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INVEST BANKIN CAREE VAULT CAREER GUIDE TO INVESTMENT BANKING Copyright © 2005 by Vault Inc. All rights reserved. All information in this book is subject to change without notice. Vault makes no claims as to the accuracy and reliability of the information contained within and disclaims all warranties. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Vault Inc. Vault, the Vault logo, and “The Most Trusted Name in Career Information TM ” are trademarks of Vault Inc. For information about permission to reproduce selections from this book, contact Vault Inc., 150 West 22nd Street, New York, NY 10011, (212) 366-4212. Library of Congress CIP Data is available. ISBN 1-58131-306-3 Printed in the United States of America ACKNOWLEDGMENTS We are extremely grateful to Vault’s entire staff for all their help in the editorial, production and marketing processes. 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Visit the Vault Finance Career Channel at www.vault.com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more. ix C A R E E R L I B R A R Y INTRODUCTION 1 THE INDUSTRY Chapter 1: What is Investment Banking? 3 The Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 The Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Chapter 2: Commercial Banking, Investment Banking and Asset Management 9 Commercial Banking vs. Investment Banking . . . . . . . . . . . . . . . . . . . . . . .9 Glass-Steagall Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 The Buy-Side vs. the Sell-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Chapter 3: The Equity Markets 17 Bears vs. Bulls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Stock Valuation Measures and Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Value Stocks, Growth Stocks and Momentum Stocks . . . . . . . . . . . . . . . .25 Chapter 4 The Fixed Income Markets 27 What is the Bond Market? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Bond Market Indicators? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Fixed Income Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Chapter 5 Trends in I-Banking 37 Chapter 6 Stock and Bond Offerings 43 Initial Public Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Follow-On Offerings of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Bond Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 Table of Contents Vault Career Guide to Investment Banking Table of Contents Visit the Vault Finance Career Channel at www.vault.com/finance — with insider firm profiles, message boards, the Vault Finance Job Board and more. xi C A R E E R L I B R A R Y Chapter 7: M&A, Private Placements, and Reorgs 49 Mergers & Acquisistions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 Private Placements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Financial Restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 ON THE JOB Chapter 8: Corporate Finance 57 The Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 The Role of the Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 The Typical Week in Corporate Finance . . . . . . . . . . . . . . . . . . . . . . . . . . .71 Formulas for Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 Chapter 9: Institutional Sales and Trading 85 Trading – The Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87 Executing a Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93 Trading – The Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99 Trading – The Routine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 Institutional Sales – The Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108 Institutional Sales – The Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 Private Client Services (PCS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117 Chapter 10: Research 121 The Players and the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122 Three Months in Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Formulas for Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134 Chapter 11: Syndicate: The Go-Betweens 137 Vault Career Guide to Investment Banking Table of Contents Visit the Vault Finance Career Channel at www.vault.com/finance — with insider firm profiles, message boards, the Vault Finance Job Board and more. xiii C A R E E R L I B R A R Y APPENDIX Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141 Recommended Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156 INVEST BANKIN CAREE THE INDUSTRY Chapter 1: What is Investment Banking? Chapter 2: Commercial Banking, Investment Banking and Asset Management Chapter 3: The Equity Markets Chapter 4: The Fixed Income Markets Chapter 5: Trends in the Investment Banking Industry Chapter 6: Stock and Bond Offerings Chapter 7: Mergers and Aquisitions, Private Placements, and Reorganizations [...]... management, and other finance careers, go to the Finance Career Channel • Vault Career Guide to Hedge Funds • Vault Career Guide to Investment Management • Vault Career Guide to Venture Capital • Vault Guide to the Top Financial Services Employers www .vault. com/finance 16 © 2005 Vault Inc The Equity Markets CHAPTER 3 “The Dow Jones Industrial Average added 38.93 points to 10,424.41, bolstered by a... © 2005 Vault Inc Vault Career Guide to Investment Banking The Equity Markets Value Stocks, Growth Stocks and Momentum Investors It is important to know that investors typically classify stocks into one of two categories – growth and value stocks Momentum investors buy a subset of the stocks in the growth category Value stocks are those that often have been battered by investors Typically, a stock that... ask an investment bank to sell equity or debt (stocks or bonds) Because commercial banks already have funds available from their depositors and an investment bank typically does not, an I-bank must 10 © 2005 Vault Inc Vault Career Guide to Investment Banking Commercial Banking, Investment Banking spend considerable time finding investors in order to obtain capital for its client (Note that as investment. .. Vault Finance Career Channel at www .vault. com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more CAREER LIBRARY 21 Vault Career Guide to Investment Banking The Equity Markets Stock Valuation Measures and Ratios As far as stocks go, it is important to realize that absolute stock prices mean nothing A $100 stock could be “cheaper” than a $10 stock To clarify how... 2005 Vault Inc Vault Career Guide to Investment Banking Commercial Banking, Investment Banking The Buy-Side vs the Sell-Side The traditional investment banking world is considered the “sell-side” of the securities industry Why? Investment banks create stocks and bonds, and sell these securities to investors Sell is the key word, as I-banks continually sell their firms’ capabilities to generate corporate... finance career situation you need Vault s expert advice with? We’ve got experts who can help • Trying to get into investment banking from business school or other careers? • Switching from one finance sector to another – for example, from commercial banking to investment banking? • Trying to figure out the cultural fit of the finance firm you should work for? For more information go to www .vault. com/finance... The investment bankers guide the company through the SEC approval process, and then market the offering utilizing a written prospectus, its sales force and a roadshow to find investors Visit the Vault Finance Career Channel at www .vault. com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more CAREER LIBRARY 11 Vault Career Guide to Investment Banking Commercial Banking, ... bought Wheat First and Bowles Visit the Vault Finance Career Channel at www .vault. com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more CAREER LIBRARY 13 Vault Career Guide to Investment Banking Commercial Banking, Investment Banking Hollowell Connor, Bank of America bought Robertson Stephens (and then sold it to BankBoston), Deutsche Bank bought Bankers Trust... commercial banking process is fairly straightforward You deposit money into your bank, and the bank loans that money to consumers and companies in need of capital (cash) You borrow to buy a house, Visit the Vault Finance Career Channel at www .vault. com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more CAREER LIBRARY 9 Vault Career Guide to Investment Banking Commercial... own account 6 © 2005 Vault Inc Vault Career Guide to Investment Banking What is Investment Banking? Research Research analysts follow stocks and bonds and make recommendations on whether to buy, sell, or hold those securities They also forecast companies’ future earnings Stock analysts (known as equity analysts) typically focus on one industry and will cover up to 20 companies’ stocks at any given time . from Vault. Vault Career Guide to Investment Banking What is Investment Banking? © 2005 Vault Inc. 44 For more information on top investment banks and other finance employers, go to the Vault. Income Research © 2005 Vault Inc. 6 Vault Career Guide to Investment Banking What is Investment Banking? relationships with individual investors and sell stocks and stock advice to the average Joe develop Vault Career Guide to Investment Banking What is Investment Banking? Visit the Vault Finance Career Channel at www .vault. com/finance – with insider firm profiles, message boards, the Vault