Introduction to Investment Banking (Lehman Brothers)

Lehman Brothers has presented an "introduction to investment banking" to various universities.  It is fairly "bank-neutral" and covers what is investment banking, the role of the junior bankers, a basic valuation workshop and some aspects of recruiting.

Block trade - a realistic look (Financial News)

Block trade

Financial News (c) charts the anatomy of a block trade as a guide to the process...

Prepare

Knowing when a window will come in the market for a block trade and being prepared for it in advance can be a key to the success of a deal.

ECM bankers often plot windows for potential accelerated selldowns over the course of a year, whether on behalf of existing clients or in a bid to win new business.

Some institutions, including Bank of America Merrill Lynch, Goldman Sachs and UBS, employ a dedicated blocks banker to prepare for and lead this type of transaction.

Bankers look for a variety of measures to align when plotting potential windows. 

A lock-up agreement preventing the sale of shares in a company might be in place by its management and selling shareholders if there has been a recent share sale.

Banks can waive these agreements, as was the case with a £450 million sale of shares in wealth manager St James’s Place by Bank of America Merrill Lynch last May. This tactic can, however, rile some investors.

Knowing the trigger price for the sale of a position by a shareholder is also important. Private equity firms will often watch for the shares of their listed portfolio company to rise above a particular price before they exit a position.

Monitoring the average daily volume of shares in a company traded on a stock exchange is also important. Thinly traded companies are harder to sell to investors in large portions.

This measure in particular can help to determine the price agreed with a selling shareholder. In a heavily traded stock, a bank can offer to run a deal closer to a company’s closing share price in order to win the mandate because of the wide appetite among investors.

Checking conflicts is also important for a bank to monitor. If a bank is working in another capacity for an issuer or selling shareholder, or a rival eyeing the issuer as a potential acquisition, it could be conflicted out of handling the deal.

Next step, consider what you might do to win the deal...

Winning the deal

There are two ways to win a mandate. A client either selects a banking institution in advance of the trade to place the deal, or it arranges an auction to find the bank willing to run its deal at the highest price.

Selling shareholders will often ask banks to run the trade at their risk, meaning an investment bank will agree to underwrite the shares of a company it is selling on behalf of the backer. This can be done in a number of ways.

Commonly a bank will agree a “backstop” price, usually referenced as a percentage discount to a company’s closing share price on the day the block trade is launched. For example, an investment bank may agree to underwrite a company’s shares on behalf of a seller at 3% below its closing price.

The bank would then sell those shares anywhere above that 3% discount, often arranging a profit-sharing agreement with the seller if it is able to find buyers at a tighter discount.

While banks are paid fees for block trades, bankers say the biggest gains can be made in selling stock above the price at which they have agreed to backstop the trade.

If you have been mandated on the deal, follow steps below. Otherwise, skip to an auction...

Mandated trades

Selling shareholders occasionally opt to mandate a particular bank with which they have an existing relationship to carry out an accelerated bookbuild.

With a mandated trade, banks have more time to prepare for a particular auction. Top investors in the company are sometimes “wall-crossed”, whereby bankers bring them inside a Chinese wall to gauge their interest ahead of the deal. They are barred from trading the stock ahead of the deal and sign non-disclosure agreements.

A team of bankers from across a bank’s equity capital markets, equities trading and investment banking, often arranged into various committees, agree on the best price to run the deal.

Auctions

Often arranged by lawyers or independent equity advisers such as Rothschild, Lazard or STJ Advisors, auctioned block trades can be tense, rapid-fire events with little room for error.

These situations involve pitting a handful of investment banks against one another to generate the highest price for a selling shareholder.

One ECM banker described the process as “getting a bunch of people together and letting them cut their throats”.

Bankers will often be called on the afternoon before the launch of an overnight deal to be asked to sign a nondisclosure agreement. They will then be told the name of the selling shareholder and the position they wish to exit, before being asked to name the price at which they would be willing to run the trade.

The timing of this call can be key. Often it will come as early as 2:30pm, while other auctions can come later in the day.

One particular trade last year was marred by a late auction, at 7:30pm London time. This left the investment bank that won the deal little time to sell to European investors, causing the block to turn sour.

Two bankers said independent advisers had asked them to meet a rival’s bid for an auctioned block trade which they later felt to be a ruse to artificially inflate the price of a deal.

