CHAPTER 1

INTRODUCTION
At a very macro level, Investment Banking as term suggests, is concerned with the primary function of
assisting the capital market in its function of capital intermediation, i.e., the movement of financial
resources from those who have them (the Investors), to those who need to make use of them for
generating GDP (the Issuers). Banking and financial institution on the one hand and the capital market
on the other are the two broad platforms of institutional that investment for capital flows in economy.
Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks
in the capital markets in the function of intermediation in the resource allocation. Nevertheless, it would
be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities
in the modern world of high finance. Over the decades, backed by evolution and also fuelled by recent
technologies developments, an investment banking has transformed repeatedly to suit the needs of the
finance community and thus become one of the most vibrant and exciting segment of financial services.
Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for the
price for excessive flamboyance as well.

To continue from the above words of John F. Marshall and M.E. Eills, investment
banking is what investment banks do. This definition can be explained in the context of how
investment banks have evolved in their functionality and how history and regulatory intervention have
shaped such an evolution. Much of investment banking in its present form, thus owes its origins to the
financial markets in USA, due o which, American investment banks have banks have been leaders in the
American and Euro markets as well. Therefore, the term investment banking can arguably be said to be

of American origin. Their counterparts in UK were termed as investment banks since they had
confined themselves to capital market intermediation until the US investments banks entered the UK and
European markets and extended the scope of such businesses.

Investment banks help companies and governments and their agencies to raise money by issuing and
selling securities in the primary market. They assist public and private corporations in raising funds in
the capital markets (both equity and debt), as well as in providing strategic advisory services for
mergers, acquisitions and other types of financial transactions. Investment banks also act as
intermediaries in trading for clients. Investment banks differ from commercial banks, which take
deposits and make commercial and retail loans. In recent years however, the lines between the two types
of structures have blurred, especially as commercial banks have offered more investment banking
services. In the US, the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of
1929,

prohibited

banks

from

both

accepting

deposits

and

underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1999.

Investment banks may also differ from brokerages, which in general assist in the purchase and
sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment
banks; this includes some of the best known financial services firms in the world.
More commonly used today to characterize what was traditionally termed investment banking is sells
side." This is trading securities for cash or securities (i.e., facilitating transactions, market-making), or
the promotion of securities (i.e. underwriting, research, etc.).

Definition
An individual or institution, which acts as an underwriter or agent for corporations and municipalities
issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued
securities, and offer advisory services to investors. Investment banks also have a large role in facilitating
mergers and acquisitions private equity placements and corporate restructuring. Unlike traditional banks,
investment banks do not accept deposits from and provide loans to individuals.

1.1 Commercial banking vs. investment banking

While regulation has changed the businesses in which commercial and investment banks may now
participate, the core aspects of these different businesses remain intact. In other words, the difference
between how a typical investment bank and a typical commercial operate bank is simple. A commercial
bank takes deposits for checking and savings accounts from consumers while an investment bank does
not. We'll begin examining what this means by taking a look at what commercial banks do.

Commercial banks

A commercial bank may legally take deposits for checking and savings accounts from consumers. The
federal government provides insurance guarantees on these deposits through the Federal Deposit
Insurance Corporation (the FDIC), on amounts up to $100,000. To get FDIC guarantees, commercial
banks must follow a myriad of regulations. The typical commercial banking process is fairly
straightforward. You deposit money into your bank, and the bank loans that money to consumers and
companies in need of capital (cash). You borrow to buy a house,
3

Finance a car, or finance an addition to your home. Companies borrow to finance the growth of their
company or meet immediate cash needs. Companies that borrow from commercial banks can range in
size from the dry cleaner on the corner to a multinational conglomerate.

Investment banks

An investment bank operates differently. An investment bank does not have an inventory of cash
deposits to lend as a commercial bank does. In essence, an investment bank acts as an intermediary, and
matches sellers of stocks and bonds with buyers of stocks and bonds.
Note, however, that companies use investment banks toward the same end as they use commercial
banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to
sell equity or debt (stocks or bonds). Because commercial banks already have funds available from their
depositors and an investment bank does not, an I-bank must spend considerable time finding investors in
order to obtain capital for its client.

1.2 History of Investment banking

Given its history, investment banking is often thought of as a European, and especially British, financial

Issue
r specialty, and British institutions continue to maintain a major presence in this area. Since the 1800s and

even earlier, however, U.S. firms (such as J.P. Morgan) also have been active in investment banking.
However, although both investment banks and commercial banks, as well as other types of businesses,
have been authorized to engage in private equity investment in the United States, financial institutions
have not been major providers of private equity.

Until the 1950s, U.S. investors in private equity were primarily wealthy individuals and families. In the
1960s and 1970s, corporations and financial institutions joined them in this type of investment. (In the
1960s, commercial banks were the major providers of one kind of private equity investing, venturecapital financing.) Through the late 1970s, wealthy families, industrial corporations, and financial
institutions, for the most part investing directly in the issuing firms, constituted the bulk of private equity
investors.
In the late 1970s, changes in the Employee Retirement Income Security Act (ERISA) regulations, in tax
laws, and in securities laws brought new investors into private equity. In particular, the Department of
Labor's revised interpretation of the "prudent man rule" spurred pension fund investment in private
equity capital. Currently, the major investors in private equity in the United States are pension funds,
endowments and foundations, corporations, and wealthy investors; financial institutions-both
commercial banks and investment banks-represent approximately 20 percent of total private equity
capital, divided approximately equally between the two. The U.S. Department of the Treasury (Treasury)
estimates that at year-end 1999, commercial banks accounted for approximately $35 billion to $40
billion and investment banks for approximately another $40 billion, of the $400 billion total investment
in the private equity market.
At $400 billion as of year-end 1999, the private equity market is approximately one-quarter the size of
the commercial and industrial bank-loan market and the commercial-paper market. In recent years,
funds raised through private equity have approximately equaled and sometimes exceeded funds raised
through initial public offerings and public high-yield corporate bond issuance. The market also has
grown dramatically in recent years, increasing from approximately $4.7 billion in 1980 to its 1999

figure. Despite this tremendous growth, the private equity market is extremely small compared with the
public equity market, which was approximately $17 trillion at year-end 1999

