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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 Competition on the Street – and beyond – is heating up. With the finance job market tightening, you need to be your best. For more information go to www.vault.com/finance “Thank you, thank you, thank you! I would have never come up with these changes on my own!” – W.B., Associate, Investment Banking, NY “Having an experienced pair of eyes looking at the resume made more of a difference than I thought.” – R.T., Managing Director, SF “I found the coaching so helpful I made three appointments!” – S.B., Financial Planner, NY Finance Resume Writing and Resume Reviews • Have your resume reviewed by a practicing finance professional. • For resume writing, start with an e-mailed history and 1- to 2-hour phone discussion. Our experts will write a first draft, and deliver a final draft after feedback and discussion. • For resume reviews, get an in-depth, detailed critique and rewrite within TWO BUSINESS DAYS. Finance Career Coaching Have a pressing 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? “We got the best revamp from Vault.com. Our expert pronounced the resume ‘perfect.’” Named the “Top Choice” by The Wall Street Journal for resume makeovers The Wall Street Journal [...]... largely unregulated For more information on hedge fund, investment 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 ... 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. .. 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, ... the spring of 19 98 In 19 98, NationsBank bought Montgomery Securities, Société Génerale bought Cowen & Co., First Union 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... companies to affiliate within a financial holding company (“FHC”) structure Under the new system, insurance, banking, and securities activities are “functionally regulated.” 14 © 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. .. 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... biggest tier of commercial banks are able to do so, because the size of most public bond issues is large and Wall Street competition for such deals is quite fierce 12 © 2005 Vault Inc Vault Career Guide to Investment Banking Commercial Banking, Investment Banking Glass-Steagall Reform Previously, we briefly discussed that much has recently changed in the investment banking industry, driven primarily by... 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... attention to “league tables,” which are rankings of investment banks in several categories (e.g., equity underwriting or M&A advisory) The most commonly referred to league tables are published quarterly by Thomson 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 3 Vault Career Guide to Investment. .. www .vault. com/finance – with insider firm profiles, message boards, the Vault Finance Job Board and more CAREER LIBRARY 15 Vault Career Guide to Investment Banking Commercial Banking, Investment Banking borrow substantially more capital, and therefore multiply its returns through this risky leveraging Buying derivatives is a common way to quickly leverage a portfolio Because hedge funds have relatively . 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. . . . . . . . . . .13 4 Chapter 11 : Syndicate: The Go-Betweens 13 7 Vault Career Guide to Investment Banking Table of Contents Visit the Vault Finance Career Channel at www .vault. com/finance —. 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.