As part of the bidding process, one bank may emerge as the only institution prepared to do the deal. In others, a small syndicate of two or three institutions may be arranged to split the workload.

Arranging internal committees of senior bankers to decide on a price for the trade can be a frantic affair, often with less than an hour open to banks to submit a bid. Decisions can go as high as a global investment bank’s group executive board level, particularly on $1 billion-plus deals.

Now that you have gone through the stress of winning the deal, it's time to get the transaction done...

Execution

Once a bank or syndicate of institutions has been selected to handle a block trade, the deal shifts from the equity capital markets desk to the trading floor.

Banks’ sales teams will look to sell the trade overnight to investors, at first targeting European accounts in the first hours after the London market close, before looking to US buyers.

There are a number of ways this deal will get done. Read on below...

Books covered

If there is sufficient demand for the deal, the bank or syndicate will send out a coverage message to the market.

Stock will then be allocated to investors who placed orders for shares on the following morning before the market opens.

If you are unable to find enough buyers for the shares on offer, consider one of the following three options...

Handling a residual stake

If the bank or syndicate fails to secure sufficient orders for the deal, there are a number of options available when it comes to handling the position.

Cutting your losses

Banks cut their losses on occasion when they have failed to fully distribute a block trade, rather than running the risk of holding on to the stake for a longer period.

In one example last May, Morgan Stanley was unable to distribute fully a €612.5 million sale of stock in fashion brand Hugo Boss on behalf of buyout firm Permira, according to two people familiar with the matter. The bank had agreed to backstop the trade but sold shares in the company below that level to avoid being left with a residual position for a prolonged period, the people said.

Warehousing

Although bankers say there is no uniform way to handle a residual stake, holding on to a position in a tactic known as “warehousing” is perhaps most common.

The position would be held on the bank’s equities trading book, with buyers for the shares found in dribs and drabs over several weeks.

In one example last July, Deutsche Bank and Goldman Sachs were left with about $120 million worth of shares each in German residential property company Gagfah. The investment banks were forced to publicly disclose these positions on the Frankfurt Stock Exchange after the trade. However, they have since exited these positions, according to one person familiar with the matter.

Finding a strategic buyer

A less common resolution to a soured block trade could come in the shape of a strategic buyer, stepping in to purchase the shares from the bank that was unable to fully distribute the trade.

In one high-profile example of a soured block trade, Barclays was left with a €697 million position in Dutch cable company Ziggo last March. US media company Liberty Global then bought the stake in a €632.5 million deal a week later.

Does work life balance exist on Wall Street? (Vault)

This Vault article on work-life balance is a little friendly to the investment banking industry.  Here are some further thoughts about some abstracts.

(...) despite the monstrous workloads, many analysts and associates say their firms actually provide them with a very good work/life balance.
One can challenge the reliability of Analysts' and Associates' views, since they have generally not worked in a traditional corporate environment. Many suffer from burn-out and leave their industry.

(...) the ubiquitous phrase work/life balance does not necessarily (or only) refer to number of hours worked; rather (or in addition), it refers to flexibility of scheduling, the ability to work remotely, respect of one’s time, the ability to take the vacation time one is entitled to, and not doing meaningless work, among other things.
...in which case(s), one needs to be realistic and acknowledge there is little work-life balance in the industry! Working remotely equates to working any time and all the time. Junior bankers are often unable to plan much privately due to the required "flexibility" (i.e. availability) for work. The sheer quantity of (sometimes meaningless) work under inefficient practices all add to a high number of working hours and a very suboptimal work-life balance.

(...) most people don’t mind if you take a day off to attend things such as weddings or family events—as long as the work gets done
"As long as the work gets done" (!) This says it all.  Priorities are set.  Family birthdays, weddings or funerals will be missed during a banking career...

(...) Senior bankers don’t care if you’re in the office as long as you’re getting your work done (...)

Since they don't (indeed) care, it is safe to bet long hours will be spent working...

Stock or Cash? (HBR)

This very well written article was published in Harvard Business Review and covers a topic discussed at senior executive and board levels in the context of M&A transactions.

Do investment bankers have social lives? (AskIvy)

This article from AskIvy has an interesting tone.  It reads like one can have a social life in investment banking.  But is it really so?