1.3 Evolution of investment banking in India

The origin of investment banking in India can be traced back to the late 19th century when European
investment banks set up their agency house in the country to assist in the setting up of new projects. In
the early 20th century large business houses followed suit by establishing managing agencies which
acted as issue house for securities, promoters for new projects and also provided finance to green field
ventures. But these entire roles were limited to small capital base.
In 1967, ANZ Grindlays bank set up separate Investment banking division to handle new capital issues.
It was soon followed by CitiBnak, which started rendering Investment Banking services. The foreign
banks monopolized investment banking services in the country. The banking commission, in its report in
1972, took note if this with concern and recommended setting up of investment banking institutions by
commercial banks and financial institutions. SBI ventured into this business by starting a investment
business bureau in 1972. In 1973, ICICI became the first financial institutions to offer investment
banking. JM finance was set up in 1973. The growth of industry during that period was very slow. The
industry remained more or less stagnant in the eighties.
The capital market witnessed some buoyancy in the late eighties. The advent of economic reforms in
1991 resulted in a sudden spurt in both the primary and secondary market. Several new players entered
into the field. The securities scam in may, 1992 was a major setback to the industry. Several leading
investment banker, both in public and private sector were found to be involved in various irregularities,

some of the prominent public sector players involved in the scam were canbank financial services and
champaklal investment and finances. The markets turned bullish again in the end of 1993 after the
tainted shares problems were substantially resolved. The registration norms with SEBI were quiet
liberal. Many foreign investment bankers stated entering in India in tie ups with Indian player. Some of
tie ups player were

JM Finance- Morgan Stanley

DSP Financial consultants- Merill lynch

Kotak Mahindra- Goldman Sachs

SBI Capital Markets Lehman Brothers

In India investment banker can be segregated as follows, depending on the sector to which they belong.
1. Public sector Investment bankers
a. Commercials banks.
b. National Financial Institutions.
c. State financial institutions.
2. Private sector Investment Bankers
a. Foreign Bankers
b. Indian private Banks
c. Leasing Banks.
d. Financial and Investment companies.
The current of the investment banking industry is in state of flux. The current transition phase is
witnessing a paradigm shift in the nature and composition of this industry. The industry was hitherto
7

synonymous with issue management and underwriting. Investment bankers have stared diversifying into
new function such M&A, new products, new techniques.
1.4 Who needs an Investment Bank
Any firm contemplating a significant transaction can benefit from the advice of an investment bank.
Although large corporations often have sophisticated finance and corporate development departments
provide objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally
interested in seeing the transaction close. Most small to medium sized companies do not have a large inhouse staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality
investment banking firm can provide the services required to initiate and execute a major transaction,
thereby empowering small to medium sized companies with financial and transaction experience
without the addition of permanent overhead, an investment bank provides objectivity, a valuable contact
network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction
close. Most small to medium sized companies do not have a large in-house staff, and in a financial
transaction may be at a disadvantage versus larger competitors. A quality investment-banking firm can
provide the services.

1.5 Type of Expertise Required

Investment banking is one of the best ways a young person can learn about finance and make good
money right out of school. It requires substantial hardships, including high pressure, long days and
nights of hard work, a few difficult personalities, and the expectationno, the requirement that all
personal plans are subject to the demands of work. Life is very much at the mercy of the markets. Bull

markets bring more work to do than is humanly possible. The type of staff required for a investment
bank will depend upon its functions which are them selves flexible. The investment bank should have an
organization large enough to deal with a number of applications at a time. The issue house which acts as
the investment banker normally pays visits to the company's plant, warehouses, and other physical assets
and if a company is making its first issue, it might secure independent reports from Chartered
Accountants, industrial consultants, technical experts etc. The issue house, which is a investment bank
also, requires, plant, management, labor, competitors, profit margins, taxations, etc. They have to keep
ready all the information needed in the form of dossiers with respect to the affairs of the company
generally enquired into by the investing public, lending financial institutions and the government.
Secondly, a investment bank has to suggest an appropriate time of issue and provisional
terms. Once these terms are settled the share certificates, prospectus and other documents are
drafted by the investment bank with the assistance of lawyers, accountants and others. They
have to satisfy the Companies Act and other SS requirements of law.

Subsequently, the

investment bank may have to get ready the application to the SEBI for the public issues. This
requires familiarity with the regulations under the Companies Act and the SEBI guidelines and
the procedures to be followed and the authorities to be approached. The provisions under the
MRTP Act regulating monopoly practices and other activities of big industrial houses should also
be looked into.
Thirdly, they may have to make an application to the appropriate stock exchange for quotation
and satisfy the stock exchange authorities with respect to the terms of issue and prospectus.
Listing requirements are to be observed and familiarity with the stock exchange rules and byelaws as well as the provisions of the Securities Contracts Regulations) Act would be essential.
They may have to advise on the desirability or otherwise of listing on the stock exchange as well

as help the companies go through the process of getting their shares listed. Advertisements
containing all the information legally required to be given in the prospectus must be published in
all the leading proposed date of opening and closing, a summary of the companys business
history, balance sheet, etc, to which a reference was made earlier. Once the issue made, the work
of the investment bank relates to arranging for the allotment of shares in consultation with the
company and the stock exchange authorities with the help of Registrars.

10

CHAPTER 2
THE MAIN ACTIVITIES AND UNITS
The primary function of an investment bank is buying and selling products both on behalf of the bank's
clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special
set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader
after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks
seek to maximize profitability for a given amount of risk on their balance sheet
An investment bank is split into the so-called Front Office, Middle Office and Back Office. The
individual activities are described below:
Front Office

Investment Banking is the traditional aspect of investment banks which involves helping
customers raise funds in the Capital Markets and advising on mergers and acquisitions.
Investment bankers prepare idea pitches that they bring to meetings with their clients, with the
expectation that their effort will be rewarded with a mandate when the client is ready to
undertake a transaction. Once mandated, an investment bank is responsible for preparing all
materials necessary for the transaction as well as the execution of the deal, which may involve
subscribing investors to a security issuance, coordinating with bidders, or negotiating with a
merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions
(M&A) and Corporate Finance (often pronounced "corpfin").

