(IPOs) Investment Banks for Medium Businesses | Friday January 30th, 2004 | |
Have you considered going public?
Most investment banks provide a wide range of services including fundraising, mergers and acquisitions, sale of companies, and evaluations, to name a few.
The investment bank specializes in the “going public” process. Public money is raised from a public offering. Some investment banks specialize in private offerings, which is money raised directly from institutional investors. An example of a private offering is selling preferred stock to an insurance company.
Investment bankers also assist their clients with financing for special occasions – mergers and acquisitions, for example.
An investment firm underwrites deals in order to generate commissions for their firm. Further, most investment banking firms have a brokerage of sales department, and the investment banks’ underwriting provides product to their brokerage arms.
The trend for smaller investment banking firms is to specialize. California firms such as Montgomery, Hambrecht & Quist, and Robertson Stephens specialize in companies rooted in technology and health care, and both seem to be making a specific effort to specialize in these businesses.
An investment banking firm makes a negotiated commission which may vary by transaction. In researching the commissions on several deals at random, the commissions ranged from 1% to 9% of the capital generated. The smaller commission deals are usually debt, whereas the raising of equity earns the investment bankers larger commissions. The commissions are not the only expense in the process. There are expenditures for legal opinions, accounting audits, printing, and other related expenses.
The investment bank actually takes the risk that they can ultimately sell the entire offering when the time is right. However, even in “firm” publish offerings, quite often the underwriter doesn’t commit to the deal until the “eleventh hour.” Many banks pre-sell an offering by getting indications of interest from their customers before the issue becomes effective. This “indication of interest” is taken on “when-issued” securities. At closing, they pay out the cash before they sell the complete offering. So, not only do they take the risk that the market may go down before the remainder of the offering is sold.
One way to mitigate the risk is to form Selling Syndicates. The syndicate makes a selling commission, and the managers of the syndicate make a management commission.
HOW INVESTMENT BANKS WORK
An investment bank usually issues debt or equity. Their equity usually consists of common or preferred stock, whereas the debt is usually long-term debt. If a investment bank undertakes a debt offering, they usually pay for one of the major ratings agencies (Moody’s, Standard & Poors, or Duff & Phelp) to “rate” the offering. This rating then gives an objective measurement as to the quality of the company.
Further, this market is dominated by large institutional money. One of the largest historical buyers of corporate debt is banks which are federally mandated to purchase a debt security which is ranked over a certain minimum quality level.
TIMING
Timing of an investment bank’s investment: Investment banks are not a particularly good financing source for any company looking for money quickly. The companies which get investment banking resources are generally those which are looking to expand their businesses and have several years of good historical financial statements.
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