At its simplest, investment banks arrange for additional capital from investors so corporations can grow and expand. An investment bank can put together additional securities offerings (i.e., stocks) and arrange loans or bonds. One of the most prestigious aspects of investment banking is merger and acquisition work.
An investment banker may act as an advisor to one or both of the parties involved, or as someone who looks for companies that may be good targets for buying or selling. M&A analysis is a specialized field and can involve many different components like business valuation (how much a company is worth), to performing due diligence (making sure the company is as they represent themselves), and arranging for the financing of the merger.
Typically in a merger or acquisition, an investment bank will identify likely targets and will discreetly approach those companies to determine the level of interest. If there is interest, then more work is done to make sure that the transaction if it happens, makes good sense to both the buy and sell side. Once this is completed, the parties will start to negotiate the purchase or merger. This part of the process is more than just the dollars and cents side of the transaction. It also includes discussions of what the new company will look like in term of its board, management, and employee makeup.
When all of the negotiations are finalized, the boards of each company meet to approve the deal. Assuming that the okay is given, then the M&A team begin working on the various regulatory issues that must be settled. Sometimes, anti-trust issues must be dealt with in addition to the filings with Securities and Exchange Commission for new stocks, bonds, etc.
To finally reach closing on a merger or acquisition significant time and resources have been spent by all parties. Usually, the process can take as little as six months but sometimes can take a couple of years for complex relationships.
An excellent example of an investment banker is James Dondero, the co-founder and CEO of Highland Capital Management (HCM). Mr. Dondero started his career after graduating from the University of Virginia’s McIntire School of Commerce with degrees in accounting and finance. He started with Morgan Guaranty and went on to be the Portfolio Manger with American Express before opening HCM in 1993. HCM currently manages in excess of $20 billion in assets.
Dondero has led the market as a pioneer in Collateralized Loan Obligations. CLO’s are securities that are backed by a pool of corporate debts (i.e., bonds).