Investment management is the professional management of various securities (shares, bonds etc)
and other assets (e.g. real estate), to meet specified investment goals for the benefit of the

11

investors. Investors may be institutions (insurance companies, pension funds, corporations etc.)
or private investors (both directly via investment contracts and more commonly via collective
investment schemes e.g. mutual funds) .

Middle Office

Risk Management involves analyzing the market and credit risk that traders are taking onto the
balance sheet in conducting their daily trades, and setting limits on the amount of capital that
they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall.
Another key Middle Office role is to ensure that the above mentioned economic risks are
captured accurately (as per agreement of commercial terms with the counterparty) correctly (as
per standardized booking models in the most appropriate systems) and on time (typically within
30 minutes of trade execution). In recent years the risk of errors has become known as
"operational risk" and the assurance Middle Offices provide now include measures to address
this risk. When this assurance is not in place, market and credit risk analysis can be unreliable
and open to deliberate manipulation.

Back Office

Operations involve data-checking trades that have been conducted, ensuring that they are not
erroneous, and transacting the required transfers. While it provides the greatest job security of
the divisions within an investment bank, it is a critical part of the bank that involves managing

12

the financial information of the bank and ensures efficient capital markets through the financial
reporting function. The staff in these areas are often highly qualified and need to understand in
depth the deals and transactions that occur across all the divisions of the bank.

2.1 Functions of the investment banking divisions

1. Advice and liaison obtaining consent of the Central and Stat e Government, for the
project if necessary;
2. Preparation of economic, technical and financial feasibility reports;
3. Initial project preparation, pre-investment survey, and market studies;
4. Help in raising rupee resources from financial institutions and commercial banks;
5. Underwriting and also for subscription, if necessary, to the new issues or syndication
of loans, etc;
6. Assistance in raising foreign exchange resources so as to enable the industrial
concerns to import machinery and technical know-how and secure foreign
collaboration.
7. Advice on setting up turnkey project s in foreign countries and locating foreign
markets;
8. Help in financial management and in designing proper capital structure and debtequity ratio, etc, for the company.
9. Advice on restructuring of capital, amalgamation, mergers, takeovers, etc;
10. Management of investment trust, charitable trusts etc;
11. Management aid and entrepreneurial aid (management audit providing designs of the

13

complete system, operational research and management consultancy); and

12. Recruitment (selection of technical and managerial personnel), etc.

14

CHAPTER 3
SCOPE OF INVESTMENT BANKING
The Investment banker plays a vital role in channelizing the financial surplus of the society into
productive investment avenues. The investment banker has fiduciary role in relation to the investor.
Some of the major functions performed by investment banker are as follows.
1.

Management of debt and equity offering This is the traditional bread and butter

operations for most of the investment banker in India. The role of the investment banker is
dynamic and it has to be nimble footed to capitalize on available opportunities. It has to assist
its clients in raising fund from the market. It may also be required to counsel them on various
issues that affect their finances. The main area of its role includes:
Instrument Designing
Pricing the issue

Registration of the offer document

Underwriting the support

Marketing the issue

Allotment and refund

Listing on stock exchange

Listing on stock exchange

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2. Placement and distribution The distribution network of Investment banker can be classified as
institutional and retail. The network of institutional investors consist of Mutual Funds, FIIs, bank,
domestic and multinational financial institutions, PE, pension funds, etc. the size of this network
represent the wholesale reach of the Investment banker. The basic requirement to create and service the
institutional segment is the existence of good in-house research facilities. The investment proposal
should be accompanied by high quality research reports of the Investment banker to justify the
investment recommendation. The retail distribution reach depends upon the networking with the
investors. Many Investment banks have associate firms which are brokers on the stock exchange. These
brokers appoint sub-brokers at various locations to service both the primary market and secondary
market needs of the local investors. Thus a large base of captive investors is created and maintained.

The distribution network can be used to distribute various financial products like:

Equity

retail and institutional investors

Debt Instruments

retail and institutional investors

Mutual Fund products :

retail investors

Fixed deposits

retail investors

Insurance products

retail investors

Commercial paper

institutional investors

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3. Corporate advisory Services - investment bankers offers customized solutions to the financial
problem of their clients. One of the key areas for advisory role is financial structuring. The process
includes determining the appropriate level of gearing and advising the company whether to leverage, deleverage or maintain its current debt-equity levels. The asset turnover ratios may be analyzed to study
whether the company is over trading or under trading. The companys working capital practices are
studied and alternative working capital policies are suggested. The investment banker may also explore
the possibility of refinancing high cost funds with alternative cheaper funds. They play advisory role in
securitization of receivables. They also help their cash rich clients in deployment of their short-term
surpluses.
4. Project Advisory - investment bankers are associated with their clients from the early stage of their
project. They assist the companies in conceptualizing the project idea when it is at nebulous stage. Once
the project is conceptualized, they carry out the initial feasibility studied to examine its viability.
Investment bankers provide inputs to their clients in preparation of the detailed project report. They also
offer project appraisal services to clients.
5. Loan syndication - investment bankers arrange to tie up loans for their clients. The first step
involves analyzing the clients cash flow pattern so that terms of borrowing can be defined to suit the
cash flow requirements. The important loan parameters include amount, currency, tenure, drawdown,
moratorium and the amortization. The investment bankers then prepare the detailed loan memorandum.
The loan memorandum is then circulated to various banks and financial institutions and they are invited
to participate in the syndicate.

17

The banks indicate the amount of exposure of service they are willing to take and the interest rates
thereon. The terms are further negotiated and fine- tuned to the satisfaction of both parties. The final
allocation is done to the various members of the syndicate. The investment banker also helps the clients
in loan documentation procedures.

