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Project report
Investment Banking
In partial fulfillment of the requirements of
the Summer Internship of
Post Graduate Diploma in Business Management
Ri!i Academ" of Management
under the guidance of
Prof# $# %# Gupta
Su&mitted &"
Batch' ()*) + ()*(#
I ,ould li-e to m" gratitude to,ards m" project guide Prof# $#%#Gupta
,ithout ,hose continuous guidance and encouragement this project ,ould not ha!e
&een possi&le#
Also I ,ould li-e to than- our director Dr# %alim %han ,ho has pro!ided the
necessar" infrastructure and guidance in the course of the project# Also I ,ould li-e to
ta-e this opportunit" to than- all the teaching as ,ell as non/teaching staff for their
continuous help and support#
%alpesh Metha
PG 1inance
Roll $o# 23
This is to certif" that Mr.Kalpes Meta! a student of Ri!i Academ" of
Management4 of PGDBM III &earing Roll $o# 23 and specialiing in 1inance has
successfull" completed the project titled
"Investment Banking#
under the guidance of Prof# $ijai# %# Gupta in partial fulfillment of the requirement of
Post Graduate Diploma in Business Management &" Ri!i Academ" of Management
for the academic "ear ()*) + ()*(#
Prof# $ijai# %# Gupta
Project Guide
000000000000000 000000000000
Prof# 5mar 1arooq Dr#%alim%han
Academic 6oordinator Director

