SPECIAL EDITION

I I M K ’ S F I NA N C I A L
N EWS LET T ER
5TH SEPTEMBER, 2008

FROM FY DESK
INSIDE THIS ISSUE:

FIN GYAAN-
INVESTMENT BANK-
ING IN M&A
2
T eam FY proudly pre-
sents before you the
next edition of IIMK‟s
for the others.

For history-lovers, there is a brief

history of how Investment Banking
originated and evolved through
financial newsletter.
the ages to the current-day sce-
FIN-TERESTING : A
DAY IN THE LIFE OF The objective of this newsletter is nario. Then there is an analysis of
AN INVESTMENT 3
to make learning interesting and the Investment Banking industry
BANKER
encourage sharing of knowledge on the basis of Porter‟s 5 forces
amongst finance enthusiasts. This theory.
IPO PRICING: BOOK
BUILDING VS. AUC- 4 would also serve as a platform for
TIONS We also draw a comparison be-
obtaining expert views from the
tween Auction and Book Building
faculty and other industry experts.
based IPO Pricing practiced by
PORTER’S ANALYSIS
OF IB INDUSTRY
5 This issue focuses on Investment Investment Banks. Some valuable
Banking, with an aim to analyze insights shared by a distinguished
some of the functions of an I- Investment Banker leaves one
HISTORY OF IN- Bank. Keeping up with our identity fulfilled.
6
VESTMENT BANKING
of knowledge and learning facilita-
tors among finance enthusiasts,
we take you through the various Finally, with an honest word of
FIN-TERVIEW 7 roles of Investment Banks in merg- thanks for your feedback for the
ers and acquisitions. A sneak-peek newsletter, we seek to incorporate
into the life of an Investment your suggestions and provide an
Banker is sure to shatter a few enriching experience to all our
CONTACTS 8
myths for some and build dreams readers.
for the others.

FIN WATCH
ARTHANOMICS 2008 — THE INVESTMENT BANKING AND PRIVATE
EQUITY SUMMIT, 6-7 SEPT. 2008, IIM KOZHIKODE
 1$ = Rs. 43.93
Arthanomics
 1 € = Rs. 63.14
The annual Finance Extravaganza
 Inflation 12.36% at IIMK that brings together indus-
try stalwarts to share their views
MARKET WATCH on financial topics. It has events
like panel discussions, case stud-
ies, knowledge sessions and
quizzes that help to hone the
knowledge of students and gener-
ate new ideas.
After the great response to last
year‟s Arthanomics, FY (Financially
Yours, the Finance interest group
of IIMK) is striving to make the
event bigger and better !
Arthanomics 2008 Highlights of the Summit
The Investment Banking and Pri-
 Panel Discussions by eminent
vate Equity summit is centered
corporate leaders on cross
around the theme - “Mergers &
border M&As, PE in India etc.
Acquisitions–India Inc. on the
Prowl”.  Knowledge Session on Capital
Markets
The objective is to make Mergers
 Knowledge Session on Corpo-
and Acquisitions, Investment
rate Finance, Banking and
Banking and Private Equity famil-
Insurance
iar concepts to all the students.
We intend to provide an impact  Finance Case Study Contest
analysis of mergers and acquisi-  Paper writing competition
tions and their effects on the per-  Equity Research Contest
formance of a company .
 IIMK’S FINANCIAL NEWSLETTER Page 2

FIN GYAAN: THE ROLE OF INVESTMENT BANKS IN MERGERS AND

W
ACQUISITIONS MANOJ BEGWANI, PGP12, IIMK

ith an ever increas-
ing demand for
growth, managers have turned to inorganic ways
to satiate shareholders of their companies, but
most of the M&A have not been value accretive.
Still we see M&A happening. In the 100 yrs or so
US has seen 5 waves of M&A, which makes us
think there is something which leads to hyperac-
tivity.
 Presence of Extra Cash Balance, Tax
Benefits and Savings
 Hubris Hypothesis
 Higher Market Power
 Bootstrapping Earnings
 Cheap Valuation of Target
 Gaining Capabilities, Competencies,
Domain Expertise, Know How.
The role of I – Banks is seen mainly in pre
merger phase.
Investment Banks start coming up with different
targets which they feel will be a strategic fit to the
acquirer or they can go through the proposal of
management of a particular company and advise
whether it forms a strategic fit or not. There on
they initiate the first contact, negotiation in terms
of due diligence, valuation of the target, deal
structure and developing the financing plan. They
generally help in providing post merger integration
plan as well.