18

6. Research Services - Nearly all banks have a staff of research analysts who study economic trends and
news, individual company stocks, and industry developments to provide proprietary investment advice
to institutional clients and in-house groups, such as the sales and trading divisions. Until recently, the
research division has also played an important role in the underwriting process, both in wooing the client
with its knowledge of the clients industry and in providing a link to the institutions that own the clients
stock once its publicly traded. Indeed, in many cases, research analysts compensation was tied to
investment banking revenues. However, in recent times banks have faced public and regulatory outcries
over conflicts of interest inherent in having bankers and researchers work hand in hand. As a
hypothetical example, consider Bank A, which counts Company X, which is facing financial difficulties,
among its banking clients. Should Bank As research team pan Company Xs stock, which would benefit
investors who subscribe to Bank As research, but might upset Company X to the point that it drops
Bank A and hires another firm to be its investment banker? Or should it recommend the purchase of
Company X stock, which would help Company X financially and keep the banking revenues from
Company X rolling inand pump up research analysts bonuses, which are based in part on the success
of Bank As banking operations? In an effort to end the legal scrutiny of their operations, investment
banks are now attempting to reinforce the separation between their banking and research arms. You can
certainly count on research playing a lesser role in selling banking deals. Also, independent research
houses (e.g., Needham & Co., Sidoti & Co., and JMP Securities) are benefiting in a big way from a
settlement between the investment banking industry and regulators that requires investment banks to
spend a total $432.5 million over 5 years to give clients independent research. And as the full service
investment banks move to purchase independent research, as theyre required to do by regulators, certain
research specialistsStandard & Poors and BNY Jay hawk (which actually aggregates research from
more than 100 research organizations)are looking like theyre going to make out handsomely.

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7. Venture capital - Venture capital is risks money, which is used in risky enterprises either as equity or
debt capital. It may be in new sunshine industries or older risk enterprises. The funds, which finance
such risky, are called venture capital funds. Venture capital is a post-war phenomenon in the business
world, mainly developed as a sideline activity of the rich in USA. To connote the risk & adventure &
some element of investment, the generic name of venture capital was coined. In the late 1960s a new
breed of professional investors called venture capitalists emerged whose specialty was to combine risk
capital with entrepreneurial management & to use advance technology to launch new products and
companies in the markets place. Undoubtedly, it was venture capitalists astute ability to assess and
manage enormous risks & export from them tremendous returns that changed the face of America. In
developed countries, this capital came from pension funds, insurance companies & even large banks.
Some large companies with excess funds may provide this capital to achieve diversification, market
expansion & window on technology or to share in this result of R&D of others.

In India, as the majority of the above institutions are in the public sector, only the government or
public financial institutions can provide the funds for venture capital. Venture capital is a post-war
phenomenon in the business world, mainly developed as a sideline activity of the rich in USA. To
connote the risk & adventure & some element of investment, the generic name of venture capital was
coined. In the late 1960s a new breed of professional investors called venture capitalists emerged whose
specialty was to combine risk capital with entrepreneurial management & to use advance technology to
launch new products and companies in the markets place. Undoubtedly, it was venture capitalists astute
ability to assess and manage enormous risks & export from them tremendous returns that changed the
face of America.

20

Innovative, hi-tech ideas are necessarily risky. It is here that the concept of venture capital steps in.
Venture Capital provides long start up costs to high risks & returns project. Typically, these projects
have mortality rates and therefore are unattractive to risks-averse bankers & private sectors companies.

8. Merger and acquisitions M&A are becoming increasingly significant in term of services offered
by the investment bankers in India. During the licensing era, several companies had indulged in
unrelated diversifications depending on the availability of the licenses. The companies thrived in spite of
their inefficiencies because the total capacity in the industry was restricted due to licensing. The
companies over a period of time became unwieldy conglomerates with suboptimal portfolio of assorted
business. The policy of decontrol and liberalization coupled with globalization of the economy has
exposed the corporate sector to serve domestic and global competition. The industry is passing through a
transitory phase of restructuring. The mergers and acquisitions group provides advice to companies that
are buying another company or are those selves being acquired. M&A work can seem very glamorous
and high profile. At the same time, the work leading up to the headline-grabbing multibillion-dollar
acquisition can involve a Herculean effort to crunch all the numbers, perform the necessary due
diligence, and work out the complicated structure of the deal. As one insider puts it, You have to really
like spending time in front of your computer with Excel. Often, the M&A team will also work with a
corporate finance industry group to arrange the appropriate financing for the transaction (usually a debt
or equity offering). In many cases, all this may happen on a very tight timeline and under extreme
secrecy. M&A is often a subgroup within corporate finance; but in some firms, it is a stand-alone
department. M&A can be one of the most demanding groups to work for.

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M&A benefits the following

Financial:
I. Benefits on account of tax shield.
II. Restructuring and strengthening the balance sheet.
III. Profiting from leveraged buyouts.
IV. Investment of surplus cash.

Marketing
I. Increase in market share.
II. Elimination of competition.
III. Diversification of risks.
IV. Growth without increase in the capacity.

Production
I. Horizontal and vertical integration.
II. Acquisition of new technology.

Classifications of mergers

Horizontal mergers take place where the two merging companies produce similar product in
the same industry.

Vertical mergers occur when two firms, each working at different stages in the production of
the same good, combine.

Con-generic merger/concentric mergers occur where two merging firms are in the same
general industry, but they have no mutual buyer/customer or supplier relationship, such as a

22

merger between a bank and a leasing company. Example: Prudential's acquisition of Bache &
Company.

Conglomerate mergers take place when the two firms operate in different industries.

M&Q requires following step

(i) Acquisition search: - the first step is to determine the universe of potential target
companies. Information is gathered about these companies based on their published data,
industry specific journals, database etc. if the acquisition involves buying only part of the
target company, segmental data may be difficult to obtain. Similarly, information about
private companies may not be readily available. Once the universe is determined, targets
may be short listed based on those parameters.

(ii) Approaching the target: - This is one of the most critical roles played by the investment
bankers in the deal. There are broadly two methods of approaching the targets- passive
strategy i.e. no aggressive approach is used and active strategy i.e. acquisition may be
friendly or hostile.
(iii) Valuation: - valuation of the target company is the most critical task performed by the
investment banker. A conservative valuation can result in collapse of the deal while an
aggressive valuation may create perpetual problems for the acquiring company. The
commonly used valuation methods are
(a) Discounted cash flow method.
(b) Comparable companies method
(c) Book value method

23

(d) Market value method

(iv) Negotiation: - This is the process of formulating the structure of the deal. The investment
banker plays a vital role in closing the financial side of the negotiation. From a financial
standpoint, the key elements of negotiations are the price and the form of consideration.
Both the elements are interrelated and affect the attractiveness of the deal. The investment
banker must ensure that the final price paid should not exceed the perceived value of the
targets to the acquirer.
(v) Acquisition finance: - once the negotiation is over and the price is finalized, the investment
banker has to assist the acquirer in arranging the required finance. The consideration can be
paid in the form of cash, debt securities or equity of the acquiring company. Cash may be
raise from the internal accruals, sale of assets, etc. It may also be refinanced by bank
borrowing, public issue or private placement of debt and equity.

9. Initial Public Offerings: - Initial Public Offerings (IPO) is the first time a company sells its stock to
the public. Sometimes IPOs are associated with huge first-day gains; other times, when the market is
cold, they flop. It's often difficult for an individual investor to realize the huge gains, since in most cases
only institutional investors have access to the stock at the offering price. By the time the general public
can trade the stock, most of its first-day gains have already been made. However, a savvy and informed
investor should still watch the IPO market, because this is the first opportunity to buy these stocks.

Reasons for an IPO: -

When a privately held corporation needs to raise additional capital, it can

either take on debt or sell partial ownership. If the corporation chooses to sell ownership to the public, it
engages in an IPO. Corporations choose to "go public" instead of issuing debt securities for several

24

reasons. The most common reason is that capital raised through an IPO does not have to be repaid,
whereas debt securities such as bonds must be repaid with interest. Despite this apparent benefit, there
are also many drawbacks to an IPO. A large drawback to going public is that the current owners of the
privately held corporation lose a part of their ownership. Corporations weigh the costs and benefits of an
IPO carefully before performing an IPO.
Appointment of investment banker and other intermediaries:
The company first selects the Investment Banker(S) for handling the issue. The investment banker
should have a valid SEBI registration to be eligible for appointment.
The criteria normally used in selection of Investment Bankers are:
i.

Past track record in successfully handling similar issues

ii.

Distribution network with institutional and individual investors

iii.

General reputation in the market

iv.

Trained manpower and skills for instrument designing and pricing

v.

Good rapport with other market intermediaries

vi.

Value added services like providing bridge loans against public issue proceeds

Issue in any of the capacities

An investment banker can be associated with the issue in any of the following capacities:

Lead Manager to the issue

Co Manager to the issue

Underwriter to the issue

Advisor/Consultant to the issue

25

10. Working capital: - Working capital, also known as net working capital, is a financial metric
which represents operating liquidity available to a business. Along with fixed assets such as plant
and equipment, working capital is considered a part of operating capital. Finance for working
capital, particularly for new ventures, often needs to be syndicated on behalf of the promoters,
and investment banks assist in this as well. For existing companies, non/traditional sources such
as through the issue of debentures for this purpose, and others have been successfully tapped by
investment bankers. This ensures that the firm is able to continue its operations and that it has
sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses

11. Foreign currency finance: - Of late, India has become increasingly active in the
international money markets, and this trend is likely to continue. For import of capital goods and
services from overseas, the arrangement of various kinds of export credits from different
countries is also required.
In addition to this wide range of services, some of the larger banks are also involved in areas
such as the arrangement of lease finance, and assistance in acquisitions and mergers etc.
12. Underwriting: - Underwriting refers to the process that a large financial service provider (bank,
insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity
capital, insurance, mortgage or credit). This is a way of placing a newly issued security, such as stocks
or bonds, with investors. A investment banker underwrites the transaction, which means they have taken
on the risk of distributing the securities. Should they not be able to find enough investors, they will have
to hold some securities themselves. Underwriters make their income from the price difference (the
"underwriting spread") between the price they pay the issuer and what they collect from investors or
from broker-dealers who buy portions of the offering. When a dealer bank purchases Treasury securities

26

in a quarterly Treasury bond auction, it acts as underwriter and distributor. Treasury securities purchased
by a primary dealer are held in a dealer bank's trading account assets portfolio, and they are often resold
to other banks and to private investors. The main work of investment banks relates to underwriting of
new issues and rising of new capital for the corporate sector. Of the amount underwritten, some part
devolves on the underwriters, which varies depending on the state of the capital market, and the intrinsic
worth of the project. The SEBI has made underwriting Compulsory for all issues offered to Public first
but later it was made optional. SEBI made it necessary for investment bank to undertake or make a firm
commitment for 5% of issued amount to the public.

13. Financial Engineering by Investment Bankers: - It involves design, development and

implementation of innovative financial instruments and processes and the formulation of creative
solutions to the problem in finance. A number of factors have accelerated the process of financial
innovation. They include:
Interest rate volatility
Exchange rate volatility
Regulatory and tax changes
Globalization of the market
Increased competition among investment bankers
14. Securitization:- is a structured finance process, which involves pooling and repackaging of cashflow-producing financial assets into securities that are then sold to investors. The name "securitization"
is derived from the fact that the forms of financial instruments used to obtain funds from the investors

27

are securities. All assets can be securitized so long as they are associated with cash flow. Hence, the
securities which are the outcome of securitization processes are termed asset-backed securities (ABS).
From this perspective, securitization could also be defined as a financial process leading to an issue of
an ABS.
Securitization often utilizes a special purpose vehicle (SPV), alternatively known as a special purpose
entity (SPE) or special purpose company (SPC), in order to reduce the risk of bankruptcy and thereby
obtain lower interest rates from potential lenders. A credit derivative is also generally used to change the
credit quality of the underlying portfolio so that it will be acceptable to the final investors.
A very basic example would be as follows. XYZ Bank loans 10 people $100,000 a piece, which they
will use to buy homes. XYZ has invested in the success and/or failure of those 10 home buyers- if the
buyers make their payments and pay off the loans, XYZ makes a profit. Looking at it another way, XYZ
has taken the risk that some borrowers won't repay the loan. In exchange for taking that risk, the
borrowers pay XYZ interest on the money they borrow. From the perspective of XYZ, those loans are
10 different assets. They have value- one, if the loan fails, XYZ takes ownership of the house. Two, if
the loan succeeds, XYZ gets their money back along with the interest they charge. XYZ can do two
things with those loans. They can hold them for 30 years and, they would hope, make a profit on their
investment. Or they could sell them to some other investor, and walk away. In doing this, they would
make less profit than if they held onto them long term, but they would benefit in that they make some
profit while also getting their original investment back. They give up some of the reward (profit) in
exchange for not having the risk. So XYZ Bank decides they'd rather have the cash now. They could sell
those 10 loans to 10 investors. Each investor would be taking a risk in buying those loans, because if any
loan defaults, that one investor loses. Naturally, investors would not be willing to pay very much for