E$e%&tive '&mmar(
In!estment has different meanings in finance and economics# In 1inance in!estment is
putting mone" into something ,ith the e.pectation of gain that upon thorough
anal"sis4 has a high degree of securit" of principle4 as ,ell as securit" of return4
,ithin an e.pected period of time# In contrast putting mone" into something ,ith an
e.pectation of gain ,ithout thorough anal"sis4 ,ithout securit" of principal4 and
,ithout securit" of return is speculation or gam&ling#
In!estment is related to sa!ing or deferring consumption# In!estment is in!ol!ed in
man" areas of the econom"4 such as &usiness management and finance ,hether for
households4 firms4 or go!ernments#
To a!oid speculation an in!estment must &e either directl" &ac-ed &" the pledge of
sufficient collateral or insured &" sufficient assets pledged &" a third part"# A
thoroughl" anal"ed loan of mone" &ac-ed &" collateral ,ith greater immediate !alue
than the loan amount ma" &e considered an in!estment# A financial instrument that is
insured &" the pledge of assets from a third part"4 such as a deposit in a financial
institution insured &" a go!ernment agenc" ma" &e considered an in!estment#
Promoters of and ne,s sources that report on speculati!e financial transactions such
as stoc-s4 mutual finds4 real estate4 oil and gas leases4 commodities4 and futures often
inaccuratel" or misleadingl" descri&e speculati!e schemes as in!estment#
In!estment' thorough anal"sis and securit" Speculation' anal"sis and some ris-
Gam&ling' lac- of anal"sis and lac- of safet"#
In!estment &an-s help companies and go!ernments raise mone" &" issuing and
selling securities in the capital mar-ets 7&oth equit" and de&t8# A majorit" of
in!estment &an-s also offer strategic ad!isor" ser!ices for mergers4 acquisitions4
di!estiture or other financial ser!ices for clients4 such as the trading of deri!ati!es4
fi.ed income4 foreign e.change4 commodit"4 and equit" securities# Trading securities
for cash or securities 7i#e#4 facilitating transactions4 mar-et/ma-ing84 or the promotion
of securities 7i#e under,riting4 research4 etc#8 is referred to as the 9sell side9# The 9&u"
side9 constitutes the pension funds4 mutual funds4 hedge funds4 and the in!esting
pu&lic ,ho consume the products and ser!ices of the sell/side in order to ma.imie
their return on in!estment# Man" firms ha!e &oth &u" and sell side components#
Ri!i Academ" of Management %alpesh Mehta
In!estment Ban-ing 1
'r. N*. +arti%&lars +g. N*.
* Introduction to In!estment Ban-ing *
( Organiational Structure (
2 Roles of In!estment Ban-ing 2/:
2#* 1ront Office 2/;
2#( Middle Office ;/<
2#2 Bac- Office </=
2#; 1unctions of In!estment Ban-ing :
; Mergers and Acquisitions >/;)
< Initial Pu&lic Offering7IPO8 ;*
<#* IPO c"cle ;(/;3
3 1unding and ?e!erage in In!estment Ban-ing ;=/<*
= Major In!estment Ban-s in India <(/<=
=#* %ota- in!estment &an- <(/<;
=#( Religare In!estment Ban- <<
=#2 @del,eiss In!estment Ban- <3/<=
: Major In!estment Ban-s Aorld,ide <:/32
:#* Goldman Sachs <>/3)
:#( Morgan Stanle" 3*
:#2 6iti&an- 3(
:#; Ban- of America 32
> BP Morgan 6hase 3;
>#* Cistor" of BP Morgan 6hase 3</3:
>#( BP Morgan 6hase Business ?ine 3>/=)
*) 6ase Stud"' Disne" Bu"s =*/=(
*( Bi&liograph" =;
Ri!i Academ" of Management %alpesh Mehta
Intr*,&%ti*n t* Investment Banking
In!estment Ban-ingD as term suggests4 is concerned ,ith the primar" function of
assisting the capital mar-et in its function of capital intermediation4 i#e#4 the
mo!ement of financial resources from those ,ho ha!e them 7the In!estors84 to those
,ho need to ma-e use of them for generating GDP 7the Issuers8# Ban-ing and
financial institution on the one hand and the capital mar-et on the other are the t,o
&road platforms of institutional that in!estment for capital flo,s in econom"#
Therefore4 it could &e inferred that in!estment &an-s are those institutions that are
counterparts of &an-s in the capital mar-ets in the function of intermediation in the
resource allocation# $e!ertheless4 it ,ould &e unfair to conclude so4 as that ,ould
confine in!estment &an-ing to !er" narro, sphere of its acti!ities in the modem ,orld
of high finance# O!er the decades4 &ac-ed &" e!olution and also fuelled &" recent
technologies de!elopments4 an in!estment &an-ing has transformed repeatedl" to suit
the needs of the finance communit" and thus &ecome one of the most !i&rant and
e.citing segment of financial ser!ices# In!estment &an-ers ha!e al,a"s enjo"ed
cele&rit" status4 &ut at times4 the" ha!e paid the price for the price for e.cessi!e
flam&o"ance as ,ell# In!estment &an-s help companies4 go!ernments4 and their
agencies to raise mone" &" issuing and selling securities in the primar" mar-et# The"
assist pu&lic and pri!ate corporations in raising funds in the capital mar-ets 7&oth
equit" and de&t84 as ,ell as in pro!iding strategic ad!isor" ser!ices for mergers
acquisitions and other t"pes of financial transactions#
In!estment Ban-ing 2
Ri!i Academ" of Management %alpesh Mehta
Organi-ati*nal str&%t&re
An in!estment &an- is split into the so/called front office4 middle office4 and &ac-
office# Ahile large ser!ice in!estment &an-s offer all of the lines of &usinesses4 &oth
sell side and &u" side4 smaller ones sell side in!estment firms such as &outique
in!estment &an-s and small &ro-er/dealers focus on in!estment &an-ing and
salesEtradingEresearch4 respecti!el"# In!estment &an-s offer ser!ices to &oth
corporations issuing securities and in!estors &u"ing securities# 1or corporations4
in!estment &an-ers offer information on ,hen and ho, to place their to an in!estment
&an-Fs reputation4 and hence loss of &usiness# Therefore4 in!estment &an-ers pla" a
!er" important role in issuing ne, securit" offerings#
In!estment Ban-ing 2
Ri!i Academ" of Management %alpesh Mehta
R*le *. Investment Banking
Fr*nt *..i%e
Investment /anking is the traditional aspect of in!estment &an-s ,hich also in!ol!es
helping customers raise funds in capital mar-ets and gi!ing ad!ice on mergers and
acquisitions 7MGA8# This ma" in!ol!e su&scri&ing in!estors to a securit" issuance4
coordinating ,ith &idders4 or negotiating ,ith a merger target# Another term for the
in!estment &an-ing di!ision is corporate finance4 and its ad!isor" group is often
termed mergers and acquisitions# A pitch &oo- of financial information is generated to
mar-et the &an- to a potential MGA clientH if the pitch is successful4 the &an-
arranges the deal for the client# The in!estment &an-ing di!ision 7IBD8 is generall"
di!ided into industr" co!erage and product co!erage groups# Industr" co!erage
groups focus on a specific industr"4 such as healthcare4 industrials4 or technolog"4 and
maintain relationships ,ith corporations ,ithin the industr" to &ring in &usiness for a
&an-# Product co!erage groups focus on financial products4 such as mergers and
acquisitions4 le!eraged finance4 project finance4 asset finance and leasing4 structured
finance4 restructuring4 equit"4 and high/grade de&t and generall" ,or- and colla&orate
,ith industr" groups on the more intricate and specialied needs of a client#
'ales an, tra,ing on &ehalf of the &an- and its clients4 a large in!estment &an-Fs
primar" function is &u"ing and selling products# In mar-et ma-ing4 traders ,ill &u"
and sell financial products ,ith the goal of ma-ing mone" on each trade# Sales is the
term for the in!estment &an-Fs sales force4 ,hose primar" jo& is to call on institutional
and high/net/,orth in!estors to suggest trading ideas and ta-e orders# Sales des-s
then communicate their clientsF orders to the appropriate trading des-s4 ,hich can
price and e.ecute trades4 or structure ne, products that fit a specific need# Structuring
has &een a relati!el" recent acti!it" as deri!ati!es ha!e come into pla"4 ,ith highl"
technical and numerate emplo"ees ,or-ing on creating comple. structured products
,hich t"picall" offer much greater margins and returns than underl"ing cash
securities# Strategists ad!ise e.ternal as ,ell as internal clients on the strategies that
can &e adopted in !arious mar-et# Ban-s also underta-e ris- through proprietar"
trading 4 performed &" a special set of traders ,ho do not interface ,ith clients and
through 9principal ris-9Iris- underta-en &" a trader after he &u"s or sells a product
In!estment Ban-ing 3
Ri!i Academ" of Management %alpesh Mehta
to a client and does not hedge his total e.posure# Ban-s see- to ma.imie profita&ilit"
for a gi!en amount of ris- on their &alance sheet#
Resear% is the di!ision ,hich re!ie,s companies and ,rites reports a&out their
prospects4 often ,ith 9&u"9 or 9sell9 ratings# Ahile the research di!ision ma" or ma"
not generate re!enue4 its resources are used to assist traders in trading4 the sales force
in suggesting ideas to customers4 and in!estment &an-ers &" co!ering their clients#
Research also ser!es outside clients ,ith in!estment ad!ice in the hopes that these
clients ,ill e.ecute suggested trade ideas through the sales and trading di!ision of the
&an-4 and there&" generate re!enue for the firm#
Mi,,le *..i%e
Risk management in!ol!es anal"ing the mar-et and credit ris- that traders are
ta-ing onto the &alance sheet in conducting their dail" trades4 and setting limits on the
amount of capital that the" are a&le to trade in order to pre!ent 9&ad9 trades ha!ing a
detrimental effect on a des- o!erall# Another -e" Middle Office role is to ensure that
the economic ris-s are captured accuratel"4 correctl" and on time 7t"picall" ,ithin 2)
minutes of trade e.ecution8# In recent "ears the ris- of errors has &ecome -no,n as
9operational ris-9 and the assurance Middle Offices pro!ide no, includes measures to
address this ris-# Ahen this assurance is not in place4 mar-et and credit ris- anal"sis
can &e unrelia&le and open to deli&erate manipulation#
C*rp*rate treas&r( is responsi&le for an in!estment &an-Fs funding4 capital structure
management4 and liquidit" ris- monitoring#
Finan%ial %*ntr*l trac-s and anal"es the capital flo,s of the firm4 the 1inance
di!ision is the principal ad!iser to senior management on essential areas such as
controlling the firmFs glo&al ris- e.posure and the profita&ilit" and structure of the
firmFs !arious &usinesses#
C*rp*rate strateg( along ,ith ris-4 treasur"4 and controllers4 also often falls under
the finance di!ision#
In!estment Ban-ing 4
Ri!i Academ" of Management %alpesh Mehta
C*mplian%e areas are responsi&le for an in!estment &an-Fs dail" operations
compliance ,ith go!ernment regulations and internal regulations# Often also
considered a &ac-/office di!ision#
Ba%k *..i%e
Operati*ns in!ol!e data/chec-ing trades that ha!e &een conducted4 ensuring that the"
are not erroneous4 and transacting the required transfers# Ahile some &elie!e that
operations pro!ide the greatest jo& securit" and the &lea-est career prospects of an"
di!ision ,ithin an in!estment &an-4 man" &an-s ha!e outsourced operations# It is4
ho,e!er4 a critical part of the &an-# Due to increased competition in finance related
careers4 college degrees are no, mandator" at most Tier * in!estment &an-s# A
finance degree has pro!ed significant in understanding the depth of the deals and
transactions that occur across all the di!isions of the &an-#
Te%n*l*g( refers to the information technolog" department# @!er" major in!estment
&an- has considera&le amounts of in/house soft,are4 created &" the technolog" team4
,ho are also responsi&le for technical support# Technolog" has changed considera&l"
in the last fe, "ears as more sales and trading des-s are using electronic trading#
Some trades are initiated &" comple. algorithms for hedging purposes#
In!estment Ban-ing 5
Ri!i Academ" of Management %alpesh Mehta
+erspe%tive *. Investment Banking in In,ia
Ban-ing in India originated in the last decades of the *:th centur"# The first &an-s
,ere The General Ban- of India4 ,hich started in *=:34 and Ban- of Cindustan4
,hich started in *=>)H &oth are no, defunct# The oldest &an- in e.istence in India is
the State Ban- of India4 ,hich originated in the Ban- of 6alcutta in Bune *:)34 ,hich
almost immediatel" &ecame the Ban- of Bengal# This ,as one of the three presidenc"
&an-s4 the other t,o &eing the Ban- of Bom&a" and the Ban- of Madras4 all three of
,hich ,ere esta&lished under charters from the British @ast India 6ompan"# 1or
man" "ears the Presidenc" &an-s acted as quasi/central &an-s4 as did their successors#
The three &an-s merged in *>(* to form the Imperial Ban- of India4 ,hich4 upon
IndiaFs independence4 &ecame the State Ban- of India#
The &an-ing scenario in India is itself huge4 co!ering the different facets of the
econom"# B" and large4 in!estment &an-s in India are itself an institution ,hich
generates funds in t,o different ,a"s# The first manner in ,hich it ,or-s is &"
dra,ing pu&lic funds !ia the capital mar-et &" ,a" of selling stoc- in their compan"#
The other ,a" in ,hich it operates is to see- for !enture capital or pri!ate equit"4 as a
su&stitute for a sta-e in their compan"#
In!estment Ban-ing 6
Ri!i Academ" of Management %alpesh Mehta
R*le *. an Investment Bank in In,ia
The major ,or- of in!estment &an-s includes a lot of consulting# 1or instance4 the"
offer ad!ices on mergers and acquisitions to companies# The other arena ,here the"
gi!e ad!ice are trac-ing the mar-et and determining ,hen should a compan" come
out ,ith a pu&lic offering and ,hat is the &est possi&le ,a" to manage the pu&lic
assets of &usinesses# The role that an in!estment &an- pla"s sometimes gets
o!erlapped ,ith that of a pri!ate &ro-erage house# The usual ad!ice of &u"ing and
selling is also gi!en &" in!estment &an-s#
There is no demarcating line &et,een the in!estment &an-ing and other forms of
&an-ing in India# This has &een o&ser!ed majorl" of late# All &an-s no,ada"s ,ant to
pro!ide their customers the &est of ser!ices and create a niche for themsel!es and that
is ,h" apart from in!estment &an-s4 all other &an-s too are aiming at ma-ing it &ig#
At the macro le!el4 in!estment &an-ing is related ,ith the primar" function of
assisting the capital mar-et in its function of capital intermediation4 i#e#4 the
mo!ement of financial resources from those ,ho ha!e them 7the in!estors84 to those
,ho need to ma-e use of them for producing GDP 7the issuers8# O!er the decades4
in!estment &an-s ha!e al,a"s suited the needs of the finance communit" and thus
&ecome one of the most !i&rant and e.citing segment of financial ser!ices#
Glo&all" in!estment &an-s handle significant fund/&ased &usiness of their o,n in the
capital mar-et along ,ith their non/fund ser!ice portfolio ,hich is offered to the
clients# All these acti!ities are &roadl" segmented across three platforms / equit"
mar-et acti!it"4 de&t mar-et acti!it" and merger and acquisitions 7MGA8 acti!it"# In
addition4 gi!en the structure of the mar-et4 there is also a segmentation &ased on
,hether a particular in!estment &an- &elongs to a &an-ing parent or is a stand/alone
pure in!estment &an-#
In!estment Ban-ing 7
Ri!i Academ" of Management %alpesh Mehta
The %e" roles of the RBI are'
Regulator and super!isor of the financial s"stem
Manager of e.change control
Issuer of currenc"
Ban-er to the Go!ernment
Ban- to &an-s' maintains &an-ing accounts of all scheduled &an-s
F&n%ti*ns *. Investment Banking
JIn!estment &an-ing help pu&lic and pri!ate corporations in issuing securities
in the primar" mar-et4 guarantee &" stand&" under,riting or &est efforts
selling and foreign e.change management # Other ser!ices include acting as
intermediaries in trading for clients#
JIn!estment &an-ing pro!ides financial ad!ice to in!estors and ser!es them &"
assisting in purchasing securities4 managing financial assets and trading
JIn!estment &an-ing differs from commercial &an-ing in the sense that the"
donFt accept deposits and grant retail loans# Co,e!er the di!iding lines
&et,een the t,o fraternal t,ins ha!e &ecome flims" ,ith loans and securities
&ecoming almost su&stituta&le ,a"s of raising funds#
JSmall firms pro!iding ser!ices of in!estment &an-ing are called &outiques#
These mainl" specialie in &ond trading4 ad!ising for mergers and
acquisitions4 pro!iding technical anal"sis or program trading#
In!estment Ban-ing 8
Ri!i Academ" of Management %alpesh Mehta
Mergers an, A%0&isiti*ns
Mergers can &e descri&ed from a legal perspecti!e and from an economic perspecti!e#
This distinction is rele!ant to discussions concerning deal structuring4 regulator"
issues4 and strategic planning#
Legal +erspe%tive
This perspecti!e refers to the legal structure used to consummate the transaction# Such
structures ma" ta-e on man" forms depending on the nature of the transaction#
A merger is a com&ination of t,o or more firms in ,hich all &ut one legall" cease to
e.ist4 and the com&ined organiation continues under the original name of the
sur!i!ing firm# In a t"pical merger4 shareholders of the target firm e.change their
shares for those of the acquiring firm4 after a shareholder !ote appro!ing the merger#
Minorit" shareholders4 those not !oting in fa!or of the merger4 are required to accept
the merger and e.change their shares for those of the acquirer# If the parent firm is the
primar" shareholder in the su&sidiar"4 the merger does not require appro!al of the
parentKs shareholders in the majorit" of states# Such a merger is called a short form
merger# The principal requirement is that the parentKs o,nership e.ceeds the
minimum threshold set &" the state# 1or e.ample4 Dela,are allo,s a parent
corporation to merge ,ithout a shareholder !ote ,ith a su&sidiar" if the parent o,ns
at least >) percent of the outstanding !oting shares# A statutor" merger is one in
,hich the acquiring compan" assumes the assets and lia&ilities of the target in
accordance ,ith the statutes of the state in ,hich the com&ined companies ,ill &e
incorporated# A su&sidiar" merger in!ol!es the target &ecoming a su&sidiar" of the
parent# To the pu&lic4 the target firm ma" &e operated under its &rand name4 &ut it ,ill
&e o,ned and controlled &" the acquirer#
Although the terms mergers and consolidations often are used interchangea&l"4 a
statutor" consolidation, ,hich in!ol!es t,o or more companies joining to form a ne,
compan"4 is technicall" not a merger# All legal entities that are consolidated are
In!estment Ban-ing 9
Ri!i Academ" of Management %alpesh Mehta
dissol!ed during the formation of the ne, compan"4 ,hich usuall" has a ne, name#
In a merger4 either the acquirer or the target sur!i!es# The *>>> com&ination of
Daimler/Ben and 6hr"sler to form Daimler6hr"sler is an e.ample of a
consolidation# The ne, corporate entit" created as a result of consolidation or the
sur!i!ing entit" follo,ing a merger usuall" assumes o,nership of the assets and
lia&ilities of the merged or consolidated organiations# Stoc-holders in merged
companies t"picall" e.change their shares for shares in the ne, compan"#
A merger of equals is a merger frame,or- usuall" applied ,hene!er the merger
participants are compara&le in sie4 competiti!e position4 profita&ilit"4 and mar-et
capitaliation# 5nder such circumstances4 it is unclear if either part" is ceding control
to the other and ,hich part" is pro!iding the greatest s"nerg"# 6onsequentl"4 target
firm shareholders rarel" recei!e an" significant premium for their shares# It is
common for the ne, firm to &e managed &" the former 6@Os of the merged firms
,ho ,ill &e co/equal and for the composition of the ne, firmKs &oard to ha!e equal
representation from the &oards of the merged firms# In such transactions4 it is
uncommon for the o,nership split to &e equall" di!ided# The *>>: formation of