A Typical Merger Process

The I – banks also help companies in terms of
anti takeover policies the companies need to
take when they want to ward off unwanted
raiders. As there are a number of defensive
and active Anti – Takeover Mechanisms, they
help in arriving at the most suitable one. They
may also help the other side of the table, the
aggressor in taking over the target by devising
a strategy for it as and when target board
turns hostile. They also help prevent suitors
from overbidding for the target.
One of the important aspects of I-Banks is or to use a particular expertise.
their unbiased opinion on valuation of the
Some of the reasons why most of M&As end up as
target company.
failures are:
As there is no standard technique for valua-
 Overestimation of quantum of synergies and
tion it is dependent on many factors. There-
the time frame involved
fore, it is required to have valuation done
through various models, and arrive at the
most appropriate value.  Overpaying for the target; especially while bid-
ding for the target
I – Banks are involved on both sides of the
transactions and multiple I- Banks are gener-  Inadequate Due Diligence
ally employed to maintain neutrality of opinion
 SPECIAL EDITION Page 3

CONTINUED FROM PAGE 2: ROLE OF IB IN M&A FIN—CTIONARY

Advantages of using the services of
Investment Banks:
 They are the experts and take care of
the whole process right from initiating
the first contact to finalization of the
deal
 They will get the deal done quickly and
efficiently
 Indispensible in tying up the financing
 Help in structuring large and complex
deals with unusual features
FIN-TERESTING : A DAY IN THE
INVESTMENT BANKER
Disadvantages of using the services of The Hubris Hypothesis: The
Investment Banks: acquiring firm‟s management
over-value their ability to cre-
 Companies should not rely on I – Banks
ate value once they take con-
completely. M&A is important part of trol of the target firm‟s assets
corporate strategy and they should not
outsource them Chinese wall: An investment
bank can also be split into
 They might have vested interests in the private and public functions
deal going through as in case of M&A which separate the two to
greater than $ 1bn they are generally prevent information from
paid fees upwards of 0.5% crossing
 Companies tend to use many layers of Dutch auction: Auctioneer
advisors, which might make the deal go- begins with a high asking
ing awry. They should rather be used for price which is lowered until
specific jobs only some participant is willing to
accept the auctioneer's price,
LIFE OF AN or a predetermined reserve