28

those loans, knowing the risk involved. XYZ wants to sell those loans for the best price they can get, so
they decide to securitize those loans. They combine the 10 loans into one entity, and then they split that
one entity into 10 equal shares. Each investor still pays the same $100,000, but instead of owning one
loan, they will own 10% of all 10 loans. If one loan fails, every investor loses 10%.
The result is that XYZ bank is able to sell their assets for more money, and investors are insulated from
the volatility of directly owning individual mortgages. However, if a majority of the mortgages in the
asset pool act in the same way ( Correlation ) then the risk is similar to owning one mortgage. Investors
incur some of the volatility and there is no inherent "insurance" against major loss.
15. Portfolio management services:- A list of all those services and facilities that are provided by a
portfolio manager to its clients, relating to the management and administration of portfolio of securities
or the funds of clients, is referred to as portfolio management services. The term portfolio means the
total holdings of securities belonging to any person.
Portfolio Manager: - According to SEBI, Portfolio Manager means any person who pursuant to
contract or arrangements with a clients, advices or directs or undertakes on behalf of the clients the
management or administration of a portfolio of securities or the funds of client, as the case may be
Discretionary Portfolio Manager:- According to SEBI, discretionary portfolio manager means a
portfolio manager who exercises or may, under a contract relating to portfolio management, exercises
any degree of discretion as to the investments or management of the portfolio of securities or the funds
of the clients, as the case may be.

29

16. Sales & Trading: - Make trades in securities for the primary and secondary markets
For currencies, stocks, bonds, derivatives, futures, commodities, asset-backed treasuries etc on
Behalf of institutional clients (mutual and pension funds), individual investors and for the
Banks themselves.
Sales are another core component of any investment bank. Salespeople take the form of:
1) The classic retail broker
2) The institutional salesperson, or
3) The private client service representative.

Brokers develop relationships with individual investors and sell stocks and stock advice to the average
Joe. Institutional salespeople develop business relationships with large institutional investors.
Institutional investors are those who manage large groups of assets, for example pension funds or mutual
funds. Private Client Service (PCS) representatives lie somewhere between retail brokers and
institutional salespeople, providing brokerage and money management services for extremely wealthy
individuals. Salespeople make money through commissions on trades made through their firms.

In trading traders also provide a vital role for the investment bank. Traders facilitate the buying
and selling of stock, bonds, or other securities such as currencies, either by carrying an inventory of
securities for sale or by executing a given trade for a client. Traders deal with transactions large and
small and provide liquidity (the ability to buy and sell securities) for the market. (This is often called
making a market.) Traders make money by purchasing securities and selling them at a slightly higher
price. This price differential is called the "bid-ask spread.

30

CHAPTER 4
RISK INVOLVED IN INVESTMENT BANKING
In the course of their operations, investment banks are invariably faced with different types of risks that
may have a potentially negative effect on their business. Risk management in investment bank
operations includes risk identification, measurement and assessment, and its objective is to minimize
negative effects risks can have on the financial result and capital of a bank. Investment banks are
therefore required to form a special organizational unit in charge of risk management. Also, they are
required to prescribe procedures for risk identification, measurement and assessment, as well as
procedures for risk management.
The risks to which a investment bank is particularly exposed in its operations are: liquidity risk, credit
risk, market risks (interest rate risk, foreign exchange risk and risk from change in market price of
securities, financial derivatives and commodities), exposure risks, investment risks, risks relating to the
country of origin of the entity to which a bank is exposed, operational risk, legal risk, reputational risk
and strategic risk.

Liquidity risk - is the risk of negative effects on the financial result and capital of the bank
caused by the banks inability to meet all its due obligations.

Credit risk - is the risk of negative effects on the financial result and capital of the bank caused
by borrowers default on its obligations to the bank.

31

Market

risk-

includes

interest

rate

and

foreign

exchange

risk.

1. Interest rate risk is the risk of negative effects on the financial result and capital of the bank
caused

by

changes

in

interest

rates.

2. Foreign exchange risk - is the risk of negative effects on the financial result and capital of the
bank caused by changes in exchange rates.
A special type of market risk is the risk of change in the market price of securities,
financial derivatives or commodities traded or tradable in the market.

Exposure risks - include risks of banks exposure to a single entity or a group of related entities,
and risks of banks exposure to a single entity related with the bank.

Investment risks - include risks of banks investments in entities that are not entities in the
financial sector and in fixed assets.

Risks relating to the country of origin of the entity to which a bank is exposed -(country
risk) is the risk of negative effects on the financial result and capital of the bank due to banks
inability to collect claims from such entity for reasons arising from political, economic or social
conditions in such entitys country of origin. Country risk includes political and economic risk,
and transfer risk.

Operational risk - is the risk of negative effects on the financial result and capital of the bank
caused by omissions in the work of employees, inadequate internal procedures and processes,
inadequate management of information and other systems, and unforeseeable external events.

32

Legal risk it is the risk of loss caused by penalties or sanctions originating from court disputes
due to breach of contractual and legal obligations, and penalties and sanctions pronounced by a
regulatory body.

Reputational risk - is the risk of loss caused by a negative impact on the market positioning of
the bank.

Strategic risk - is the risk of loss caused by a lack of a long-term development component in the
banks managing team.

4.1 Need for risk management

The primary goal of risk management is to ensure that a financial institutions trading, position taking,
credit extension, and operational activities do not expose it losses that could threaten the viability of the
firm. As risk taking is an integral Part of the investment banking business, it is not surprising that
investment bank have been risk management ever since they have been established. The only thing
which has change is the complexity.
It involves following steps

Identifying and assessing risks

Establishing policies, procedures, and risk limits

Monitoring and reporting compliance with reliance with these limits

Delineating capital allocation and portfolio management

Developing guidelines for new products and including new exposures within the current frame
work
33

Applying new measurements methods to the existing product

Risk management practices in front office

1. Taping of telephone lines of traders and dealers to resolve of disputes at a later date.
2. Restriction on personal trading by the dealer.
3. Restrictions on transaction at off market rates and documentation procedures to justify any offmarket transactions.
4. Restrictions on after-hours trading and off-premises trading and documentation procedures to
justify them when undertaken.
5. Adequate compensation policies should be formulated to protect dealers from losses in case of
disputed traders.
6. Revaluation of position may be conducted by traders to monitor positions by the controllers to
record periodic profit and loss, and by the risk mangers who seek to estimate risk under various
market conditions.
7. Traders should maintain professionalism, confidentiality and proper language in telephone and
electronic conversation.
8. Management should analyze the trading activity periodically.