6itigroup from 6iti&an- and Tra!elers is an e.ample of a merger of equals# Research
suggests that the 6@Os of target firms in such transactions often negotiate to retain a
significant degree of control in the merged firm for &oth their &oard and management
in e.change for a lo,er premium for their shareholders#
An E%*n*mi% +erspe%tive
Business com&inations also ma" &e classified as horiontal4 !ertical4 and
conglomerate mergers# Co, a merger is classified depends on ,hether the merging
firms are in the same or different industries and on their positions in the corporate
!alue chain# Defining &usiness com&inations in this manner is particularl" important
from the standpoint of antitrust anal"sis in ,hich regulators often use the com&ined
firmsK mar-et share as a measure of their a&ilit" to influence productE ser!ice selling
prices# Coriontal and conglomerate mergers are &est understood in the conte.t of
,hether the merging firms are in the same or different industries#
In!estment Ban-ing 10
Ri!i Academ" of Management %alpesh Mehta
T(pes *. Mergers
1*ri-*ntal merger
Coriontal merger occurs &et,een t,o firms ,ithin the same industr"# @.amples of
horiontal acquisitions include Proctor G Gam&le and Gillette 7())38 in household
products4 Oracle and PeopleSoft in &usiness application soft,are 7());84 oil giants
@..on and Mo&il 7*>>>84 SB6 6ommunications and Ameritech 7*>>:8 in
telecommunications4 and $ationsBan- and Ban-America 7*>>:8 in commercial
C*ngl*merate mergers
6onglomerate mergers are those in ,hich the acquiring compan" purchases firms in
largel" unrelated industries# An e.ample ,ould &e 5#S# SteelKs acquisition of
Marathon Oil to form 5SL in the mid/*>:)s#
2erti%al mergers
Mertical mergers are those in ,hich the t,o firms participate at different stages of the
production or !alue chain# A simple !alue chain in the &asic steel industr" ma"
distinguish &et,een ra, materials4 such as coal or iron oreH steel ma-ing4 such as Nhot
metalO and rolling operationsH and metals distri&ution# Similarl"4 a !alue chain in the
oil and gas industr" ,ould separate e.ploration acti!ities from production4 refining4
and mar-eting# An Internet !alue chain might distinguish &et,een infrastructure
pro!iders4 such as 6iscoH content pro!iders4 such as Do, BonesH and portals4 such as
Pahoo and Google# In the conte.t of the !alue chain4 a !ertical merger is one in
,hich companies that do not o,n operations in each major segment of the !alue chain
choose to N&ac-,ard integrateO &" acquiring a supplier or to Nfor,ard integrateO &"
acquiring a distri&utor# An e.ample of for,ard integration includes paper
manufacturer Boise 6ascadeKs acquisition of office products distri&utor4 Office Ma.4
for Q*#* &illion in ())2# An e.ample of &ac-,ard integration in the technolog"
industr" is America OnlineKs purchase of media and content pro!ider Time Aarner in
()))# In ()):4 American steel compan"4 $ucor 6orporation4 announced the
In!estment Ban-ing 11
Ri!i Academ" of Management %alpesh Mehta
acquisition of the $orth American scrap metal operations of pri!atel" held Dutch
conglomerate SCM Coldings $M# The acquisition further secures $ucorKs suppl" of
scrap metal used to fire its electric arc furnaces#
Recent research indicates that horiontal4 conglomerate4 and !ertical mergers
accounted for an a!erage of ;( percent4 <; percent4 and ; percent of transactions
glo&all" since *>:*# Ahile pure !ertical mergers are rare4 studies suggest that a&out
one/fifth of the all mergers during the same period e.hi&ited some degree of !ertical
In finance4 !aluation is the process of estimating ,hat something is ,orth# Items that
are usuall" !alued are a financial asset or lia&ilit"# Maluations can &e done on assets
7for e.ample4 in!estments in mar-eta&le securities such as stoc-s4 options4 &usiness
enterprises4 or intangi&le assets such as patents and trademar-s8 or on lia&ilities 7e#g#4
&onds issued &" a compan"8# Maluations are needed for man" reasons such as
in!estment anal"sis4 capital &udgeting4 merger and acquisition transactions4 financial
reporting4 ta.a&le e!ents to determine the proper ta. lia&ilit"4 and in litigation#
Businesses or fractional interests in &usinesses ma" &e !alued for !arious purposes
such as mergers and acquisitions4 sale of securities4 and ta.a&le e!ents# An accurate
!aluation of pri!atel" o,ned companies largel" depends on the relia&ilit" of the firmFs
historic financial information# Pu&lic compan" financial statements are audited &"
6ertified Pu&lic Accountants 75S84 6hartered 6ertified Accountants 7A66A8 or
6hartered Accountants 75% and 6anada8 and o!erseen &" a go!ernment regulator#
Alternati!el"4 pri!ate firms do not ha!e go!ernment o!ersightIunless operating in a
regulated industr"Iand are usuall" not required to ha!e their financial statements
audited# Moreo!er4 managers of pri!ate firms often prepare their financial statements
to minimie profits and4 therefore4 Alternati!el"4 managers of pu&lic firms tend
to ,ant higher profits to increase their stoc- price# Therefore4 a firmFs historic
financial information ma" not &e accurate and can lead to o!er and under!aluation# In
an acquisition4 a &u"er often performs due diligence to !erif" the sellerFs information#
1inancial statements prepared in accordance ,ith generall" accepted accounting
principles 7GAAP8 sho, man" assets &ased on their historic costs rather than at their
In!estment Ban-ing 12
Ri!i Academ" of Management %alpesh Mehta
current mar-et !alues# 1or instance4 a firmFs &alance sheet ,ill usuall" sho, the !alue
of land it o,ns at ,hat the firm paid for it rather than at its current mar-et !alue# But
under GAAP requirements4 a firm must sho, the fair !alues 7,hich usuall"
appro.imates mar-et !alue8 of some t"pes of assets such as financial instruments that
are held for sale rather than at their original cost# Ahen a firm is required to sho,
some of its assets at fair !alue4 some call this process 9mar-/to/mar-et9 But reporting
asset !alues on financial statements at fair !alues gi!es managers ample opportunit"
to slant asset !alues up,ard to artificiall" increase profits and their stoc- prices#
Managers ma" &e moti!ated to alter earnings up,ard so the" can earn &onuses#
Despite the ris- of manager &ias4 equit" in!estors and creditors prefer to -no, the
mar-et !alues of a firmFs assetsIrather than their historical costsI&ecause current
!alues gi!e them &etter information to ma-e decisions#
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Ri!i Academ" of Management %alpesh Mehta
Acquisition in general sense is acquiring the o,nership in the propert"# In the conte.t
of &usiness com&inations4 an acquisition is the purchase &" one compan" of a
controlling interest in the share capital of another e.isting compan"#
It is the purchase of one corporation &" another4 through either the purchase of its
shares4 or the purchase of its assets#
ThereFs onl" one real ,a" to achie!e massi!e gro,th literall" o!ernight4 and thatFs &"
&u"ing some&od" elseFs compan"# Acquisition has &ecome one of the most popular
,a"s to gro, toda"#
6ompanies choose to gro, &" acquiring others to increase mar-et share4 to gain
access to promising ne, technologies4 to achie!e s"nergies in their operations4 to tap
,ell/de!eloped distri&ution channels4 to o&tain control of under!alued assets4 and a
m"riad of other reasons# But acquisition can &e ris-" &ecause man" things can go
,rong ,ith e!en a ,ell/laid plan to gro, &" acquiring' 6ultures ma" clash4 -e"
emplo"ees ma" lea!e4 s"nergies ma" fail to emerge4 assets ma" &e less !alua&le than
percei!ed4 and costs ma" s-"roc-et rather than fall# Still4 perhaps &ecause of the
appeal of instant gro,th4 acquisition is an increasingl" common ,a" to e.pand#
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Ri!i Academ" of Management %alpesh Mehta
1ere are te t*p 34 a%0&isiti*ns ma,e /( In,ian %*mpanies 5*rl,5i,e6
val&e 78
Tata 'teel 6orus Group plc 5% *(4))) Steel
1in,al%* $o!elis 6anada <4>:( Steel
@lectronics 6orp#
%orea =(> @lectronics
Dr. Re,,(:s
Betapharm German" <>= Pharmaceutical
Cansen Group Belgium
%en"a Petroleum
Refiner" ?td#
%en"a <)) Oil and Gas
Terapia SA Romania
Tata 'teel $atSteel Singapore (>2 Steel
2i,e*%*n Thomson SA 1rance (>) @lectronics
2'NL Teleglo&e 6anada
T(pes *. A%0&isiti*ns
There are t,o t"pes of acquisitions or ta-eo!ers'
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Ri!i Academ" of Management %alpesh Mehta
*# Frien,l( Take*vers
It is a situation in ,hich a target compan"Fs management and &oard of directors
agree to a merger or acquisition &" another compan"# In a friendl" ta-eo!er4 a pu&lic
offer of stoc- or cash is made &" the acquiring firm4 and the &oard of the target firm
,ill pu&licl" appro!e the &u"out terms4 ,hich ma" "et &e su&ject to shareholder or
regulator" appro!al#
It is the acquisition of one firm &" another ,here the o,ners of &oth firms agree to the
terms of the ta-eo!er transaction#
(# 1*stile Take*vers
Costile Ta-eo!ers is the one ,hich goes against the ,ishes of the target compan"Ks
management and Board of Directors# It is the opposite of 1riendl" Ta-eo!er# It is a
ta-eo!er attempt that is strongl" resisted &" the target firm#
It is an acquisition in ,hich the compan" &eing purchased doesnFt ,ant to &e
purchased4 or doesnFt ,ant to &e purchased &" the particular &u"er that is ma-ing a
&id# Co, can someone &u" something thatFs not for saleR
Costile ta-eo!ers onl" ,or- ,ith pu&licl" traded companies# That is4 the" ha!e issued
stoc- that can &e &ought and sold on pu&lic stoc- mar-ets# A stoc- confers a share of
o,nership in the compan" that issued it# If a compan" issued *4))) shares4 and "ou
o,n *)) of them4 "ou o,n a tenth of that compan"# If "ou o,n more than <)) shares4
"ou o,n a majorit" or controlling interest in that compan"# Ahen the compan" ma-es
major decisions4 the shareholders must !ote on them# The more shares "ou ha!e4 the
more !otes "ou get# If "ou o,n more than half of the shares4 "ou al,a"s ha!e a
majorit" of the !otes# In man" respects4 "ou can control the compan"# So a hostile
ta-eo!er &oils do,n to this# The &u"er has to gain control of the target compan" and
force them to agree to the sale#
There are se!eral reasons ,h" a compan" might ,ant or need a hostile ta-eo!er# The"
ma" thin- the target compan" can generate more profit in the future than the selling
price# If a compan" can ma-e Q*)) million in profits each "ear4 then &u"ing the
compan" for Q()) million ma-es sense# ThatKs ,h" so man" corporations ha!e
su&sidiaries that donKt ha!e an"thing in common + the" ,ere &ought purel" for
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Ri!i Academ" of Management %alpesh Mehta
financial reasons# 6urrentl"4 strategic mergers and acquisitions are more common# In
a strategic acquisition4 the &u"er acquires the target compan" &ecause it ,ants access
to its distri&ution channels4 customer &ase4 &rand name4 or technolog"#
In some cases4 purchasers use a hostile ta-eo!er &ecause the" can do it quic-l"4 and
the" can ma-e the acquisition ,ith &etter terms than if the" had to negotiate a deal
,ith the targetKs shareholders and &oard of directors#
C*mm*n /&siness val&ati*n met*,s
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Ri!i Academ" of Management %alpesh Mehta
Dis%*&nte, %as .l*5s met*,
This method estimates the !alue of an asset &ased on its e.pected future cash flo,s4
,hich are discounted to the present 7i#e#4 the present !alue8# This concept of
discounting future mone" is commonl" -no,n as the time !alue of mone"# 1or
instance4 an asset that matures and pa"s Q* in one "ear is ,orth less than Q* toda"#
The sie of the discount is &ased on an opportunit" cost of capital and it is e.pressed
as a percentage# Some people call this percentage a discount rate#
The idea of opportunit" cost can &e illustrated in an e.ample# A person ,ith onl"
Q*)) to in!est can ma-e just one Q*)) in!estment e!en ,hen presented ,ith t,o or
more in!estment choices# If this person is later offered an alternati!e in!estment
choice4 the in!estor has lost the opportunit" to ma-e that second in!estment since the
Q*)) is spent to &u" the first opportunit"# This e.ample illustrates that mone" is
limited and people ma-e choices in ho, to spend it# B" ma-ing a choice4 the" gi!e up
other opportunities#
In finance theor"4 the amount of the opportunit" cost is &ased on a relation &et,een
the ris- and return of some sort of in!estment# 6lassic economic theor" maintains that
people are rational and a!erse to ris-# The"4 therefore4 need an incenti!e to accept
ris-# The incenti!e in finance comes in the form of higher e.pected returns after
&u"ing a ris-" asset# In other ,ords4 the more ris-" the in!estment4 the more return
in!estors ,ant from that in!estment# 5sing the same e.ample as a&o!e4 assume the
first in!estment opportunit" is a go!ernment &ond that ,ill pa" interest of <S per
"ear and the principal and interest pa"ments are guaranteed &" the go!ernment#
Alternati!el"4 the second in!estment opportunit" is a &ond issued &" small compan"
and that &ond also pa"s annual interest of <S# If gi!en a choice &et,een the t,o
&onds4 !irtuall" all in!estors ,ould &u" the go!ernment &ond rather than the small/
firm &ond &ecause the first is less ris-" ,hile pa"ing the same interest rate as the
ris-ier second &ond# In this case4 an in!estor has no incenti!e to &u" the ris-ier second
&ond# 1urthermore4 in order to attract capital from in!estors4 the small firm issuing the
second &ond must pa" an interest rate higher than <S that the go!ernment &ond pa"s#
Other,ise4 no in!estor is li-el" to &u" that &ond and4 therefore4 the firm ,ill &e
una&le to raise capital# But &" offering to pa" an interest rate more than <S the firm
gi!es in!estors an incenti!e to &u" a ris-ier &ond#
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Ri!i Academ" of Management %alpesh Mehta
1or a !aluation using the discounted cash flo, method4 one first estimates the future
cash flo,s from the in!estment and then estimates a reasona&le discount rate after
considering the ris-iness of those cash flo,s and interest rates in the capital mar-ets#
$e.t4 one ma-es a calculation to compute the present !alue of the future cash flo,s#
Guideline companies method
This method determines the !alue of a firm &" o&ser!ing the prices of similar
companies 7guideline companies8 that sold in the mar-et# Those sales could &e shares
of stoc- or sales of entire firms# The o&ser!ed prices ser!e as !aluation &enchmar-s#
1rom the prices4 one calculates price multiples such as the price/to/earnings or price/
to/&oo- !alue ratios# $e.t4 one or more price multiples are used to !alue the firm# 1or
e.ample4 the a!erage price/to/earnings multiple of the guideline companies is applied
to the su&ject firmFs earnings to estimate its !alue#
Man" price multiples can &e calculated# Most are &ased on a financial statement
element such as a firmFs earnings 7price/to/earnings8 or &oo- !alue 7price/to/&oo-
!alue8 &ut multiples can &e &ased on other factors such as price/per/su&scri&er#
Net asset value method
The third common method of estimating the !alue of a compan" loo-s to the assets
and lia&ilities of the &usiness# At a minimum4 a sol!ent compan" could shut do,n
operations4 sell off the assets4 and pa" the creditors# An" cash that ,ould remain
esta&lishes a floor !alue for the compan"# This method is -no,n as the net asset !alue
or cost method# $ormall"4 the discounted cash flo,s of a ,ell/performing e.ceed this
floor !alue# Co,e!er4 some companies are 9,orth more dead than ali!e94 such as
,ea-l" performing companies that o,n man" tangi&le assets# This method can also
&e used to !alue heterogeneous portfolios of in!estments4 as ,ell as non/profit
companies for ,hich discounted cash flo, anal"sis is not rele!ant# The !aluation
premise normall" used is that of an orderl" liquidation of the assets4 although some
!aluation scenarios 7e#g# purchase price allocation8 impl" an 9in/use9 !aluation such
as depreciated replacement cost ne,#
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Ri!i Academ" of Management %alpesh Mehta
An alternati!e approach to the net asset !alue method is the e.cess earnings method#
This method ,as first descri&ed in ARM2;4 and later refined &" the 5#S# Internal
Re!enue Ser!iceFs Re!enue Ruling 3:/3)># The e.cess earnings method has the
appraiser identif" the !alue of tangi&le assets4 estimate an appropriate return on those
tangi&le assets4 and su&tract that return from the total return for the &usiness4 lea!ing
the 9e.cess9 return4 ,hich is presumed to come from the intangi&le assets# An
appropriate capitaliation rate is applied to the e.cess return4 resulting in the !alue of
those intangi&le assets# That !alue is added to the !alue of the tangi&le assets and an"
non/operating assets4 and the total is the !alue estimate for the &usiness as a ,hole#
Asset val&ati*n met*,
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Ri!i Academ" of Management %alpesh Mehta
Capital Asset +ri%ing M*,el 7CA+M9
In finance4 the capital asset pricing model 76APM8 is used to determine a
theoreticall" appropriate required rate of return of an asset4 if that asset is to &e added
to an alread" ,ell/di!ersified portfolio4 gi!en that assetFs non/di!ersifia&le ris-# The
model ta-es into account the assetFs sensiti!it" to non/di!ersifia&le ris- 7also -no,n
as s"stematic ris- or mar-et ris-84 often represented &" the quantit" &eta 7T8 in the
financial industr"4 as ,ell as the e.pected return of the mar-et and the e.pected return
of a theoretical ris-/free asset#
Te F*rm&la
The 6APM is a model for pricing an indi!idual securit" or a portfolio# 1or indi!idual
securities4 ,e ma-e use of the securit" mar-et line 7SM?8 and its relation to e.pected
return and s"stematic ris- 7&eta8 to sho, ho, the mar-et must price indi!idual
securities in relation to their securit" ris- class# The SM? ena&les us to calculate the
re,ard/to/ris- ratio for an" securit" in relation to that of the o!erall mar-et#
Therefore4 ,hen the e.pected rate of return for an" securit" is deflated &" its &eta
coefficient4 the re,ard/to/ris- ratio for an" indi!idual securit" in the mar-et is equal
to the mar-et re,ard/to/ris- ratio4 thus'
The mar-et re,ard/to/ris- ratio is effecti!el" the mar-et ris- premium and &"
rearranging the a&o!e equation and sol!ing for @ 7Ri84 ,e o&tain the 6apital Asset
Pricing Model 76APM8#
is the e.pected return on the capital asset
is the ris-/free rate of interest such as interest arising from go!ernment
In!estment Ban-ing 21
Ri!i Academ" of Management %alpesh Mehta
7the beta8 is the sensiti!it" of the e.pected e.cess asset returns to the
e.pected e.cess mar-et returns4 or also 4
is the e.pected return of the mar-et
is sometimes -no,n as the market premium or risk premium
7the difference &et,een the e.pected mar-et rate of return and the ris-/free
rate of return8#
Restated4 in terms of ris- premium4 ,e find that'
,hich states that the individual risk premium equals the market premium times #
$ote *' the e.pected mar-et rate of return is usuall" estimated &" measuring the
Geometric A!erage of the historical returns on a mar-et portfolio 7e#g# SGP <))8#
$ote (' the ris- free rate of return used for determining the ris- premium is usuall"
the arithmetic a!erage of historical ris- free rates of return and not the current ris-
free rate of return#
'e%&rit( market line
The SM? essentiall" graphs the results from the capital asset pricing model 76APM8
formula# The x/ represents the ris- 7&eta84 and the y/ represents the e.pected
return# The mar-et ris- premium is determined from the slope of the SM?#
