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Overview of Investment Banking

What is investment banking?
Depending on who you ask (including i-bankers themselves), you will get somewhat different answers. Broadly speaking, investment banks provide a gamut of financial and advisory services to corporations, institutions (both private and public) and even individuals (usually high-net-worth ones.very high). There are generally three or more distinct business areas that major financial service firms such as Goldman Sachs and Merrill Lynch cover. These include Corporate and Public Finance and Advisory Services; Sales and Trading; and Research. Conventional notions of an investment bank encompass work that is done in corporate/public finance and advisory services. Sales and Trading and Research are separate departments within financial service firms and offer their own unique career paths, compensation structures, work hours, and cultures.
Investment banking practices (in Europe and Asia, the term “merchant banking” is oftentimes used instead, although merchant banking has a slightly different meaning in the US) are typically organized along product and industry lines. This creates an overlapping (and sometimes confusing) matrix of i-banking teams with specialized skillsets to provide services to clients with particular needs.

Product groups include mergers and acquisitions, high-yield (junk bond) financing, leasing, project financing, structured financing, and restructuring. These product groups deliver specialized services to companies across all industries. Take the perennially sexy (read “sounds cool enough it should damn well impress my friends who have no clue about i-banking”) area of mergers and acquisitions for example. The M&A department provides strategic advisory services to corporations looking to acquire or merge with other companies, or to spin off parts of their businesses. Behind practically every major merger or acquisition announcement you read in newspapers are packs of M&A bankers representing the various parties. The outcome of the deal is heavily determined by the cuts and thrusts of the opposing sides of i-bankers flashing complex models, valuations, comparables and industry analyses to justify their clients’ respective negotiating positions. These guys could be working on an acquisition of an international telecom company one week and helping a oil company defend itself against a hostile takeover the next. Glamorous you say? Well, wait until you get to the latter part of this article.
Industry groups, on the other hand, provide a broad range of services (typically all the services rendered within the product groups) to high-revenue-generating industries. Major groups include healthcare, media & telecommunications, energy & power, financial services, high tech and transportation. I-bankers in these groups are industry specialists and have built a level of expertise in order to advise clients on major issues affecting their particular industries. Of course, despite all this seemingly complex specialization, investment banking remains a very relationship-oriented business. For example, if a banker in the high yield product group has an oil refining client who is interested in acquiring a petrochemical distribution firm, he will still typically oversee the acquisition process together with bankers from the M&A department, as well as professionals from the oil & gas industry coverage group. In this manner, teams are assembled from across functions to offer clients the best possible combination of experts.

For individual investment bankers, the structure of product and industry groupings really only becomes more “rigid” with seniority and experience. Prior to that, most i-bankers, especially those with newly minted MBAs (Associates), typically are generalists, or are supposed to have enough fundamental skillset flexibility to work in any of the departments even if they have been assigned to one product or industry group. Most banks recruit Associates into generalist pools where they will stay for anywhere from 6 to 24 months Some bankers remain generalists their entire careers, either because they like the flexibility or because their firms are smaller and thus do not require the same level of organizational structure.

How Does Investment Banking Relate to Institutional Sales and Trading and Research?

Sales and Trading cover a broad array of financial products including equity, debt, convertible securities, derivatives, foreign exchange, and structured products. The area of Sales and Trading most related to investment banking is mainly in the securities that investment bankers package for their clients such as equity, debt and hybrids of the two such as convertible debt. In this capacity, the Sales and Trading department acts as an interface between the investment banking department and the institutional investors who buy and sell the securities. Sales and Trading professionals’ primary responsibilities include soliciting and managing investor orders; disseminating research and news on the i-banking client to investors; and providing advice and trading opportunities to investors. Through their intimate knowledge of the capital markets and what investors are willing to buy, Sales and Trading professionals provide important advice to i-bankers on matters such as the timing, structuring and pricing of new security issues.
Equity and Debt Research analysts monitor economic factors, industry trends and specific company developments to assess how these factors will impact the stock and bond prices of the companies they follow. The quality of a financial service firm’s research coverage is very important in helping investment banks secure new client business. This is because a bank with good research is able to more easily attract the interest of institutional investors and will also be able to promote greater awareness of the i-banking client through wider readership of the research reports.

The combination of a bank’s Sales and Trading and Research capabilities help determine its placement power, or its ability to sell securities to investors. This therefore oftentimes makes the larger and more international banks more attractive to companies seeking to issue securities.

“Doing Deals and Going to Parties on the Weekend”I literally heard an investment banker jokingly utter these words once when describing his life as an i-banker to a friend. Believe it at your own peril. Truth be told, while there is a certain level of mystique and glamour about investment banking, reality is that it’s not always a bed of roses. For every international business class flight an i-banker has to make to complete a deal, there are also frustrations of having to work on board the overnight “red-eye” flight from Los Angeles to New York, only to land in subzero weather and head straight for a meeting. For every stay at the Oriental Hotel in Bangkok on a cross border transaction, there may be just as many instances of overnight work in the office.

Rule No. 1: You make darned good money. Rule No. 2: You oftentimes do not have the chance to spend it. I know of a professional who was sent out to Asia and who saved nearly all his money and never rented an apartment. He was constantly on the road working on projects which meant that his hotel and food bills were all expensed.

All right, so that was an extreme case and most Associates do have a life of sorts (thank goodness for the concept of 24-hour TV and takeout). But you get the point, and it is important to have a little perspective before jumping into a career in investment banking. Despite the extremes, investment banks strongly value and reward self-starting, high-achieving, energetic people. The experience curve is very steep and there is definitely a big element of continuous learning which makes most jobs seem outright monotonous in comparison. The investment banking industry is also well aware of its reputation for having sweatshops, and many firms have taken steps to address this in order to attract and retain the best people.

As an Associate, you w
ill often work on three to five transactions simultaneously in deal teams typically composed of yourself, a Vice-President, a Managing Director or Partner, and an Analyst. Obviously, this context requires that you work effectively in a team-based environment. You will be given responsibilities commensurate with your abilities and enthusiasm, such as direct contact with institutional investors and the client’s senior management. Additionally within your team, you will form the bridge between the more technically-intensive work of the Analyst and the more strategic-oriented view of senior bankers. (Note: experienced Analysts are huge assets-they work crazier hours, get less pay than you and probably know more about investment banking than many new Associates with no background in the industry – so treat them very nicely).

You will have the opportunity to affect the direction of the transaction, as well as the chance to witness the inner working of major corporations. You may also be able to work on international assignments or postings, which are always interesting. Every transaction you work on will be unique and many will close within three to six months (yes, some do drag on for over a year). The diversity of assignments and rapid work pace ensure that you move up that learning curve quickly, and rookie i-bankers often wonder in amazement at how much they have learned and accomplished six months into the job.

Which Firm?
Perhaps the most important point is to select a firm whose bankers you really like. If you are going to be spending awfully long hours on flights or in the office, you want to make sure that the people around you are folks you genuinely like. Nothing is worse than having to spend 80-100 hour work weeks with people you find intolerable.

Finally, if you cannot make a distinction between two or three firms, go with the one that feels right in your gut. Trust your instincts and follow your sense of personal fit. A career in investment banking can be extremely rewarding from a personal development and learning point of view. While it may sometimes be exhausting and frustrating, many have found it to be an exhilarating and satisfying career choice.

December 3, 2001
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