Risk management in the back office

34

1. It should have written documentation indicating the range of permissible products, trading
authorities and permissible counterparties.
2. It should have limits for each type of contract or risk type.
3. The management should explicitly state the procedure for the written authorization of the trades
in excess of the laid down limits.
4. Adequate procedure for promptly resolving the failure to receive or deliver securities on the
settlement dates must be established.
Other risk management practices
1. As with traditional banki9ng transactions, an independent credit function should conduct an
internal credit review before engaging in transaction with the prospective counterparties. Credit
guidelines should ensure that the limits are approved for only those counterparties that meet the
appropriate credit criteria. The credit risk management function should verify that the limits are
approved by the credit specialist.
2. The assessment of the counterparties based on simple balance sheet measures the traditional
assessment of the financial condition may be adequate for many types of counterparties. The
credit risk assessment policies should also properly define the type of analysis to be conducted
on the counterparties based on the nature of their risk profile. In some instance stress testing may
be needed when counterpartys creditworthiness may be adversely affected by the short-term
fluctuations in the financial markets.
3. The top management has to identify those areas where the bank practices may not comply with
the stated policies. Necessary internal controls for ensuring that the practices confirm with that
stated policies should be put in place.

35

CHAPTER 5
THE BIG PICTURE- MAJOR PLAYERS IN INVESTMENT BANKING

Until the wave of consolidation and convergence that started in the 1990s in the financial services
industry, the playing field had changed very little and was easy to understand. Commercial banks and
investment banks each had their roles, as defined by federal regulations, and seldom did the two meet.
And within investment banking, firms could be neatly categorized by their size, market focus, or both.
At the top was the bulge bracket, which consisted of the six largest firms: Merrill Lynch, Goldman
Sachs, Morgan Stanley, Salomon Smith Barney, First Boston, and Lehman Brothers. These firms still
dominate the securities underwriting and M&A markets, though there are few name changes in the past
few years. All firms beyond the bulge bracket were labeled boutiques or regional. Boutiques are niche
firms that focus on a particular industry, such as technology, or financing vehicle. Regional, as the name
implies, focus on financing and investment services in a particular geographic region. These labels are
still used (although the smaller firms scorn the boutique image), but as the rapid pace of mergers and
acquisitions continues to alter the landscape, the traditional categories are becoming less and less
meaningful. Large commercial banks that have acquired investment banks are bringing large amounts of

36

capital to the playing field, along with a mix of financial services more varied than ever before. Some of
the major players on investment banking are:

1. Bank of America Securities LLC -Bank of America Securities is the U.S. investment banking
arm of Bank of America, one of the biggest commercial banks around. Together with Bank of
Americas U.K. investment banking subsidiary, Banc of America Securities Ltd., it offers a full
range of investment banking and brokerage services. The company was created in 1998, when its
parent bank acquired Montgomery Securities. Later, Bank of America was acquired by
NationsBank, and the combined entity took on the Bank of America name. Banc of America
Securities main offices are in San Francisco, New York, and Charlotte. It employs people in
areas including corporate and investment banking, the global markets group (debt capital raising,
sales, trading, and research), portfolio management, e-commerce, global treasury services, and
asset management. Banc of America Securities offers full-time and summer associate and analyst
programs in the United States and in Europe.

2. Credit Suisse first Boston LLC - Credit Suisse First Boston is the result of the 1988 merger of
the investment bank First Boston and Credit Suisse, a European commercial bank. In 2000, the
firm acquired Donaldson, Lufkin & Jenrette, and a leading underwriter of high-yield bonds with
a golden reputation in research. A bulge-bracket bank, CSFB ranked fifth among all banks in
2003 in terms of global debt, equity, and equity-related issuance. CSFB has experienced trouble
in recent years, with business slackening in key areas (e.g., IPO underwriting) and regulatory
trouble (the firm paid a $200 million fine in 2002 for research improprieties and another $100
million in 2002 to settle charges that it received kickbacks in the form of higher commissions

37

from clients to whom it allocated hot IPO sharesand in the process rock-star tech banker Frank
Quattrone resigned and eventually was convicted of criminal charges). The firm has also been
losing key bankers in recent times; epitomizing this trend, the CEO of the investment bank, John
Mack, announced plans to leave the firm in the summer of 2004, reportedly due to the fact that
his desire to merge Credit Suisse with another firm was not in line with the desires of the
majority of the directors of Credit Suisse. After that announcement, the firms head in China
announced plans to leave the firm, and as this guide goes to press the firm must surely be
worried that an exodus of the firms talent in Asia will ensue.

3. Deutsche Banc Securities Inc. - Deutsche Banc Securities is the full-service North American
investment banking arm of German financial services giant Deutsche Bank AG. It includes
Deutsche Bank Alex. Brown, which provides M&A, acquisition finance, and project finance
advisory to clients in the health-care, media, real estate, technology, and telecom sectors. The
bank has been undergoing some changes, with some key employees leaving the firm and the
addition of a number of senior-level hires. In March 2004, Deutsche announced it was laying-off
50 employees in the equity group, including nine senior research analysts, dropping coverage of
100 of the 731 companies it used to cover in the process. Observers report that layoffs could
continue as the bank cuts back on research coverage, a common trend on the Street. Overall,
though, Deutsche Bank has been focused on building its presence in North America.