The relationship &et,een T and required return is plotted on the securities market line
7SM?8 ,hich sho,s e.pected return as a function of T# The intercept is the nominal
ris-/free rate a!aila&le for the mar-et4 ,hile the slope is the mar-et premium4 @ 7R
# The securities mar-et line can &e regarded as representing a single/factor model
of the asset price4 ,here Beta is e.posure to changes in !alue of the Mar-et# The
equation of the SM? is thus'
In!estment Ban-ing 22
Ri!i Academ" of Management %alpesh Mehta
It is a useful tool in determining if an asset &eing considered for a portfolio offers a
reasona&le e.pected return for ris-# Indi!idual securities are plotted on the SM?
graph# If the securit"Fs e.pected return !ersus ris- is plotted a&o!e the SM?4 it is
under!alued since the in!estor can e.pect a greater return for the inherent ris-# And a
securit" plotted &elo, the SM? is o!er!alued since the in!estor ,ould &e accepting
less return for the amount of ris- assumed#
Asset pri%ing
Once the e.pectedErequired rate of return4 E7R
84 is calculated using 6APM4 ,e can
compare this required rate of return to the assetFs estimated rate of return o!er a
specific in!estment horion to determine ,hether it ,ould &e an appropriate
in!estment# To ma-e this comparison4 "ou need an independent estimate of the return
outloo- for the securit" &ased on either fundamental or technical anal"sis techniques4
including PE@4 MEB etc#
Assuming that the 6APM is correct4 an asset is correctl" priced ,hen its estimated
price is the same as the present !alue of future cash flo,s of the asset4 discounted at
the rate suggested &" 6APM# If the o&ser!ed price is higher than the 6APM
!aluation4 then the asset is o!er!alued 7and under!alued ,hen the estimated price is
&elo, the 6APM !aluation8#Ahen the asset does not lie on the SM?4 this could also
suggest mis/pricing# Since the e.pected return of the asset at time t is
4 a higher e.pected return than ,hat 6APM suggests
indicates that P
is too lo, 7the asset is currentl" under!alued84 assuming that at time t
V * the asset returns to the 6APM suggested price
Relative B&siness 2al&ati*n
Business !aluation is a process and a set of procedures used to estimate the economic
!alue of an o,nerKs interest in a &usiness# Maluation is used &" financial mar-et
participants to determine the price the" are ,illing to pa" or recei!e to consummate a
In!estment Ban-ing 23
Ri!i Academ" of Management %alpesh Mehta
sale of a &usiness# In addition to estimating the selling price of a &usiness4 the same
!aluation tools are often used &" &usiness appraisers to resol!e disputes related to
estate and gift ta.ation4 di!orce litigation4 allocate &usiness purchase price among
&usiness assets4 esta&lish a formula for estimating the !alue of partnersF o,nership
interest for &u"/sell agreements4 and man" other &usiness and legal purposes#
'tan,ar, an, premise *. val&e
Before the !alue of a &usiness can &e measured4 the !aluation assignment must
specif" the reason for and circumstances surrounding the &usiness !aluation# These
are formall" -no,n as the &usiness !alue standard and premise of !alue
The standard
of !alue is the h"pothetical conditions under ,hich the &usiness ,ill &e !alued# The
premise of !alue relates to the assumptions4 such as assuming that the &usiness ,ill
continue fore!er in its current form 7going concern84 or that the !alue of the &usiness
lies in the proceeds from the sale of all of its assets minus the related de&t 7sum of the
parts or assem&lage of &usiness assets8#
Business !aluation results can !ar" considera&l" depending upon the choice of &oth
the standard and premise of !alue# In an actual &usiness sale4 it ,ould &e e.pected
that the &u"er and seller4 each ,ith an incenti!e to achie!e an optimal outcome4 ,ould
determine the fair mar-et !alue of a &usiness asset that ,ould compete in the mar-et
for such an acquisition# If the s"nergies are specific to the compan" &eing !alued4 the"
ma" not &e considered# 1air !alue also does not incorporate discounts for lac- of
control or mar-eta&ilit"#
$ote4 ho,e!er4 that it is possi&le to achie!e the fair mar-et !alue for a &usiness asset
that is &eing liquidated in its secondar" mar-et# This underscores the difference
&et,een the standard and premise of !alue#
These assumptions might not4 and pro&a&l" do not4 reflect the actual conditions of the
mar-et in ,hich the su&ject &usiness might &e sold# Co,e!er4 these conditions are
assumed &ecause the" "ield a uniform standard of !alue4 after appl"ing generall"/
accepted !aluation techniques4 ,hich allo,s meaningful comparison &et,een
&usinesses ,hich are similarl" situated#
In!estment Ban-ing 24
Ri!i Academ" of Management %alpesh Mehta
Met*,s *. A%0&iring a C*mpan(
Leverage, /&(*&t
A le!eraged &u"out 7or ?BO4 or highl"/le!eraged transaction 7C?T84 or 9&ootstrap9
transaction8 occurs ,hen an in!estor4 t"picall" financial sponsor4 acquires a
controlling interest in a compan"Fs equit" and ,here a significant percentage of the
purchase price is financed through le!erage 7&orro,ing8# The assets of the acquired
compan" are used as collateral for the &orro,ed capital4 sometimes ,ith assets of the
acquiring compan"# T"picall"4 le!eraged &u"out uses a com&ination of !arious de&t
instruments from &an- and de&t capital mar-ets# The &onds or other paper issued for
le!eraged &u"outs are commonl" considered not to &e in!estment grade &ecause of
the significant ris-s in!ol!ed#
6ompanies of all sies and industries ha!e &een the target of le!eraged &u"out
transactions4 although &ecause of the importance of de&t and the a&ilit" of the
acquired firm to ma-e regular loan pa"ments after the completion of a le!eraged
&u"out4 some features of potential target firms ma-e for more attracti!e le!erage
&u"out candidates4 including'
?o, e.isting de&t loads#
A multi/"ear histor" of sta&le and recurring cash flo,s#
Card assets 7propert"4 plant and equipment4 in!entor"4 recei!a&les8 that ma" &e used
as collateral for lo,er cost secured de&t#
The potential for ne, management to ma-e operational or other impro!ements to the
firm to &oost cash flo,s#
Mar-et conditions and perceptions that depress the !aluation or stoc- price#
In!estment Ban-ing 25
Ri!i Academ" of Management %alpesh Mehta
Diagram of the &asic structure of a generic le!eraged &u"out transaction
?e!eraged &u"outs in!ol!e institutional in!estors and financial sponsors 7li-e a
pri!ate equit" firm8 ma-ing large acquisitions ,ithout committing all the capital
required for the acquisition# To do this4 a financial sponsor ,ill raise acquisition de&t
7&" issuing &onds or securing a loan8 ,hich is ultimatel" secured upon the acquisition
target and also loo-s to the cash flo,s of the acquisition target to ma-e interest and
principal pa"ments# Acquisition de&t in an ?BO is therefore usuall" non/recourse to
the financial sponsor and to the equit" fund that the financial sponsor manages#
1urthermore4 unli-e in a hedge fund4 ,here de&t raised to purchase certain securities
is also collateralied &" the fundFs other securities4 the acquisition de&t in an ?BO is
recourse onl" to the compan" purchased in a particular ?BO transaction# Therefore4
an ?BO transactionFs financial structure is particularl" attracti!e to a fundFs limited
partners4 allo,ing them the &enefits of le!erage &ut greatl" limiting the degree of
recourse of that le!erage#
In!estment Ban-ing 26
Ri!i Academ" of Management %alpesh Mehta
This -ind of acquisition &rings le!erage &enefits to an ?BOFs financial sponsor in t,o
7*8 The in!estor itself onl" needs to pro!ide a fraction of the capital for the
acquisition4 and
7(8 Assuming the economic internal rate of return on the in!estment 7ta-ing into
account e.pected proceeds8 e.ceeds the ,eighted a!erage interest rate on the
acquisition de&t4 returns to the financial sponsor ,ill &e significantl" enhanced#
As transaction sies gro,4 the equit" component of the purchase price can &e
pro!ided &" multiple financial sponsors 9co/in!esting9 to come up ,ith the needed
equit" for a purchase# ?i-e,ise4 multiple lenders ma" &and together in a 9s"ndicate9
to jointl" pro!ide the de&t required to fund the transaction# Toda"4 larger transactions
are dominated &" dedicated pri!ate equit" firms and a limited num&er of large &an-s
,ith 9financial sponsors9 groups#
As a percentage of the purchase price for a le!erage &u"out target4 the amount of de&t
used to finance a transaction !aries according to the financial condition and histor" of
the acquisition target4 mar-et conditions4 the ,illingness of lenders to e.tend credit
7&oth to the ?BOFs financial sponsors and the compan" to &e acquired8 as ,ell as the
interest costs and the a&ilit" of the compan" to co!er those costs# T"picall" the de&t
portion of a ?BO ranges from <)S/:<S of the purchase price4 &ut in some cases de&t
ma" represent up,ards of ><S of purchase price# Bet,een ()))/())< de&t a!eraged
&et,een <>#;S and 3=#>S of total purchase price for ?BOs in the 5nited States#
To finance ?BOFs pri!ate/equit" firms usuall" issue some com&ination of s"ndicated
loans and high/"ield &onds# Smaller transactions ma" also &e financed ,ith
meanine de&t from insurance companies or specialt" lenders# S"ndicated loans are
t"picall" arranged &" in!estment &an-s and financed &" commercial &an-s and loan
fund managers4 such as mutual funds4 hedge funds4 credit opportunit" in!estors and
structured finance !ehicles# The commercial &an-s t"picall" pro!ide re!ol!ing credits
that pro!ide issuers ,ith liquidit" and cash flo, ,hile fund managers generall"
In!estment Ban-ing 27
Ri!i Academ" of Management %alpesh Mehta
pro!ided funded term loans that are used to finance the ?BO# These loans tend to &e
senior secured4 floating/rate instruments pegged to the ?ondon Inter&an- Offered
Rate 7?IBOR8# The" are t"picall" pre/pa"a&le at the option of the issuer4 though in
some cases modest prepa"ment fees appl"# Cigh/"ield &onds4 mean,hile4 are also
under,ritten &" in!estment &an-s &ut are financed &" a com&ination of retail and
institutional credit in!estors4 including high/"ield mutual funds4 hedge funds4 credit
opportunities and other institutional accounts# Cigh/"ield &onds tend to &e fi.ed/rate
instruments# Most are unsecured4 though in some cases issuers ,ill sell senior secured
notes# The &onds usuall" ha!e no/call periods of 2+< "ears and then high prepa"ment
fees thereafter# Issuers4 ho,e!er4 ,ill in man" cases ha!e a 9cla,/&ac- option9 that
allo,s them to repa" some percentage during the no/call period 7usuall" 2<S8 ,ith
equit" proceeds#
Another source of financing for ?BOFs is sellerFs notes4 ,hich are pro!ided in some
cases &" the entit" as a ,a" to facilitate the transaction#
Management /&(*&ts
A special case of a le!eraged acquisition is a management &u"out 7MBO84 ,hich
occurs ,hen a compan"Fs managers &u" or acquire a large part of the compan"# The
goal of an MBO ma" &e to strengthen the managersF interest in the success of the
compan"# In most cases ,hen the compan" is initiall" listed4 the management ,ill
then ma-e it pri!ate# MBOs ha!e assumed an important role in corporate
restructurings &eside mergers and acquisitions# %e" considerations in an MBO are
fairness to shareholders4 price4 the future &usiness plan4 and legal and ta. issues# One
recent criticism of MBOs is that the" create a conflict of interestIan incenti!e is
created for managers to mismanage 7or not manage as efficientl"8 a compan"4 there&"
depressing its stoc- price4 and profiting handsomel" &" implementing effecti!e
management after the successful MBO
Of course4 the incenti!e to artificiall" reduce share price e.tends &e"ond management
It is fairl" eas" for a top e.ecuti!e to reduce the price of hisEher compan"Fs stoc- / due
to information as"mmetr"# The e.ecuti!e can accelerate accounting of e.pected
In!estment Ban-ing 28
Ri!i Academ" of Management %alpesh Mehta
e.penses4 dela" accounting of e.pected re!enue4 engage in off &alance sheet
transactions to ma-e the compan"Fs profita&ilit" appear temporaril" poorer4 or simpl"
promote and report se!erel" conser!ati!e 7e#g# pessimistic8 estimates of future
earnings# Such seemingl" ad!erse earnings ne,s ,ill &e li-el" to 7at least
temporaril"8 reduce share price# 7This is again due to information as"mmetries since it
is more common for top e.ecuti!es to do e!er"thing the" can to ,indo, dress their
compan"Fs earnings forecasts8#
A reduced share price ma-es a compan" an easier ta-eo!er target# Ahen the compan"
gets &ought out 7or ta-en pri!ate8 / at a dramaticall" lo,er price / the ta-eo!er artist
gains a ,indfall from the former top e.ecuti!eFs actions to surreptitiousl" reduce
share price# This can represent tens of &illions of dollars 7questiona&l"8 transferred
from pre!ious shareholders to the ta-eo!er artist# The former top e.ecuti!e is then
re,arded ,ith a golden parachute for presiding o!er the firesale that can sometimes
&e in the hundreds of millions of dollars for one or t,o "ears of ,or-# 7This is
ne!ertheless an e.cellent &argain for the ta-eo!er artist4 ,ho ,ill tend to &enefit from
de!eloping a reputation of &eing !er" generous to parting top e.ecuti!es8#
Similar issues occur ,hen a pu&licl" held asset or non/profit organiation undergoes
pri!atiation# Top e.ecuti!es often reap tremendous monetar" &enefits ,hen a
go!ernment o,ned or non/profit entit" is sold to pri!ate hands# Bust as in the e.ample
a&o!e4 the" can facilitate this process &" ma-ing the entit" appear to &e in financial
crisis / this reduces the sale price 7to the profit of the purchaser84 and ma-es non/
profits and go!ernments more li-el" to sell# Ironicall"4 it can also contri&ute to a
pu&lic perception that pri!ate entities are more efficientl" run reinforcing the political
,ill to sell of pu&lic assets#
Again4 due to as"mmetric information4 polic" ma-ers and the general pu&lic see a
go!ernment o,ned firm that ,as a financial FdisasterF / miraculousl" turned around &"
the pri!ate sector 7and t"picall" resold8 ,ithin a fe, "ears#
$e!ertheless4 the incenti!e to artificiall" reduce the share price of a firm is higher for
management &u"outs4 than for other forms of ta-eo!ers or ?BOs#
In!estment Ban-ing 29
Ri!i Academ" of Management %alpesh Mehta
+r*%ess in Mergers an, A%0&isiti*ns
+reliminar( Assessment *r B&siness 2al&ati*n
In this first step of Merger and Acquisition Process4 the mar-et !alue of the target
compan" is assessed# In this process of assessment not onl" the current financial
performance of the compan" is e.amined &ut also the estimated future mar-et !alue is
considered# The compan" ,hich intends to acquire the target firm engages itself in an
thorough anal"sis of the target firmFs &usiness histor"# The products of the firm4 itsF
capital requirement4 organiational structure4 &rand !alue e!er"thing are re!ie,ed
+ase *. +r*p*sal
After complete anal"sis and re!ie, of the target firmFs mar-et performance4 in the
second step4 the proposal for merger or acquisition is gi!en# The total price the
acquiring compan" is read" to pa" for the target compan" and its assets is ,or-ed out
,ith assistance from in!estment &an-ers as ,ell as the financial ad!isors# Thereafter
the tender offer is pu&lished informing the shareholders a&out the offer price as ,ell
as deadlines for either rejecting the offer or accepting it#
Reaction of the target compan"'
The target compan" responds to the a&o!e course of action in an" one of the
follo,ing ,a"s'
7i8 Agree ,ith the Offer terms' In the e!ent it is felt &" the top le!el e.ecuti!es and
managers that the offer price ma" &e accepted4 the deal of merger or acquisition is
7ii8 Tr" to negotiate' If the terms offered &" the acquiring compan" are not accepta&le4
then the shareholders of the target compan" ,ill tr" to negotiate the deal of merger or
acquisition# The shareholders and the top le!el management of the su&ject compan"
,ill tr" to ,or- out issues so that the" do not lose their jo&s and simultaneousl" see
the interest of the target compan"#
In!estment Ban-ing 30
Ri!i Academ" of Management %alpesh Mehta
7iii8 ?oo-ing for a Ahite %night' A Ahite %night is referred to another compan"4
,hich ,ould li-e to go for a friendl" ta-e o!er of the su&ject compan"4 there&" sa!ing
the target or the su&ject compan" from falling pre" to that compan"4 ,hich is
intending for a hostile ta-eo!er of the target compan"#
7i!8 5sing a Poison Pill' The target compan" uses a Poison pill ,herein it attempts to
ma-e its assets or shares less appealing to the compan"4 ,hich is attempting the tale
o!er# The target compan" ma" do it &" t,o methods'
7a8 B" using a 9flip in9' Permits the pre!ailing shareholders of the target compan" to
&u" shares at a discounted rate#
7&8 B" using a 9flip o!er9' Permits the shareholders to &u" sta-es of the acquiring
compan" at a discounted rate after the merger has ta-en place#
Cl*s&re *. te ,eal *. merger *r a%0&isiti*n6
Ahen the tender offer has &een finall" agreed upon &" the target compan" and after
fulfilling certain regulator" criteria4 the deal of merger or acquisition is e.ecuted
,herein some -ind of transaction ta-es place# During the course of the transaction4 the
compan"4 ,hich &u"s the target compan" ma-es pa"ment ,ith stoc-4 cash or ,ith
E$it +lan
Ahen a compan" decides to &u" out the target firm and the target firm agrees4 then
the latter in!ol!es in Planning# The target firm plans the right time for It
considers all the alternati!es li-e 1ull Sale4 Partial Sale and others# The firm also does
the ta. planning and e!aluates the options of rein!estment#
'tr&%t&re, Marketing
After finaliing the Plan4 the target firm in!ol!es in the mar-eting process and
tries to achie!e highest selling price# In this step4 the target firm concentrates on
structuring the &usiness deal#
In!estment Ban-ing 31
Ri!i Academ" of Management %alpesh Mehta
Originati*n *. +&r%ase Agreement *r Merger Agreement
In this step4 the purchase agreement is made in case of an acquisition deal# In case of
Merger also4 the final agreement papers are generated in this stage#
'tage *. Integrati*n
In this final stage4 the t,o firms are integrated through Merger or Acquisition# In this
stage4 it is ensured that the ne, joint compan" carries same rules and regulations
through out the organiation#
In!estment Ban-ing 32
Ri!i Academ" of Management %alpesh Mehta
MGA has &ecome a dail" transaction no,/a/da"s# Mergers and acquisitions are an
important area of capital mar-et acti!it" in restructuring a corporation and had latel"
&ecome one of the fa!oured routes for gro,th and consolidation# The reasons to
merge4 amalgamate and acquire are !aried4 ranging from acquiring mar-et share to
restructuring the corporation to meet glo&al competition# One of the largest and most
difficult parts of a &usiness merger is the successful integration of the enterprise
net,or-s of the merger partners# The main o&jecti!e of each firm is to gain profits#
MGA has a great scope in sectors li-e steel4 aluminium4 cement4 auto4 &an-ing G
finance4 computer soft,are4 pharmaceuticals4 consumer dura&le food products4
te.tiles etc#
It is an indispensa&le strategic tool for e.panding product portfolios4 entering into
ne, mar-et4 acquiring ne, technologies and &uilding ne, generation organiation
,ith po,er G resources to compete on glo&al &asis# Aith the increasing num&er of
Indian companies opting for mergers and acquisitions4 India is no, one of the leading
nations in the ,orld in terms of mergers and acquisitions# Till fe, "ears ago4 rarel"
did Indian companies &id for American/@uropean entities# Toda"4 &ecause of the