Here are some selected abstracts... with some commentaries / highlights.  The key underlying questions being, what is a social life?, and how much of it can you reasonably expect when working in investment banking?

"Your social circle will quickly start to revolve around other junior bankers in other teams (ie. different industry groups, or departments) and [maybe] in other banks."
"(...) You will most likely only have time to spend with people that are immediately next to you (ie. a few desks away)"
"Social life of investment bankers consists of weekday dinners [and often weekends, too] at the office, 15min coffee chats [often at the office], and weekend dinners that are always organised at the last minute (...)."
Is this a "social life"?

"The question is, are your non-banking friends nice enough to accept not seeing you several months in a row?"
Is this worth trying?
"If you have a boyfriend/girlfriend, you will need to plan your time carefully and make him/her accept that you may have to cancel your plans at the last minute, and may not see each other much during the week, only weekends, but sometimes not."

The article finishes saying "There is hope: banking gets better every year. The more senior you are, the better the hours."
Some believe this is a similar fallacy was that with pay.  It assumes you actually make it to VP, Director, or even Managing Director.  With staff turnover of ca. 20% per year, the odds are not that favourable to the juniors to reach the really attractive layers of hierarchy.
Some say you would end up with little or no social life for many years, before leaving the industry and not having the "rewards" of being a senior investment banker.  Sounds like sacrifices without the rewards... are monetary rewards the only benchmark, though?

iBankingFAQ

Here is another website with some resources and information for graduates.

Career planning and money (FT)

All career considerations don't revolve around money.  Or, at least, don't have to.  An interesting experience is shared in this article.

10 things you wish you had known before starting in investment banking

1. What a 90-110 hour week actually feels like.
2. It is a "full time job". You will rarely use your holiday time.  Enjoying your weekends when you can is a luxury.
3. The lifestyle is not glamorous.
4. Getting a nice flatmate is important.
5. You have to manage your career yourself; nobody will do this for you.
6. You will spend more time on format than content.
7. If you don't eat healthy, you will get fat.
8. You only have so much energy and enthusiasm.
9. It is so nice and important to stay close to your family, friends and other half.
10. Nothing is as important as it seems.

Family holidays with a workaholic – a wife’s tale (FT)

Working while on holiday has an impact on families. This article gives a few examples.

Dilbert on 5 hours sleep per night (Humour)

Young professionals often underestimate how much a good night sleep is required, not only to avoid mistakes, but also to be able to work fast and be in a good mood.

Is business bluffing ethical? (HBR)

Here is a brilliant article published in the Harvard Business Review... and a critic thereof!
How much this applies to banking is left to the reader's judgement

10 scientifically proven ways to be incredibly happy

How many of these ways to happiness does a career in banking allow you to pursue?

Sleep & Banking (FT)

Here is a nice article about sleep and banking by Lucy Kellaway, as well as a Health Report about sleep from the FT which has some arguments and counter-arguments, as well as pretty clear warnings...

20 ways to tell... (Humour)

20 ways to tell... you're either a prostitute or an investment banker:

1. You work very odd hours.

2. You are paid a lot of money to keep your clients happy.

3. You are paid well but your boss gets most of the money.

4. You spend a disproportionate amount of time in a hotel room.

5. You would change employers at the drop of a hat for more money.

6. Creating fantasies for your clients is rewarded.

7. It's difficult to have a family.

8. You have no job satisfaction.

9. If a client beats you up, the boss just sends you to another client.

10. When people ask you, "What do you do?”, you can't explain it.

11. If you don't do everything to please the client, the boss gets angry, your compensation suffers, and he might even ditch you for a better model.

12. Your clients always want to know what they get for their money, often make strict demands as an excuse to get their "money's worth".

13. Your boss drives nice cars like Mercedes or Porsche.

14. Your boss encourages drinking to ease the pain of it all.

15. When you leave to go see a client, you look great, but return looking like hell.

16. You are rated on your "performance" in an excruciating ordeal.

17. Even though you get paid the big bucks, it's the client who walksway smiling.

18. Your boss keeps close tabs on what you're doing, who you're doing it with, how much time you're spending with them, and your "productivity" levels.

19. You're always telling clients what they want to hear.

20. To feel better, you keep saying to yourself, "Well, I at least I'm not a lawyer."