4. The Goldman Sachs Group, Inc. - Goldman Sachs was founded in 1869 when Marcus
Goldman, an immigrant from Europe, began a small enterprise to provide an alternative to
expensive bank credit. In the 1950s, Goldman played a lead role in establishing the municipal

38

bond market, and in the 1970s the firm formed the first official M&A and real estate departments
on Wall Street. Today it continues to sit at or near the top in most areas of investment banking
advisory, sales, and trading. In the first 6 months of 2004, Goldman ranked second in global
equity and equity-related business, second in global IPO underwriting, fourth in global
investment-grade corporate debt, fourth in underwriting, and first in M&A advisory. Perhaps
even more significant, it is probably considered by the majority of people in the industry as the
gold standard in terms of the quality of its employees (a belief thats especially true among
Goldman employees, naturally), what an investment bank should be, and how a bank should do
business. (A fact thats a bit ironic given that Goldman has faced as much scrutiny as any other
bank as the SEC and other regulators try to clean up Wall Street in the wake of the early-2000s
banking scandalsand has had to pay a pretty penny to settle charges of misdeeds brought
against it.)

5. J.P Morgan & Co. - This firm was formed by a mega-merger when Chase Manhattan, one of the
largest commercial banks around, paid $33 billion to join with J.P. Morgan, one of the oldest and
most prestigious commercial and investment banks in the world. Subsidiaries include J.P.
Morgan Fleming Asset Management, which serves institutional investors; J.P. Morgan Partners, a
private-equity house; J.P. Morgan H&Q, an investment banking arm focused on areas like tech
and health care; and J.P. Morgan Private Bank, which serves wealthy private clients. And now,
with the 2004 acquisition of Bank One, its getting even bigger. (However, the acquisition
probably wont have a major effect on the way things are done in the investment bank, J.P.
Morgan.) J.P. Morgan is a major player in terms of debt and equity issuance worldwide; in the
first half of 2004, it was third in the league tables in global equity underwriting, in U.S. IPO

39

underwriting, and in overall debt underwriting. It is also a player in M&Afifth best in the
business, in terms of worldwide announced deals in the first half of 2004.

6. Merill Lynch & Co., Inc. - Merrill was founded in 1914, when Charles Merrill opened the first
U.S. retail brokerage firm, winning his company the nickname the firm that brought Wall Street
to Main Street. He was joined a year later by his friend Edmund Lynch. In recent years, the
company has worked to increase its presence in the global market place. The firms strength lays
in its vast retail brokerage network and large asset management business, as well as its position
near the top of the global underwriting and advisory league tables. All has not been rosy for
Merrill of late. Poor performance has forced the firm to drop thousands of employees over the
past several years. In 2002, the firm was forced to pay $100 million to New York State after
evidence supporting allegations of fraudulent
stock recommendations by Merrill research
analysts came to light. Also in 2002, the firm was one of a number of major banks paying
between $80 million and $125 million as part of a $1.335
billion settlement with regulators for research misdeeds. In
2003, the firm was charged by the SEC with helping Enron
fraudulently pump up its profits in 1999, and Merrill agreed
to

pay

$80

million

to

settle.

40

CHAPTER 6
THE EVOLVING INDUSTRY STRUCTURE

As the global economic climate cooled down following the economic and financial meltdown, so did
investment banking performance. Lower interest rates drive business, such as mortgage-backed and
municipal securities. At the same time, the big banks found

them

selves tremendously overstaffed, having hired new employees

like

gangbusters in the boom years of the 1990s. As a result,

investment banks have started laying-off.
Investment banking has witnessed a rash of cross-industry mergers and acquisitions in recent times,
largely due to the late-1999 repeal of the
Depression-era Glass-Steagall Act. The
repeal, which marked the deregulation of
the financial services industry, now allows
41

commercial banks, investment banks, insurers, and securities brokerages to offer one anothers services.
As I-banks add retail brokerage and lending to their offerings and commercial banks try to build up their
investment banking services, the industry is undergoing some serious global consolidation, allowing
clients to invest, save, and protect their money all under one roof. These mergers have added a
downward pressure on employment in the industry, as merged institutions make an effort to reduce
redundancy.
The Industry One of the biggest issues was the fact that banks overrated the investment potential of
client companies stocks intentionally, deceiving investors in the pursuit of favorable relationshipsand
ongoing banking revenue opportunitieswith those companies. Firms also came under fire for the
methods by which they allocated stock offerings (specifically, for whether they charged excessive
commissions to clients who wanted to purchase hot offerings), as well as for possible manipulation of
accounting rules in the course of presenting clients financial info to potential investors. By now, almost
all of the important investment banks have paid fines totaling in the billions of dollars to settle
allegations against them, and the scrutiny of regulators remains sharp. And banks are paying millions to
purchase independent research to provide to their customers.

42

CHAPTER 7
CONCLUSION
For the past couple of years the investment banking industry has been shrinking and the current scenario
calls for combined efforts by the regulators and the industry itself to take measures for improving the
situation. At present the industry is going through changes. Many non banking finance companies are
focusing on becoming multi business entities so that they can remain commercially viable. The
corporate sector has perennial needs for services such as investment advisory, corporate restructuring,
distressed assets acquisition and equity and debt financing. And as the economy improves the need for
these services will further intensify. This indicates good prospects for the investment banks proficient in
43

these areas of business. It is time for the investment banks to focus on developing competitive
advantages in the form of wider outreach and ability to mobilize national savings with greater efficiency.

In this scenario, investment banks have had to increase their international presence in order to retain
existing clients and to generate new business. They have been achieving these offices abroad as well as
by acquiring or merging with foreign investment banks. Similarly investment banks from other countries
have been strengthening their ties with American investment banks. The industry has been witnessing
consolidation across geographical functional-supermarket, where all the financial need of all types of
clients can be fulfilled. With the abolition of glass-Steagell act, it is possible for bank to convert itself
into a supermarket that offers all types of financial services to issuers and investors, at both retail and
wholesale level. The range of services offered may cover underwriting services, fund, management,
insurance products, credit cards, loans, depository services. Corporate advisory services, trust services
etc.

The rapid technology changes have started affecting the industry. As various commercial
banking and investment banking activities have become digitalized, the established players are facing
challenge on pricing front from all small new players. This is big forcing big banks to find means of
turning the digitalization to their advantage and reducing cost. Today they are focusing more on lower
cost, better quality services, innovative products and new service channel so that can have deeper
penetration in the market. During the downturn in the economy the demand for the industries services
declines equally fast. The earning in the industry are extremely volatile as they depend upon extremely
volatile factors like interest rates, exchange rates., inflation etc. they need to stay big enough at all times

44

to be able to satisfy suddenly increasing demand, yet be flexible enough to be able to downsize quickly
in a declining market.

45