&uo"ant Indian econom"4 supporti!e go!ernment policies and d"namic leadership of
Indian organiations4 the ,orld has ,itnessed a ne, trend in acquisitions# Indian
companies are no, aggressi!el" loo-ing at $orth American and @uropean mar-ets to
spread their ,ings and &ecome glo&al pla"ers# Almost :< per cent of Indian firms are
using Mergers and Acquisitions as a core gro,th strateg"#
In!estment Ban-ing 33
Ri!i Academ" of Management %alpesh Mehta
A,vantages *. Mergers an, A%0&isiti*n
Benefits of Mergers and Acquisitions are manifold# Mergers and Acquisitions can
generate cost efficienc" through economies of scale4 can enhance the re!enue through
gain in mar-et share and can e!en generate ta. gains# The principal &enefits from
mergers and acquisitions can &e listed as increased !alue generation4 increase in cost
efficienc" and increase in mar-et share#
Benefits of Mergers and Acquisitions are the main reasons for ,hich the companies
enter into these deals# Mergers and Acquisitions ma" generate ta. gains4 can increase
re!enue and can reduce the cost of capital# The main &enefits of Mergers and
Acquisitions are the follo,ing'
Greater 2al&e Generati*n
Mergers and acquisitions often lead to an increased !alue generation for the compan"#
It is e.pected that the shareholder !alue of a firm after mergers or acquisitions ,ould
&e greater than the sum of the shareholder !alues of the parent companies# Mergers
and acquisitions generall" succeed in generating cost efficienc" through the
implementation of economies of scale#
Merger G Acquisition also leads to ta. gains and can e!en lead to a re!enue
enhancement through mar-et share gain# 6ompanies go for Mergers and Acquisition
from the idea that4 the joint compan" ,ill &e a&le to generate more !alue than the
separate firms# Ahen a compan" &u"s out another4 it e.pects that the ne,l" generated
shareholder !alue ,ill &e higher than the !alue of the sum of the shares of the t,o
separate companies#
Mergers and Acquisitions can pro!e to &e reall" &eneficial to the companies ,hen
the" are ,eathering through the tough times# If the compan" ,hich is suffering from
!arious pro&lems in the mar-et and is not a&le to o!ercome the difficulties4 it can go
for an acquisition deal# If a compan"4 ,hich has a strong mar-et presence4 &u"s out
the ,ea- firm4 then a more competiti!e and cost efficient compan" can &e generated#
Cere4 the target compan" &enefits as it gets out of the difficult situation and after
&eing acquired &" the large firm4 the joint compan" accumulates larger mar-et share#
This is &ecause of these &enefits that the small and less po,erful firms agree to &e
acquired &" the large firms#
In!estment Ban-ing 34
Ri!i Academ" of Management %alpesh Mehta
Gaining C*st E..i%ien%(
Ahen t,o companies come together &" merger or acquisition4 the joint compan"
&enefits in terms of cost efficienc"# A merger or acquisition is a&le to create
economies of scale ,hich in turn generates cost efficienc"# As the t,o firms form a
ne, and &igger compan"4 the production is done on a much larger scale and ,hen the
output production increases4 there are strong chances that the cost of production per
unit of output gets reduced# An increase in cost efficienc" is affected through the
procedure of mergers and acquisitions# This is &ecause mergers and acquisitions lead
to economies of scale# This in turn promotes cost efficienc"# As the parent firms
amalgamate to form a &igger ne, firm the scale of operations of the ne, firm
increases# As output production rises there are chances that the cost per unit of
production ,ill come do,n#
E%*n*m( *. s%ale
This refers to the fact that the com&ined compan" can often reduce its fi.ed costs &"
remo!ing duplicate departments or operations4 lo,ering the costs of the compan"
relati!e to the same re!enue stream4 thus increasing profit margins#
E%*n*m( *. s%*pe
This refers to the efficiencies primaril" associated ,ith demand/side changes4 such as
increasing or decreasing the scope of mar-eting and distri&ution4 of different t"pes of
Market sare
This assumes that the &u"er ,ill &e a&sor&ing a major competitor and thus increase its
mar-et po,er 7&" capturing increased mar-et share8 to set prices#
In!estment Ban-ing 35
Ri!i Academ" of Management %alpesh Mehta
1or e.ample4 a &an- &u"ing a stoc- &ro-er could then sell its &an-ing products to the
stoc- &ro-erFs customers4 ,hile the &ro-er can sign up the &an-Fs customers for
&ro-erage accounts# Or4 a manufacturer can acquire and sell complementar" products#
1or e.ample4 managerial economies such as the increased opportunit" of managerial
specialiation# Another e.ample is purchasing economies due to increased order sie
and associated &ul-/&u"ing discounts#
A profita&le compan" can &u" a loss ma-er to use the targetFs loss as their ad!antage
&" reducing their ta. lia&ilit"# In the 5nited States and man" other countries4 rules are
in place to limit the a&ilit" of profita&le companies to 9shop9 for loss ma-ing
companies4 limiting the ta. moti!e of an acquiring compan"# Ta. minimiation
strategies include purchasing assets of a non/performing compan" and reducing
current ta. lia&ilit" under the Tanner/Ahite P??6 Trou&led Asset Reco!er" Plan#
In!estment Ban-ing 36
Ri!i Academ" of Management %alpesh Mehta
Disa,vantages *. Mergers an, A%0&isiti*n
De-merged firms are likely to be substantially smaller than their parents, possibly making it harder to
tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller
size of the firm may mean it has less representation on major, making it more difficult to attract
interest from institutional investors.
Mean,hile4 there are the e.tra costs that the parts of the &usiness face if separated#
Ahen a firm di!ides itself into smaller units4 it ma" &e losing the s"nerg" that it had as a
larger entity. For instance, the division of expenses such as marketing, administration and research
and de!elopment (!"# into different business units may cause redundant costs $ithout increasing
overall revenues.
Restr&%t&ring Met*,s
There are se!eral restructuring methods' doing an outright sell/off4 doing an equit"
car!e/out4 spinning off a unit to e.isting shareholders or issuing trac-ing stoc-# @ach
has ad!antages and disad!antages for companies and in!estors# All of these deals are
quite comple.#
A sell-off, also kno$n as a di!estiture, is the outright sale of a company subsidiary. %ormally, sell-offs
are done because the subsidiary doesn&t fit into the parent company&s core strategy. 'he market may be
under!aluing the combined businesses due to a lack of synergy bet$een the parent and subsidiary.
As a result, management and the board decide that the subsidiary is better off under different
(esides getting rid of an un$anted subsidiary, sell-offs also raise cash, $hich can be used to pay off
debt. )n the late *+,-s and early *++-s, corporate raiders $ould use debt to finance ac.uisitions.
'hen, after making a purchase they $ould sell-off its subsidiaries to raise cash to service the debt. 'he
raiders& method certainly makes sense if the sum of the parts is greater than the $hole. /hen it isn&t,
deals are unsuccessful.
E0&it( Carve=O&ts
More and more companies are using equit" car!e/outs to &oost shareholder !alue# A
parent firm ma-es a su&sidiar" pu&lic through an initial pu&lic offering ()01# of shares,
amounting to a partial sell-off. A ne$ publicly-listed company is created, but the parent keeps a
controlling stake in the ne$ly traded subsidiary.
In!estment Ban-ing 37
Ri!i Academ" of Management %alpesh Mehta
A car!e/out is a strategic a!enue a parent firm ma" ta-e ,hen one of its su&sidiaries
is gro,ing faster and carr"ing higher !aluations than other &usinesses o,ned &" the
parent# A car!e/out generates cash &ecause shares in the su&sidiar" are sold to the
pu&lic4 &ut the issue also unloc-s the !alue of the su&sidiar" unit and enhances the
parentFs shareholder !alue#
The ne, legal entit" of a car!e/out has a separate &oard4 &ut in most car!e/outs4 the
parent retains some control# In these cases4 some portion of the parent firmFs &oard of
directors ma" &e shared# Since the parent has a controlling sta-e4 meaning &oth firms
ha!e common shareholders4 the connection &et,een the t,o ,ill li-el" &e strong#
'hat said, sometimes companies carve-out a subsidiary not because it&s doing $ell, but because it is a
burden. 2uch an intention $on&t lead to a successful result, especially if a carved-out subsidiary is too
loaded $ith debt, or had trouble even $hen it $as a part of the parent and is lacking an established
track record for gro$ing revenues and profits.
6ar!e/outs can also create une.pected friction &et,een the parent and su&sidiar"#
Pro&lems can arise as managers of the car!ed/out compan" must &e accounta&le to
their pu&lic shareholders as ,ell as the o,ners of the parent compan"# This can create
di!ided lo"alties#
A spinoff occurs $hen a subsidiary becomes an independent entity. 'he parent firm distributes shares
of the subsidiary to its shareholders through a stoc- di!idend. 2ince this transaction is a dividend
distribution, no cash is generated. 'hus, spinoffs are unlikely to be used $hen a firm needs to finance
gro$th or deals. 3ike the carve-out, the subsidiary becomes a separate legal entity $ith a distinct
management and board.
?i-e car!e/outs4 spinoffs are usuall" a&out separating a health" operation# In most
cases4 spinoffs unloc- hidden shareholder !alue# 1or the parent compan"4 it sharpens
management focus# 1or the spinoff compan"4 management doesnFt ha!e to compete
for the parentFs attention and capital# Once the" are set free4 managers can e.plore
ne, opportunities#
In!estors4 ho,e!er4 should &e,are of thro,/a,a" su&sidiaries the parent created to
separate legal lia&ilit" or to off/load de&t# Once spinoff shares are issued to parent
In!estment Ban-ing 38
Ri!i Academ" of Management %alpesh Mehta
compan" shareholders4 some shareholders ma" &e tempted to quic-l" dump these
shares on the mar-et4 depressing the share !aluation#
Tra%king 't*%k
A trac-ing stoc- is a special t"pe of stoc- issued &" a pu&licl" held compan" to trac-
the !alue of one segment of that compan"# The stoc- allo,s the different segments of
the compan" to &e !alued differentl" &" in!estors#
?etFs sa" a slo,/gro,th compan" trading at a lo, price/earnings ratio (045 ratio#
happens to have a fast gro$ing business unit. 'he company might issue a tracking stock so the market
can value the ne$ business separately from the old one and at a significantly higher 045 rating.
Ah" ,ould a firm issue a trac-ing stoc- rather than spinning/off or car!ing/out its
fast gro,th &usiness for shareholdersR The compan" retains control o!er the
su&sidiar"H the t,o &usinesses can continue to enjo" s"nergies and share mar-eting4
administrati!e support functions4 a headquarters and so on# 1inall"4 and most
importantl"4 if the trac-ing stoc- clim&s in !alue4 the parent compan" can use the
trac-ing stoc- it o,ns to ma-e acquisitions#
Still4 shareholders need to remem&er that trac-ing stoc-s are class B4 meaning the"
donFt grant shareholders the same !oting rights as those of the main stoc-# @ach share
of trac-ing stoc- ma" ha!e onl" a half or a quarter of a !ote# In rare cases4 holders of
trac-ing stoc- ha!e no !ote at all#
'teps t* make Mergers an, A%0&isiti*ns s&%%ess.&l
This programme ta-es "ou through the ten essential steps to successful mergers and
1ormulating a strateg"
Defining acquisition criteria
Searching for the target
Planning the acquisition process
In!estment Ban-ing 39
Ri!i Academ" of Management %alpesh Mehta
Maluing and e!aluating the target
$egotiating the deal
6arr"ing out financial and commercial due diligence
6ompleting the purchase and sale contract
1inancing the deal
Ta-ing charge and integrating the &usiness
In!estment Ban-ing 40
Ri!i Academ" of Management %alpesh Mehta
Initial +&/li% O..ering 7I+O9
I+O De.initi*n
An initial pu&lic offer4 as the name indicates4 is the first 7initial8 instance of a
compan" 7called the issuer8 offering its commons stoc- 7or shares8 to the general
pu&lic for su&scription#
It is a common misconception that onl" ne,l" formed companies resort to raising
mone" through an IPO# @!en long esta&lished pri!ate companies can access the IPO
route to raise capital4 and &ecome pu&licl" traded companies as a result# An IPO is
considered as a Nrite of passageO into the &ig league of pu&licl" traded stoc-s# An"
compan" that needs to &e listed on a stoc- e.change has to offer its shares to the
In addition to IPO4 an alread" listed and pu&licl" traded compan" ma" issue an 1PO +
a 1ollo, on Pu&lic Offer + to raise further capital for the compan"# At an" gi!en time4
there are a num&er of IPO and 1PO issues floating around in the mar-et4 therefore4 it
is essential to understand the difference &et,een the t,o#
Shares issued in an IPO are &ought in the primar" mar-et4 ,hile shares &rought from
another in!estor are e.changed in the secondar" mar-et# The distinct &et,een primar"
and secondar" mar-et is notional4 there is no ph"sical separation &et,een the t,o# An
important distinction &et,een shares purchased during an IPO and shares purchased
from the secondar" mar-et is that ,hile in case of an IPO4 the mone" goes directl"
into the compan" coffersH in case of secondar" mar-et4 the mone" is transferred from
one in!estor to another#
I+O Li.e%(%le 'tages
In!estment Ban-ing 41
Ri!i Academ" of Management %alpesh Mehta
The issuance of an IPO is a process ,ith distincti!e stages# The life c"cle of an IPO
can &e understood to &e spread o!er these steps or stages# The !arious stages in the
life c"cle of an Initial Pu&lic Offering are as follo,s /
Initiali-ati*n + In this stage4 the compan" appoints !arious entities that are crucial in
the management of the IPO#These entities include the issue managers or &oo- runners
7mostl" in!estment &an-s8 and registrars to the issue#
+re Iss&e A%tivities + In this stage4 the draft offer prospectus is prepared and
su&mitted to S@BI# The lead manager ma" conduct road sho,s ,hich are &asicall"
mar-eting acti!ities to generate a,areness a&out the issue#
+r*spe%t&s Revie5 + S@BI re!ie,s the prospectus su&mitted to it4 and an" changes
and re!isions suggested &" S@BI are incorporated at this stage# Once the draft is
appro!ed &" S@BI4 it is termed as the Offer Prospectus#
'&/mits +r*spe%t&s t* 't*%k E$%ange + The offer prospectus is no, su&mitted to
rele!ant stoc- e.change for appro!al# Ahen the date of issue and the price &and 7and
not the e.act price8 is decided and incorporated into the offer prospectus4 it &ecomes
the DRed Cerring ProspectusK#
Distri/&ti*n *. Re, 1erring +r*spe%t&s an, I+O F*rms + The prospectus and the
forms are distri&uted to retail in!estors through the s"ndicate mem&ers#
+&/li% Iss&e + In this stage4 the issue is thro,n open to the pu&lic and the &ids are
collected# The pu&lic issue closes at a predetermined date# This stage can &e
considered to &e the Npu&lic faceO of the IPO#
+ri%e Fi$ing + Once all the &ids are collected4 the lead managers decide the final
issue price4 and inform the stoc- e.change and S@BI#
In!estment Ban-ing 42
Ri!i Academ" of Management %alpesh Mehta
+r*%essing *. I+O Appli%ati*ns /( Registrar + This is the DclericalK stage4 ,herein
the forms are collected4 chec-s are processed4 share allotment is completed4 shares are
transferred to the demat accounts and an" e.cess mone" is refunded#
Listing in te 't*%k E$%ange + Once the date of listing is decided4 the shares of the
issuer compan" are listed on the stoc- e.change shares#
In!estment Ban-ing 43
Ri!i Academ" of Management %alpesh Mehta
A,vantages *. I+O
IPO has a num&er of ad!antages# IPO helps the compan" to create a pu&lic a,areness
a&out the compan" as these pu&lic offerings generate pu&licit" &" inducing their
products to !arious in!estors#
Te in%rease in te %apital6 An IPO allo,s a compan" to raise funds for utiliing in
!arious corporate operational purposes li-e acquisitions4 mergers4 ,or-ing capital4
research and de!elopment4 e.panding plant and equipment and mar-eting#
Li0&i,it(6 The shares once traded ha!e an assigned mar-et !alue and can &e resold#
This is e.tremel" helpful as the compan" pro!ides the emplo"ees ,ith stoc- incenti!e
pac-ages and the in!estors are pro!ided ,ith the option of trading their shares for a
2al&ati*n6 The pu&lic trading of the shares determines a !alue for the compan" and
sets a standard# This ,or-s in fa!or of the compan" as it is helpful in case the
compan" is loo-ing for acquisition or merger# It also pro!ides the share holders of the
compan" ,ith the present !alue of the shares#
In%rease, 5ealt6 The founders of the companies ha!e an affinit" to,ards IPO as it
can increase the ,ealth of the compan"4 ,ithout di!iding the authorit" as in case of
In!estment Ban-ing 44
Ri!i Academ" of Management %alpesh Mehta
Disa,vantages *. I+O
In%rease, ,is%l*s&re
Ahen a compan" mo!es from pri!ate o,nership to pu&lic4 it !astl" increases the
num&er of people ,ho ha!e access to its financial records# This can &e a huge shoc-
to the e.isting o,ners4 not just the reporting of the compan"Ks results4 &ut the
disclosure of management salaries and per-s that often piques the interest of
ne,spaper editors on a slo, da"#
6ompanies are required &" stoc- e.changes4 securities commissions and regulators to
disclose information on a regular &asis so that in!estors and potential in!estors can
ma-e &u"4 sell or hold decisions# A much greater amount of information is required at
the time of the IPO and is included in the offering prospectus#
Disclosure requirements !ar" &" countr"# Those countries ,ith the largest stoc-
mar-ets4 relati!e to the econom"4 t"picall" ha!e the highest disclosure requirements
7e#g# Australia4 6anada4 5%4 5SA8#
The de!elopment of efficient capital mar-ets in 6entral and @astern @urope has &een
hindered partiall" &" the reticence of corporate e.ecuti!es to disclose information
a&out their firmKs operations and performance#
ItKs not all &ad though# Botosan 7*>>=8 has found that increased disclosure on the part
of the compan" can reduce its cost of equit"# B" reducing its cost of equit"4 a
compan" is a&le to in!est in more projects4 raise capital more cheapl"4 and enhance its
C*sts *. I+Os
Initial pu&lic offerings arenKt cheap# In!estment &an-ers ta-e commissions of &et,een
( and = per cent of the total amount raisedH la,"ers and accountants &ill &" the hour4
and man" hours are required# The ancillar" costs4 such as pu&lic relations4 printing4
corporate ad!ertising and others can add se!eral hundred thousand more dollars4 euros
or pounds#
In!estment Ban-ing 45
Ri!i Academ" of Management %alpesh Mehta
In addition to the upfront costs of the IPO4 there are the costs of maintaining a quote
on the stoc- e.change 7stoc- e.change fees4 management time4 more e.tensi!e audits
and reporting4 reconciliation of accounts to 5S GAAP if listed on a 5S e.change4
Co,e!er4 the direct costs of an IPO can pale &eside the indirect cost of underpricing#
Because no cash is coming directl" out of the issuerKs poc-et4 underpricing can
sometimes &e ignored as a cost# It should not &e# IPOs around the ,orld are under
priced compared ,ith their short/term performance# On a!erage4 an IPO ,ill close at
a price that is *< to () per cent a&o!e its issue price4 although this !aries &" mar-et
and industr" and o!er time# This means that selling shareholders and the compan" are
lea!ing significant sums of mone" on the ta&le ,hen the" go pu&lic#
The amount of mone" left on the ta&le is calculated &" su&tracting the offer price
