- We're all familiar with traditional banks, we go to them all the time. What about an investment bank? Well, an investment bank is really not a bank at all. An investment bank is just a different kind of financial institution. Investment banks have two primary functions: First, investment banks help companies do big deals. For example, let's say I am a company and I want to go out and find new investors. I want to go public, I want to issue new shares of stock. Well, this is my first company, I don't know how to do that. I need an expert to walk me through that process.
That's called underwriting. So investment banks help walk companies, new companies, through the process of making themselves public companies, issuing shares, becoming a public corporation. Also, when one company want to buy another. Let's say I want to $19 billion to buy another company. Well, I've never done that before. I need somebody to help me with this merger of my company with another company, or I need somebody to help me with acquiring a company. Investment banks do that. So they have specialists that help companies do these very important deals because they don't happen very often.
Another important function of an investment bank is to engage in investment trading. In essence, they are investment advisers for very large clients, for pension funds, for large investment funds. If I'm the State of Illinois and I need to invest my pension fund money, I'm going to have an investment bank lead me through that process. So investment banks help in investment trading for both their clients and also themselves because as investment banks study the markets ebbs and flows and identify good investments for their clients, they also take some of their own money, some of their own investment bank money, and invest it as well.
So investment banks have two primary functions: One, to lead companies through deals, and two, to engage in investment trading both as an aid to clients and also for themselves. Well here's an example of an investment bank helping companies through a deal. First, the underwriting, helping a company go public. Facebook went public in May 2012 as a huge initial public offering with a lot of interest. As a result, Facebook hired 33 different investment bankers, split a fee of over $170 million.
These underwriters helped Facebook through this process. Facebook had never done it before. The lead underwriters were names that you've heard of: Morgan Stanley, JP Morgan Chase and Goldman Sachs. These investment banks walked Facebook through this IPO process. Mergers and acquisitions. Facebook purchased WhatsApp for $19 billion in February 2014, one of the most interesting transactions I've ever seen. We won't talk about it right now, but how did that happen? WhatsApp had just barely started.
They had never been acquired before. Facebook, this is the biggest acquisition they had ever made up to that point. They needed advisers to walk them through this merger, this acquisition process. So the investment bankers on each side of that transaction earned millions of dollars in fees in helping Facebook and WhatsApp make this large deal happen.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans