly $100 billion offer for U.S. biotech company Celgene. Bristol-Myers looks to the deal as a way to get a beachhead in the fast-growing cancer-treatment area.
TABLE 2-1 Biggest U.S. Merger Offers of 2019
| Target | Buyer | Transaction Value ($ billions) | Industry |
| Celgene | Bristol-Myers Squibb | $59.5 | Health Care |
| Raytheon | United Technologies | $93.2 | Industrials |
| Allergan | AbbVie | $86.0 | Health Care |
| SunTrust Banks | BB&T | $29.3 | Financials |
| Viacom | CBS | $20.4 | Communication Services |
Source: S&P Global Markets Intelligence
The advantages of building versus buying
Some large companies may decide it’s better to just buy another