from the first da" closing price and multipl"ing &" the num&er of shares offered# 1or
e.ample4 man" anal"sts &elie!e Google left too much mone" on the ta&le in its ());
+*tential restri%ti*ns *n management a%ti*n
In man" pri!ate companies4 the managers are the o,ners# Therefore there are fe,
restrictions on management action other than statutor" and legal regulations and
common sense# Co,e!er4 this is not a pro&lem as the lin-age of o,nership and
control should lead to little di!ergence of opinion a&out the appropriate course of
action for the compan"#
In pu&lic companies4 the managers are the agents of the shareholders + the" should &e
acting on &ehalf of the shareholders and in the shareholdersK &est interests# In order to
ensure that the" do4 pu&lic companies ha!e &oards of directors ,ho are meant to
o!ersee managementKs actions on &ehalf of shareholders# In some circumstances a
strong &oard of directors ma" limit the actions of management#
In!estment Ban-ing 46
Ri!i Academ" of Management %alpesh Mehta
F&n,ing an, Leverage in te Investment Banking
F&n,ing in Investment Banking
1unding is to pro!ide resources4 usuall" in form of mone" 71inancing84 or other
!alues such as effort or time 7s,eat equit"84 for a project4 a person4 a &usiness or an"
other pri!ate or pu&lic institutions# Ahen a request for funding is made
then fundraising is &eing attempted#
Those funds can &e allocated for either short term or long term purposes# The health
fund is a ne, ,a" of funding pri!ate healthcare centers#
Among the main sources of funding4 there are'
6redit is the trust ,hich allo,s one part" to pro!ide resources to another part" ,here
that second part" does not reim&urse the first part" immediatel" 7there&" generating
a de&t84 &ut instead arranges either to repa" or return those resources 7or other
materials of equal !alue8 at a later date# The resources pro!ided ma" &e financial 7e#g#
granting a loan84 or the" ma" consist of goods or ser!ices 7e#g#consumer credit8#
6redit encompasses an" form of deferred pa"ment# 6redit is e.tended &" a creditor4
also -no,n as a lender4 to a de&tor4 also -no,n as a &orro,er#
A donation is a gift gi!en &" ph"sical or legal persons4 t"picall"
for charita&le purposes andEor to &enefit a cause# A donation ma" ta-e !arious forms4
including cash4 ser!ices4 ne, or used goods including clothing4 to"s4 food4
and !ehicles# It also ma" consist of emergenc"4 relief or humanitarian aid items4
de!elopment aid support4 and can also relate to medical care needs as
i#e# &lood or organs for transplant# 6harita&le gifts of goods or ser!ices are also
called gifts in -ind#
In!estment Ban-ing 47
Ri!i Academ" of Management %alpesh Mehta
Grants are funds dis&ursed &" one part" 7Grant Ma-ers84 often a Go!ernment
Department4 6orporation4 1oundation or Trust4 to a recipient4 often 7&ut not al,a"s8 a
nonprofit entit"4 educational institution4 &usiness or an indi!idual# In order to recei!e
a grant4 some form of 9Grant Ariting9 often referred to as either a proposal or an
application is usuall" required# 1or more information regarding successful grant
su&missions see Grant Ariting# Most grants are made to fund a specific project and
require some le!el of compliance and reporting# The Grant Ariting process in!ol!es
an applicant su&mitting a proposal 7or su&mission8 to a potential funder4 either on the
applicantFs o,n initiati!e or in response to a Request for Proposal from the funder#
Other grants can &e gi!en to indi!iduals4 such as !ictims of natural disasters or
indi!iduals such as people ,ho see- to open a small &usiness# Sometimes Grant
Ma-ers require Grant See-ers to ha!e some form of ta./e.empt status4 &e a registered
nonprofit organiation or a local go!ernment#
Sa!ing is income not spent4 or deferred consumption# Methods of sa!ing include
putting mone" aside in a &an- or pension plan# Sa!ing also includes reducing
e.penditures4 such as recurring costs# In terms of personal finance4 sa!ing specifies
lo,/ris- preser!ation of mone"4 as in a deposit account4 !ersus in!estment4 ,herein
ris- is higher#
9Sa!ing9 differs from 9sa!ings#9 The former refers to an increase in oneFs assets4 an
increase in net ,orth4 ,hereas the latter refers to one part of oneFs assets4 usuall"
deposits in sa!ings accounts4 or to all of oneFs assets# Sa!ing refers to an acti!it"
occurring o!er time4 a flo, !aria&le4 ,hereas sa!ings refers to something that e.ists
at an" one time4 a stoc- !aria&le#
Sa!ing is closel" related to in!estment# B" not using income to &u" consumer goods
and ser!ices4 it is possi&le for resources to instead &e in!ested &" &eing used to
produce fi.ed capital4 such as factories and machiner"# Sa!ing can therefore &e !ital
to increase the amount of fi.ed capital a!aila&le4 ,hich contri&utes to economic
In!estment Ban-ing 48
Ri!i Academ" of Management %alpesh Mehta
A su&sid" 7also -no,n as a su&!ention8 is a form of financial assistance paid to a
&usiness or economic sector# Most su&sidies are made &" the go!ernment to producers
or distri&utors in an industr" to pre!ent the decline of that industr" 7e#g#4 as a result of
continuous unprofita&le operations8 or an increase in the prices of its products or
simpl" to encourage it to hire more la&or 7as in the case of a ,age su&sid"8# @.amples
are su&sidies to encourage the sale of e.portsH su&sidies on some foods to -eep do,n
the cost of li!ing4 especiall" in ur&an areasH and su&sidies to encourage the e.pansion
of farm production and achie!e self/reliance in food production#
Su&sidies can &e regarded as a form of protectionism or trade &arrier &" ma-ing
domestic goods and ser!ices artificiall" competiti!e against imports# Su&sidies ma"
distort mar-ets4 and can impose large economic costs# 1inancial assistance in the form
of a su&sid" ma" come from oneFs go!ernment4 &ut the term su&sid" ma" also refer to
assistance granted &" others4 such as indi!iduals or non/go!ernmental institutions#
To ta. is to impose a financial charge or other le!" upon a"er7an indi!idual
or legal entit"8 &" a state or the functional equi!alent of a state such that failure to pa"
is punisha&le &" la,# are also imposed &" man" su& national entities# consist of direct
ta. or indirect ta.4 and ma" &e paid in mone" or as its la&or equi!alent 7often &ut not
al,a"s unpaid la&or8# A ta. ma" &e defined as a 9pecuniar" &urden laid upon
indi!iduals or propert" o,ners to support the go!ernment a pa"ment e.acted &"
legislati!e authorit"#9 A ta. 9is not a !oluntar" pa"ment or donation4 &ut an enforced
contri&ution4 e.acted pursuant to legislati!e authorit"9 and is 9an" contri&ution
imposed &" go!ernment ,hether under the name of toll4 tri&ute4 tall age4 ga&le4
impost4 dut"4 custom4 e.cise4 su&sid"4 aid4 suppl"4 or other name#9
In!estment Ban-ing 49
Ri!i Academ" of Management %alpesh Mehta
Leverage in te Investment Banking
In finance4 le!erage is a general term for an" technique to multipl" gains and
losses# 6ommon ,a"s to attain le!erage are &orro,ing mone"4 &u"ing fi.ed
assets and using deri!ati!es# Important e.amples are'
A pu&lic corporation ma" le!erage its equit" &" &orro,ing mone"# The more
it &orro,s4 the less equit" capital it needs4 so an" profits or losses are shared among a
smaller &ase and are proportionatel" larger as a result#
A &usiness entit" can le!erage its re!enue &" &u"ing fi.ed assets# This ,ill
increase the proportion of fi.ed4 as opposed to !aria&le4 costs4 meaning that a change
in re!enue ,ill result in a larger change in operating income#
Cedge funds often le!erage their assets &" using deri!ati!es# A fund might get
an" gains or losses on Q() million ,orth of crude oil &" posting Q* million of cash
as margin#
Leverage an, ROE
If ,e ha!e to chec- real effect of le!erage on RO@4 ,e ha!e to stud" financial
le!erage# 1inancial le!erage refers to the use of de&t to acquire additional assets#
1inancial le!erage ma" decrease or increase return on equit" in different conditions#
1inancial o!er/le!eraging means incurring a huge de&t &" &orro,ing funds at a lo,er
rate of interest and utiliing the e.cess funds in high ris- in!estments in order to
ma.imie returns#
Leverage an, Risk
The most o&!ious ris- of le!erage is that it multiplies losses# A corporation that
&orro,s too much mone" might face &an-ruptc" during a &usiness do,nturn4 ,hile a
less/le!ered corporation might sur!i!e# An in!estor ,ho &u"s a stoc- on <)S margin
,ill lose ;)S of his mone" if the stoc- declines ()S#There is an important implicit
assumption in that account4 ho,e!er4 ,hich is that the underl"ing le!ered asset is the
same as the unle!ered one# If a compan" &orro,s mone" to modernie4 or add to its
product line4 or e.pand internationall"4 the additional di!ersification might more than
offset the additional ris- from le!erage# Or if an in!estor uses a fraction of his or her
portfolio to margin stoc- inde. futures and puts the rest in a mone" mar-et fund4 he or
In!estment Ban-ing 50
Ri!i Academ" of Management %alpesh Mehta
she might ha!e the same !olatilit" and e.pected return as an in!estor in an unle!ered
equit" inde. fund4 ,ith a limited do,nside# So ,hile adding le!erage to a gi!en asset
al,a"s adds ris-4 it is not the case that a le!ered compan" or in!estment is al,a"s
ris-ier than an unle!ered one# In fact4 man" highl"/le!ered hedge funds ha!e less
return !olatilit" than unle!ered &ond funds4 and pu&lic utilities ,ith lots of de&t are
usuall" less ris-" stoc-s than unle!ered technolog" companies#
In!estment Ban-ing 51
Ri!i Academ" of Management %alpesh Mehta
Ma>*r Investment Banks in In,ia
39 K*tak Investment Bank
%ota- In!estment Ban-ing is a su&sidiar" of %ota- Mahindra Ban- ?imited4 one of
IndiaKs leading &an-ing and financial ser!ices organiations# %ota- In!estment
Ban-ing offers the complete &readth and depth of high/qualit" financial ad!isor"
ser!ices and capital mar-et solutions to domestic and multinational clients across
sectors# Our ser!ices include @quit" and De&t 6apital Mar-et issuances4 MGA
Ad!isor"4 Pri!ate @quit" Ad!isor"4 Restructuring and Recapitaliation ser!ices4 and
Infrastructure Ad!isor" G 1und Mo&iliation# The firm has a deep understanding and
strong domain -no,ledge of all major industr" sectors through a team of dedicated
sector e.perts#
a9 E0&it( %apital markets
%ota- In!estment Ban-ing4 a pioneer and leader in the equit" capital mar-ets4 has
,or-ed on the de!elopment of some of the most path/&rea-ing inno!ations in the
Indian capital mar-ets including the introduction of &oo- &uilding in pu&lic offers and
the introduction of Xualified Institutional Placements 7XIPs8 in India# The firm has a
strong trac- record of managing se!eral industr"/defining deals and has &een the &oo-
runner for some landmar- go!ernment disin!estments#
Ke( Re%ent Deals
In 1P()**4 %ota- In!estment Ban-ing ,as the lead manager to t,el!e out of the
t,ent" si. Initial E1ollo, on Pu&lic @quit" Offerings 7a&o!e Rs# (#< &illion8
accounting for 3(S of the total mone" raised in these offerings# Ae ha!e helped
companies raise o!er Rs 2<) &illion in the domestic mar-ets during 1P()**#Some of
our recent transactions include'
M&t**t Finan%e' In ()**4 Boo- Running ?ead Manager4 Rs# > &n
C*al In,ia' In ()*)4 Boo- Running ?ead Manager4 Rs# *<( &n
?a(pee In.rate%' In ()*)4 Boo- Running ?ead Manager4 Rs# ((#2 &n
In!estment Ban-ing 52
Ri!i Academ" of Management %alpesh Mehta
'K' Mi%r*.inan%e' In ()*)4 Boo- Running ?ead Manager4 Rs# *3#2 &n
DB Realt(' In ()*)4 Boo- Running ?ead Manager4 Rs# *< &n #
/9 Mergers an, A%0&isiti*ns
%ota- In!estment Ban-ing has demonstrated its leadership in MGAs &" successfull"
ad!ising on some of the largest and most comple. MGA transactions of e!er" t"pe in
India# The team has a ,ealth of e.perience and offers in/depth MGA ad!isor"
e.pertise and deal e.ecution s-ills across a &road spectrum of products G ser!ices#
%ota- In!estment Ban-ing has significant e.perience in all t"pes of MGA
transactions including acquisitions4 di!estments4 cross &order transactions4
restructuring ad!isor"4 &u"&ac-s4 defence strateg" ad!isor" and open &idding#
Ke( Re%ent Deals
Te% Main,ra' In ())>4 Tech Mahindra acquired Sat"am 6omputer Ser!ices for
5SQ <>* mn# %ota- pro!ided the entire suite of ser!ices from ad!isor" and financing
to e.ecution and open offer management#
Ispat In,&stries' In ()*)4 e.clusi!e financial ad!isor to Ispat Industries for strategic
sta-e sale to BSA Steel through a preferential issue of shares4 5SQ ;:) mn#
Relian%e' In ())>4 in the largest/e!er MGA transaction in the histor" of corporate
India4 %ota- acted as transaction ad!isor for the amalgamation of Reliance Petroleum
?imited ,ith Reliance Industries ?imited in a 5SQ *=<( mn deal#
Main,ra @ Main,ra' In ()):4 e.clusi!e financial ad!isor to Mahindra G
Mahindra for acquiring a <*S sta-e in 6hinaKs 2rd largest tractor compan"4 Biangsu
Pueda Pancheng Tractor Manufacturing 6o# ?td
+rivate E0&it( A,vis*r(
Ke( Re%ent Deals
Te M*/ile 't*re' In ()*)4 @.clusi!e ad!isor for pri!ate placement of shares to
I?G1S Pri!ate @quit"4 5SQ (( mn#
In!estment Ban-ing 53
Ri!i Academ" of Management %alpesh Mehta
Main,ra @ Main,ra' In ()):4 @.clusi!e ad!isor for pri!ate placement of 2#3:S
sta-e to Goldman Sachs4 5SQ *=< mn #
+&n> Ll*(,' In ())=4 Boint Boo- Runner for XIP 7su&scription &" &lue/chip P@
in!estors84 5SQ ()) mn #
In!estment Ban-ing 54
Ri!i Academ" of Management %alpesh Mehta
A9 Religare Investment Bank
Religare pro!ides inno!ati!e4 integrated and &est fit solutions to our corporate
customers# It pro!ides !alue enhancement through di!erse financial solutions on an
ongoing &asis# Di!ision through ,hich Religare operates in in!estment &an-ing
operations#6orporate 1inance Religare focuses on finding right and rele!ant partners
for our clients4 ,ho not onl" help in adding !alue &ut also impro!e the future
!aluation of the organiation# The" also specialie in structured financing and
pro!iding ad!isor" ser!ices related to financial planning4 modeling and ad!ising on
financial requirements#
C*rp*rate Finan%e pr*,&%ts *..ere, /( Religare6
Placement of De&t
S"ndication of Domestic ?oan E 1oreign 6urrenc" ?oan
Securitisation and Bu" Bac- of Shares
De&t S,ap G ?oan Restructuring
Short Term 6orporate De&t
Aor-ing 6apital 7cash credit G short/term loan8
6apital Mar-et Instruments
O!erseas Acquisition
Placement of @quit" 7Pri!ate @quit"8
Both for listed and unlisted companies
Merchant Ban-ing
Mergers G Acquisitions
6orporate Ad!isor" Ser!ices
In!estment Ban-ing 55
Ri!i Academ" of Management %alpesh Mehta
B9 E,el5eiss Investment Bank
At @del,eiss 6lient Ad!isor" Ser!ices4 our team is dri!en not just &" the qualit" of
our ideas4 &ut also professional ethics and integrit"# Ae ta-e pride in our philosoph"
of offering ad!ice ,hich is in the &est interest of our clients# Our emphasis on
&uilding long term relationship ensures that ,e ,or- closel" ,ith our clients
empo,ering them to gain from mar-et opportunities#
Mergers an, A%0&isiti*ns A,vis*r(
@del,eissK MGA team pro!ides insights into ho, companies can gro, and enhance
their !alue# The MGA team is engaged in turn-e" transaction management and
ad!ises a di!erse range of clients in medium to large transactions# Our -e" strengths
include independent ad!ice4 deep sector -no,ledge &ac-ed &" professionals ,ith a
range of training and e.perience that spans across multiple cross/&order deals and our
relationships ,ith large corporates#
@del,eiss ad!ises companies in the entire transaction process + this ranges from
target identification to deal closure# Ae pro!ides &oth &u"/side and sell/side ad!isor"
ser!ices as part of our MGA ad!isor" offering# Our ser!ices include identification and
short listing of target uni!erse4 strategic planning of an acquisition and arranging
finance for the transaction4 if required#
'*me Ke( Deals
Acquisition of 23#)2S sta-e in Sical ?ogistics ?imited &" Tanglin Retail Realit"
De!elopments Pri!ate ?imited#
Sale of 2:S sta-e in Spicejet to %alanithi Maran and associates
E0&it( Capital Markets
Ae are in the !anguard of equit" capital mar-ets ha!ing &rought to the mar-et a large
num&er of successful and path &rea-ing transactions# Ae ad!ise leading Indian
companies4 &an-s4 institutions and &usinesses ,hich are see-ing to mo&ilie capital
from in!estors in India and o!erseas#
In!estment Ban-ing 56
Ri!i Academ" of Management %alpesh Mehta
'*me Ke( Deals
Open Offer to the shareholders of I?G1S @ngineering and 6onstruction 6ompan"
?imited 7formerl" -no,n as Ma"tas Infra ?imited8 7OTarget 6ompan"O8#
Rigts Iss&e /( Te Karnataka Bank Limite, *. INR C!DE4.C milli*n.
In.rastr&%t&re A,vis*r(
A critical ingredient for sustaina&le de!elopment in India is the pressing need for
Infrastructure creation on a commerciall" !ia&le &asis# This signifies immense
opportunities and challenges for the sector# Recogniing this4 @del,eissK ne,
Infrastructure practice has &een formed to pro!ide inno!ati!e solutions tailored to the
unique financing and ad!isor" requirements of Indian infrastructure projects and
Ae pro!ide Infrastructure project companies and de!elopers the full range of capital
and ad!isor" ser!ices#
Capital Raising
Pri!ate @quit"
Project @quit"
Structured 1inance
Project and @6B De&t
A,vis*r( 'ervi%es
Mergers G Acquisitions + &oth Sell side and Bu" side Di!estitures4 6orporate
Restructuring and Spin offs
'*me Ke( Deals
6apital Raising of I$R <4:)) million for MB Po,er 7Madh"a Pradesh8 ?imited#
6apital Raising of I$R *24<)) million for Moser Baer Projects Pri!ate ?imited#
In!estment Ban-ing 57
Ri!i Academ" of Management %alpesh Mehta
Ma>*r Investment Banks W*rl, Wi,e
In!estment &an-s refer to the &an-ing institutions ,hich offer specialied ser!ices
related to in!estment &an-ing# In!estment &an-s pro!ide a ,ide !ariet" of ser!ices
related to in!estment management4 &u"ing and selling4 research4 ris- di!ersification4
and portfolio management#
List *. T*p Investment Banks 5*rl,5i,e6
Reven&e 7in
Net Earnings
7in 8B9
A<M 7in 8B9
Goldman Sachs ;<#( *2#; :=*
BP Morgan 6hase *))#; **#: *(*>
Morgan Stanle" (;#=; *#= ==>
6itigroup :)#2 7*#38 <<3
Ban- of America *(* 3#2 <(2
Barcla"s 2*#: *)#2 *2=>
?aard *#<2 7)#*:8 >:
6redit Suisse 2*#)< =#> 2:;
Deutche Ban- (<#2 ;#>3 *:*
5BS (; 7*#>8 *<>
In!estment Ban-ing 58
Ri!i Academ" of Management %alpesh Mehta
G*l,man 'a%s
Goldman Sachs is a glo&al in!estment &an-ing and securities firm ,hich engages in
in!estment &an-ing4 securities ser!ices4 in!estment management and other financial
ser!ices primaril" ,ith institutional clients#
The in!estment &an-ing ser!ice pro!ided &" Goldman Sachs is primaril"
di!ided into t,o parts / 1inancial Ad!isor" and 5nder,riting# Goldman Sachs is
headquartered at $e, Por- 6it" in the 5SA# The financial ad!isor" segment of
Goldman Sachs In!estment Ban-ing ta-es care of the in!estitures4 corporate defense
acti!ities4 mergers and acquisitions4 restructurings and spin/offs# The under,riting
ser!ice offered &" Goldman Sachs In!estment Ban-ing ta-es care of the pri!ate
placements and pu&lic offerings of equit" and de&t instruments#
Goldman Sachs is one of the leading in!estment &an-ing ser!ice pro!iders in the
,orld# Apart from collecting funds for the clients4 this premier financial firm is
famous for rendering e.cellent ad!isor" ser!ice on mergers and acquisitions#
The firm has gained e.treme fame for ad!ising the clients on ho, to a!oid ta-eo!ers#
Goldman Sachs is a respected name in the glo&al in!estment &an-ing ser!ices# It
offers e.cellent ser!ices on securities and in!estment management# The firm is -een
to de!elop inno!ati!e strategies and e.ecute them for its clients#
The tas- of in!estment &an-ing in Goldman Sachs is di!ided into the follo,ing

Merchant Ban-ing

Pri!ate Aealth Management

Glo&al In!estment Research

Trading and 6apital Mar-ets

Securities Ser!ices

@.ecution Ser!ices
In!estment Ban-ing 59
Ri!i Academ" of Management %alpesh Mehta
The Merchant Ban-ing Di!ision of Goldman Sachs in!ests in the corporate and real
estate assets all across the ,orld# The fund that it in!ests ma" &e the firmFs o,n
capital or fund collected from outside# The Principal In!estment Area 7PIA8 of the
di!ision pursues corporate in!estment ,hile the Real @state Principal In!estment
Area 7R@PIA8 of the di!ision pursues proprietar" capital in!estment#
The client list of the Pri!ate Aealth Management di!ision of Goldman Sachs is
formed of the ;<S of the 1or&es ;)) list of the ,ealthiest indi!iduals ,orld,ide# The
firm is committed to pro!ide some of the &est in!estment ideas to the clients#
Goldman Sachs Glo&al In!estment Research pro!ides some of the highest qualit"
in!estment opinions and fundamental research data to the clients across the ,orld#
Goldman SachsF @quit" Di!ision has &een pro!iding ad!isor" ser!ices in planning
in!estment strategies to the top corporations4 companies and go!ernments of the
,orld# It also offers ser!ices in raising capital in the pri!ate and pu&lic equit"
The Securities Ser!ices offered &" Goldman Sachs consist of the Glo&al Securities
Ser!ices# This group is engaged in securities lending4 prime &ro-erage4 financing
ser!ices and futures ser!ices ,ith the clients#
In!estment Ban-ing 60
Ri!i Academ" of Management %alpesh Mehta
M*rgan 'tanle(
The compan" is an in!estment &an- and retail &ro-er pro!ider# The compan" is
headquartered in $e, Por-# The su&sidiaries and affiliates of the compan" pro!ide
their ser!ices to indi!iduals4 financial institutions4 go!ernments and corporations# The
&usiness segments of the compan" can &e di!ided into four major segments'
Instit&ti*nal 'e%&rities
This has in its pur!ie, capital raisingH financial ad!isor" ser!ices including ad!ice on
mergers and acquisitions4 real estate4 project finance and restructuring# The compan"
also specialies in corporate lending4 sales4 trading4 financing acti!ities and mar-et
ma-ing acti!ities in equit" and fi.ed income securities# Bench mar- indices4 ris-
management anal"tics4 research and in!estment acti!ities can also &e included in this
Management Gr*&p
5nder this the compan" pro!ides ad!ices on &ro-erage and in!estment4 credit
ser!ices4 financial and ,ealth planning ser!ices4 annuit" and insurance products4
&an-ing and cash management ser!ices and retirement ser!ices# The" ser!e &oth
indi!idual and small to medium sie &usiness concerns# The compan" also pro!ides
financial solutions comprising of the compan"Fs as ,ell as third part" products and
ser!ices# There are a lot of in!estment alternati!es li-e equities4 options4 mutual
funds4 structured products4 unit in!estment trusts4 managed futures4 mutual fund asset
allocation programs#
Asset Management
Morgan Stanle" pro!ides glo&al asset management products in equit"4 fi.ed income
and alternati!e in!estments to retail and institutional clients through third part" retail
distri&ution channels and the compan"Fs distri&ution channels# The acti!ities of the
compan" carr" on these actions through Morgan Stanle" and Man %ampen &rands#
The compan" offers open/end funds and separatel" managed accounts to indi!idual
in!estors# The products and ser!ices pro!ided &" the compan" are as follo,s'
In!estment &an-ing ser!ices such as ad!ising4 securities under,riting#
In!estment Ban-ing 61
Ri!i Academ" of Management %alpesh Mehta
6iti&an-4 $#A# is the consumer &an-ing arm of financial ser!ices giant 6itigroup G
the fourth largest &an- holding compan" in the 5nited States &" domestic deposits#
6iti&an- has retail &an-ing operations in more than *)) countries and territories
around the ,orld# More than half of its *4;)) offices are in the 5nited States4 mostl"
in $e, Por- 6it"4 6hicago4 ?os Angeles4 San 1ranciscoESilicon Malle"4 and Miami#
More recentl"4 6iti&an- has e.panded its operations in the Boston4 Philadelphia4
Couston4 Dallas4 and Aashington D#6# metropolitan areas4 al&eit ,ith a mi.ed record
of success#
In addition to the standard &an-ing transactions4 6iti&an- offers insurance4 credit card
and in!estment products# Their online ser!ices di!ision is among the most successful
in the field4 claiming a&out *< million users# The 6hairman of 6iti&an- is Ailliam R#
Rhodes G the 6@O is Mi-ram Pandit# The o,nership of 6iti&an- is as follo,s'

23#) S / 5nited States Go!ernment

**#* S / Go!ernment of Singapore In!estment 6orporation 7GI68

3#) S / %u,ait In!estment Authorit"

;#> S / A&u Dha&i In!estment Authorit" 7ADIA8

;#2 S / %ingdom Colding 6ompan" ESaudi Ara&ia

As a result of the Glo&al financial crisis of ()):/())> and huge losses in the !alue of
its su& prime mortgage assets4 6iti&an- ,as rescued &" the 5#S# go!ernment under
plans agreed for 6itigroup# On $o!em&er (24 ()):4 in addition to initial aid of Q(<
&illion4 a further Q(< &illion ,as in!ested in the corporation together ,ith guarantees
for ris-" assets amounting to Q2)3 &illion#
As on Bul" *= ())>4 6itigroup Inc# reported net income for the second quarter of ())>
of Q;#2 &illion4 or Q)#;> per diluted share# Second quarter re!enues ,ere Q2)#) &illion#
These results include an Q**#* &illion pre/ta. 7Q3#= &illion after/ta.8 gain associated
,ith the Morgan Stanle" Smith Barne" joint !enture transaction4 ,hich closed on
Bune *4 ())>#
In!estment Ban-ing 62
Ri!i Academ" of Management %alpesh Mehta
Bank *. Ameri%a
Ban- of America 6orporation is a financial ser!ices compan"4 the largest &an-
holding compan" in the 5nited States4 &" assets4 and the second largest &an- &"
mar-et capitaliation#
The &an-Fs ()): acquisition of Merrill ?"nch made Ban- of America the ,orldFs
largest ,ealth manager and a major pla"er in the in!estment &an-ing industr"#
The compan" holds *(#(S of all 5#S# deposits4 as of August ())>4 and is one of the
Big 1our Ban-s of the 5nited States4 along ,ith 6itigroup4 BP Morgan 6hase and
Aells 1argo / its main competitors#

1inance G Ban-ing

6onsumer Ban-ing

6orporate Ban-ing

In!estment Ban-ing

In!estment Management

Glo&al Aealth Management

Pri!ate @quit"


6redit 6ards
In!estment Ban-ing 63
Ri!i Academ" of Management %alpesh Mehta
?+M*rgan %ase as an Investment Banking
BPMorgan 6hase G 6o# is an American multinational &an-ing corporation of
securities4 in!estments and retail# It is a major pro!ider of financial ser!ices4 and the
largest &an- in 5nited States &" sales4 profits4 assets and mar-et !alue# The hedge
fund unit of BPMorgan 6hase is the largest hedge fund in the 5nited States
It ,as
formed in ()))4 ,hen 6hase Manhattan 6orporation merged ,ith B#P# Morgan G 6o#
The B#P# Morgan &rand is used &" the in!estment &an-ing as ,ell as the asset
management4 pri!ate &an-ing4 pri!ate ,ealth management and treasur" G securities
ser!ices di!isions# 1iduciar" acti!it" ,ithin pri!ate &an-ing and pri!ate ,ealth
management is done under the aegis of BPMorgan 6hase Ban-4 $#A#Ithe actual
trustee# The 6hase &rand is used for credit card ser!ices in the 5nited States and
6anada4 the &an-Fs retail &an-ing acti!ities in the 5nited States4 and commercial
&an-ing# BPMorgan 6hase is one of the Big 1our &an-s of the 5nited States ,ith
Ban- of America4 6itigroup and Aells 1argo#
In!estment Ban-ing 64
Ri!i Academ" of Management %alpesh Mehta
BPMorgan 6hase4 in its current structure4 is the result of the com&ination of se!eral
large 5#S# &an-ing companies o!er the last decade including Case Manattan
Bank4 ?.+. M*rgan @ C*.4 Bank One4 Bear 'tearns and Wasingt*n
M&t&al# Going &ac- further4 its predecessors include major &an-ing firms
among ,hich are Cemi%al Bank4 Man&.a%t&rers 1an*ver4 First Ci%ag*
Bank4 Nati*nal Bank *. Detr*it4 Te$as C*mmer%e Bank4 +r*vi,ian
Finan%ial and Great Western Bank#
Cemi%al Banking C*rp*rati*n
The $e, Por- 6hemical Manufacturing 6ompan" ,as founded in *:(2 as a ma-er
of !arious chemicals# In *:(;4 the compan" amended its charter to perform &an-ing
acti!ities and created the 6hemical Ban- of $e, Por-# After *:<*4 the &an- ,as
separated from its parent and gre, organicall" and through a series of mergers4 most
nota&l" ,ith 6orn @.change Ban- in *><;4 6ommerce Ban- 7a large &an- in
Te.as8 in *>:34 and ManufacturerFs Cano!er Trust 6ompan" in *>>* 7the first major
&an- merger 9among equals98# In the *>:)s and earl" *>>)s4 6hemical emerged as
one of the leaders in the financing of le!eraged &u"out transactions# In *>:;4
6hemical launched 6hemical Menture Partners to in!est in pri!ate equit" transactions
alongside !arious financial sponsors# B" the late *>:)s4 6hemical de!eloped its
reputation for financing &u"outs4 &uilding a s"ndicated le!eraged finance &usiness
and related ad!isor" &usinesses under the auspices of pioneering in!estment &an-er4
Bimm" ?ee# At man" points throughout this histor"4 6hemical Ban- ,as the largest
&an- in the 5nited States 7either in terms of assets or deposit mar-et share8#
In *>>34 6hemical Ban- acquired the 6hase Manhattan 6orporation ta-ing the more
prominent 6hase name# In ()))4 the com&ined compan" acquired B#P# Morgan G 6o#
and com&ined the t,o names to form ,hat is toda" BPMorgan 6hase G 6o# BPMorgan
6hase retains 6hemical Ban-Fs headquarters at (=) Par- A!enue and stoc- price
In!estment Ban-ing 65
Ri!i Academ" of Management %alpesh Mehta
Case Manattan Bank
The 6hase Manhattan Ban- ,as formed upon the *><< purchase of 6hase $ational
Ban- 7esta&lished in *:==8 &" the Ban- of the Manhattan 6ompan" 7esta&lished in
*=>>84 the compan"Fs oldest predecessor institution# The Ban- of the Manhattan
6ompan" ,as the creation of Aaron Burr4 ,ho transformed The Manhattan 6ompan"
from a ,ater carrier into a &an-#
?ed &" Da!id Roc-efeller during the *>=)s and the *>:)s4 6hase Manhattan emerged
as one of the largest and most prestigious &an-ing concerns4 ,ith leadership positions
in s"ndicated lending4 treasur" and securities ser!ices4 credit cards4 mortgages4 and
retail financial ser!ices# Aea-ened &" the real estate collapse in the earl" *>>)s4 it
,as acquired &" 6hemical Ban- in *>>3 retaining the prominent 6hase name# Prior to
its nota&le merger ,ith B#P# Morgan G 6o#4 the ne, 6hase e.panded the in!estment
and asset management groups through t,o acquisitions# In *>>>4 it acquired San
1rancisco/&ased Cam&recht G Xuist for Q*#2< &illion# In April ()))4 5%/&ased
Ro&ert 1leming G 6o# ,as sold to the ne, 6hase Manhattan Ban- for Q=#= &illion#
Bank One C*rp*rati*n
In ());4 BPMorgan 6hase merged ,ith 6hicago &ased Ban- One 6orp#4 &ringing on
&oard current chairman and 6@O Bamie Dimon as president and 6OO and designating
him as 6@O Ailliam B# Carrison4 Br#Fs successor# DimonFs pa" ,as pegged at >)S of
CarrisonFs# Dimon quic-l" made his influence felt &" em&ar-ing on a cost/cutting
strateg"4 and replaced former BPMorgan 6hase e.ecuti!es in -e" positions ,ith Ban-
One e.ecuti!esIman" of ,hom ,ere ,ith Dimon at 6itigroup# Dimon &ecame 6@O
in Banuar" ())3 and 6hairman in Decem&er ())3#
Ban- One 6orporation ,as formed upon the *>>: merger &et,een Banc One of
6olum&us4 Ohio and 1irst 6hicago $BD# These t,o large &an-ing companies had
themsel!es &een created through the merger of man" &an-s# This merger ,as largel"
considered a failure until DimonIrecentl" ousted as President of 6itigroupItoo-
o!er and reformed the ne, firmFs practicesIespeciall" its disastrous technolog"
mishmash inherited from the man" mergers prior to this one# Dimon effected more
In!estment Ban-ing 66
Ri!i Academ" of Management %alpesh Mehta
than sufficient changes to ma-e Ban- One 6orporation a !ia&le merger partner for
BPMorgan 6hase#
Ban- One 6orporation traced its roots to 1irst Bancgroup of Ohio4 founded as a
holding compan" for 6it" $ational Ban- of 6olum&us4 Ohio and se!eral other &an-s
in that state4 all of ,hich ,ere renamed 9Ban- One9 ,hen the holding compan" ,as
renamed Banc One 6orporation# Aith the &eginning of interstate &an-ing the" spread
into other states4 al,a"s renaming acquired &an-s 9Ban- One94 though for a long time
the" resisted com&ining them into one &an-# After the 1irst 6hicago $BD merger4
ad!erse financial results led to the departure of 6@O Bohn B# Mc6o"4 ,hose father
and grandfather had headed Banc One and predecessors# Dimon ,as &rought in to
head the compan"# BPMorgan 6hase completed the acquisition of Ban- One in the
third quarter of ());# The former Ban- One and 1irst 6hicago headquarters in
6hicago ser!e as the headquarters of 6hase4 BPMorgan 6haseFs commercial and retail
&an-ing su&sidiar"#
Bear 'tearns
At the end of ())=4 Bear Stearns G 6o# Inc# ,as the fifth largest in!estment &an- in
the 5nited States &ut its mar-et capitaliation had deteriorated through the second half
of ())=# On 1rida"4 March *;4 ()): Bear Stearns lost ;=S of its equit" mar-et !alue
to close at Q2)#)) per share as rumors emerged that clients ,ere ,ithdra,ing capital
from the &an-# O!er the follo,ing ,ee-end it emerged that Bear Stearns might pro!e
insol!ent and on or around March *<4 ()): the 1ederal Reser!e engineered a deal to
pre!ent a ,ider s"stemic crisis from the collapse of Bear Stearns#
On March *34 ()):4 after a ,ee-end of intense negotiations &et,een BPMorgan4 Bear4
and the federal go!ernment4 BPMorgan 6hase announced that it had plans to acquire
Bear Stearns in a stoc- s,ap ,orth Q(#)) per share or Q(;) million pending
shareholder appro!al scheduled ,ithin >) da"s# In the interim4 BPMorgan 6hase
agreed to guarantee all Bear Stearns trades and &usiness process flo,s# T,o da"s
later4 on March *:4 ()):4 BPMorgan 6hase formall" announced the acquisition of
Bear Stearns for Q(23 million# The stoc- s,ap agreement ,as signed in the late/night
hours of March *:4 ()):4 ,ith BPMorgan agreeing to e.change )#)<;=2 of each of its
In!estment Ban-ing 67
Ri!i Academ" of Management %alpesh Mehta
shares upon closure of the merger for one Bear share4 !aluing the Bear shares at Q(
On March (;4 ()):4 after considera&le pu&lic discontent &" Bear Stearns shareholders
o!er the lo, acquisition price threatened the dealFs closure4 a re!ised offer ,as
announced at appro.imatel" Q*) per share# 5nder the re!ised terms4 BPMorgan also
immediatel" acquired a 2>#<S sta-e in Bear Stearns 7using ne,l" issued shares8 at the
ne, offer price and gained a commitment from the &oard 7representing another *)S
of the share capital8 that its mem&ers ,ould !ote in fa!or of the ne, deal# Aith
sufficient commitments thus in hand to ensure a successful shareholder !ote4 the
merger ,as completed on Bune (4 ()):#
Oter re%ent a%0&isiti*ns
In ())34 BPMorgan 6hase purchased 6ollegiate 1unding Ser!ices4 a portfolio
compan" of pri!ate equit" firm ?ight"ear 6apital4 for Q332 million#
In March ()):4 BPMorgan acquired the 5%/&ased car&on offsetting compan"
In $o!em&er ())>4 BPMorgan announced it ,ould acquire the &alance of BPMorgan
6aeno!e4 an ad!isor" and under,riting joint !enture esta&lished in ()); ,ith the
6aeno!e Group4 for GBP* &illion#
In!estment Ban-ing 68
Ri!i Academ" of Management %alpesh Mehta
?+ M*rgans Lines *. B&siness
BPMorgan 6haseKs acti!ities are organied4 for management reporting purposes4 into
si. &usiness segments'
Investment Bank
In!estment &an-ing' ad!isor"H de&t and equit" under,riting
Mar-et ma-ing and trading' 1i.ed income4 @quit"
6orporate lending
Principal in!esting
Prime ser!ices
Retail Finan%ial 'ervi%es
Retail &an-ing' 6onsumer and &usiness &an-ing 7including Business Ban-ing ?oans8H
6onsumer ?ending' ?oan originations and &alances 7including home lending4 student4
auto and other loans8H Mortgage production and ser!icingH
Car, 'ervi%es
6redit cards
Merchant acquiring
6ommercial Ban-ing
Middle/mar-et &an-ing
6ommercial term lending
Mid/corporate &an-ing
In!estment Ban-ing 69
Ri!i Academ" of Management %alpesh Mehta
Real estate &an-ing
Treas&r( @ 'e%&rities 'ervi%es
Treasur" Ser!ices 7Glo&al Trade4 6ore 6ash Management4 ?iquidit"4 ImportE@.port
Aorld,ide Securities Ser!ices
Asset Management
Cigh&ridge 6apital Management 7C6M8
In!estment Management 7including Institutional and Retail8
Pri!ate Ban-
Pri!ate Aealth Management
B#P# Morgan Securities 7formerl" Bear Stearns Bro-erage8
Retirement +lan 'ervi%es
6orporate / Includes the compan"Fs pri!ate equit"H One @quit" Partners4 Treasur" and
6orporate functions#
In!estment Ban-ing 70
Ri!i Academ" of Management %alpesh Mehta
Case 't&,( *n Investment Banking
Disne( B&(s +i$ar
In the ,a-e of a stagnating share price4 Aalt Disne" 6orporation 7Disne"8 sought to
re!i!e its animation capa&ilities as in!estors floc-ed to more successful animation
studios such as Animation Studios 7Pi.ar8 and DreamAor-s Inc# Disne"Fs
efforts in animated films in recent "ears ha!e &een disappointing# In an industr" in
,hich creati!e talent rules4 Disne" had simpl" not &een a&le to assem&le the right
com&ination of talent in an en!ironment conduci!e to creating &loc-&uster animation
films# Disne" and had &een in a joint !enture in!ol!ing three pictures since
*>>*4 in ,hich Disne" shared the production costs and profits# Disne" &enefited from
Pi.arFs success &" cofinancing and distri&uting films# Tal-s to e.tend this
arrangement disintegrated in ()); due to the failure of 6@O Ste!e Bo&s and
Disne" 6@O Michael @isner to reach agreement on allo,ing to o,n films it
produces in the future#
Aith the current distri&ution agreement set to e.pire in Bune ())34 Ro&ert Iger4
@isnerFs replacement4 mo!ed to repair the relationship ,ith 6onsequentl"4 a
deal that ,as unthin-a&le a fe, "ears earlier &ecame possi&le# Disne" announced the
acquisition of Pi.ar4 one of the most successful mo!iema-ers in Coll",ood histor"4
on Banuar" (<4 ())3# The mo!e reflected Disne"Fs desire to infuse the firmFs internal
animation resources ,ith those from a pro!en animation compan"# A -e" Disne"
strateg" is to use popular Disne" mo!ie characters across different !enues 7i#e#4 theme
par-s4 merchandise4 and tele!ision8# Disne" e.changed its stoc- for shares in a
deal !alued at Q=#; &illion for the stoc- or Q3#; &illion including Q* &illion of cash that Disne" ,ould recei!e#
Despite near/term dilution of Disne"Fs earnings per share &" as much as *) percent4
in!estors seem focused on the long/term impact to gro,th in Disne"Fs shares# Disne"Fs
shares rose * percent on ne,s of the announcement# $e!ertheless4 the ris- associated
,ith the transaction can &e measured in terms of ,hat Disne" could ha!e done ,ith
cash raised &" issuing the same num&er of ne, shares to the pu&lic# At Q3#; &illion4
Disne" could ma-e 3; sequels at Q*)) million each# Moreo!er4 Disne" ,as pro&a&l"
pa"ing top dollar for Pi.ar4 as the filmma-er ,as coming off a string of si.
consecuti!e mo!ie &loc-&usters# 1inall"4 re!enue from DMD sales might ha!e &een
In!estment Ban-ing 71
Ri!i Academ" of Management %alpesh Mehta
The long/term success of the com&ination hinges on the a&ilit" of the t,o firms to
meld their corporate cultures ,ithout losing Pi.arFs creati!e capa&ilities#
president4 @d 6atmull ,ould &ecome president of the com&ined"
animation &usiness# Bohn ?asseter4 Pi.arFs creati!e director4 ,ould assume the role of
chief creati!e officer of the com&ined firms4 helping to design attractions for the
theme par-s and ad!ising Disne"Fs Imagineering di!ision# In an effort to insulate the culture from the Disne" culture4 ,ould remain &ased in @mer"!ille4
6alifornia4 far from Disne"Fs Bur&an-4 6alifornia4 headquarters# As a condition of the
closing4 all -e" emplo"ees ,ould ha!e to sign long/term emplo"ment contracts#
As part of the deal4 chairman and chief e.ecuti!e Ste!e Bo&s4 holder of <)#3
percent of stoc-4 ,ould &ecome Disne"Fs largest indi!idual shareholder4 at a&out
3#< percent of Disne" stoc-4 and a mem&er of Disne"Fs &oard of directors# Bo&sFs
ad!ice ,as hoped to reju!enate the Disne" &oard at a time ,hen the entertainment
industr" ,as scram&ling to rein!ent itself in the digital age# Bo&s4 ,ho is also the
chairman and 6@O of Apple 6omputer Inc# 7Apple84 is in a position to appl" AppleFs
su&stantial technical s-ills to Disne"Fs animation efforts#
It is unclear if Disne" could not ha!e achie!ed man" of these &enefits at a much
lo,er cost &" partnering ,ith and offering Ste!e Bo&s a seat on the Disne"
&oard# 5ltimatel"4 the opportunit" to pre!ent Pi.arFs acquisition &" a competitor ma"
ha!e &een the primar" reason ,h" Disne" mo!ed so aggressi!el" to acquire the
animation po,erhouse#
In!estment Ban-ing 72
Ri!i Academ" of Management %alpesh Mehta
1inancial institutions 7intermediaries8 perform the !ital role of &ringing together those
economic agents ,ith surplus funds ,ho ,ant to lend4 ,ith those ,ith a shortage of
funds ,ho ,ant to &orro,#
In doing this the" offer the major &enefits of maturit" and ris- transformation# It is
possi&le for this to &e done &" direct contact &et,een the ultimate &orro,ers4 &ut
there are major cost disad!antages of direct finance#
Indeed4 one e.planation of the e.istence of specialist financial intermediaries is that
the" ha!e a related 7cost8 ad!antage in offering financial ser!ices4 ,hich not onl"
ena&les them to ma-e profit4 &ut also raises the o!erall efficienc" of the econom"# The
other main e.planation dra,s on the anal"sis of information pro&lems associated ,ith
financial mar-ets#
In!estment Ban-ing 73
Ri!i Academ" of Management %alpesh Mehta
555.r/i m*ne( %*ntr*l.%*m
Investment Banking
A&t*r='&/raman(am! +ratap
In!estment Ban-ing 74