I
PALLAVI YADAV, PGP12, IIMK
price is reached
leave for the day. evaluating the risk and market Junk Bond: A bond that in-
sentiments in favor and against
11 AM: Grab a coffee and send volves higher than usual risk
out mails to clients across the the course.
nvestment Banking, and also pays high rate of
world detailing the current state 10 PM: Calls for another cup of
opens a whole gamut interest, typically issued by a
of their funds and an update of coffee and after a long day
of career opportunities in the
world of finance. He will be the deals in hand. starts a long night with the list company lacking an estab-
doing breakfast with CFOs of the mails to be sent to apprise the lished earning history or ques-
Forbes 10 companies, lunch concerned parties on the vari-
tionable credit history
with top bank executives, taking ous deals and propositions.
client calls from US in the eve- 12 AM: Yes finally time to be Euro Debt Securities: Securi-
ning and dinner while brain- home and sleep with the calcu- ties issued outside their do-
storming on the strategy to lations going on in his brain for
place your client company‟s IPO. mestic market in the domina-
the next move and the checks of
Grueling lifestyle, cut-throat the action points for the day. tion different from issuer‟s
competition, always on the fly domicile like Euro Bonds,
and lots of traveling are com- Agreed, all this sounds like life
mon aspects of an I-Banker‟s life with all work and stacks of cof- Euro Notes
and yet the adrenaline rush in fee cups and no fun but han-
dling gigantic assets and funds, Mezzanine Financing: Hybrids
working with the top notch peo-
ple of the industry and the bags advising on billion dollar deals generally issued for short
of cash one takes home makes and being at the top of the job term in form of debt, get con-
it one of the most revered jobs along with incentives of material
pleasures like numerous bun- verted into equity shares if
in the finance world. 5 PM: And yes he is back with a
cup of coffee in one hand and a dles of money, travel all over the loan is not paid back in time
6 AM: Check voicemails and bundle of documents in the globe, being in the best of and in full. They are given
emails from across the globe other to analyze the documents places are the pulls. Those who
before he goes off to brush and and prepare a financial analysis without much due diligence
have been able to sustain in this
shower. field for long have reported high and in a short time
from the same.
7 AM: Breakfast with the Finan- 7 PM: The healthy lifestyle now level of job satisfaction and of
course have the best cars! And if Tobin Q: A ratio comparing
cial Times and laptop showing calls for a drink while waiting to
the latest trends in the stock start a meeting with the venture you still think you are Shania the value of a company given
Twain and still singing, “That by financial markets with the
market. capitalist to whom he has to sell don‟t impress me much” then
8 AM: Grab a coffee and reach the idea of investing in his cli- there are always others ready to value of a company's assets.
the office and settle in his cham- ent‟s company. jump in and for you, there are A ratio of less than one indi-
ber for a meeting to decide the 8 PM: Dinner with his associates other trains to catch. cates that the company is
game plan for a merger with to decide on the suggested
undervalued by the markets.
client in Hong Kong before they strategies to launch an IPO and
 IIMK’S FINANCIAL NEWSLETTER Page 4

INSIDE STORY HEADLINE

IPO PRICING: BOOK BUILDING VS AUCTION METHOD NILAY PRATIK, PGP12,IIMK

Three of the most widely practiced
ways of bringing out an IPO are
the book building method, the
auctions method and the fixed
price method. Fixed price method
is finding less takers by the day
due to the simple reason that the
issuer organization can never be
very sure of whether the price it‟s
asking is the best price or not.
Across the world, the most com-
monly used method is the book
building method, which has been
practiced almost everywhere,
particularly due to the support it
enjoys from the investment bank-
ing community. Lately, the method
of launching an IPO through an
auction has seen some support-
ers, but it hasn‟t caught up yet.
The Book Building
Method: The process begins
with the issuing firm hiring an
Investment Bank, which gener-
ally forms a syndicate with
other Investment Banks, and
they collectively act as under-
writers or Book Running Man-
agers for the IPO. In other
words, the role of Investment
Bankers is to remove or at
least reduce the information
asymmetry in the market. The
company issuing the IPO
knows more about its future
growth opportunities and pre-
sent situation than the inves-
tors, while at the same time
the investors know much bet-
ter what they are willing to
offer for the company‟s to say about the issue. The
shares. Both parties tend to IBs use their relationship
use this information to their with the investors (read
advantage. Investment Banks institutional investors) to get
seek information from both,
an estimate of the demand
and skillfully filter and dis-
structure for the upcoming
seminate the information they
deem fit. Also, since the de- issue, i.e. they carry out the
mand has been made, a price price discovery require-
band is decided and the inves- ments. Once an estimate of
tors make bids in the band. the demand has been
made, a price band is de-
Since the investment banks
cided and the investors
enjoy a good reputation in the
make bids in the band.
market and the investors are
very well aware that the IBs
will not do anything to malign
their reputation, they listen to
what the IBs have

Book Building Method

Advantages Disadvantages
Widely accepted by the Investment Banking commu- The offer price finalized by the IBs are generally
nity based on the demand structure of the Institu- “Winner’s Curse has
tional investors only
Investors have an incentive to buy due to expecta- There is always a 15-20% under pricing which
been touted as one
tions of a pop on listing, as the IPO is generally un- causes the issuer to leave a lot of money on of the major
der priced the table
problems of Auction

Auction Method: Compa-
nies generally hire Investment
Banks as underwriters for Auc-
tion Based IPOs also. It is per-
ceived to be a more transparent
method where the discretionary
powers of IBs in deciding the
issue price is curtailed. Broadly,
the process starts with the is-
suer announcing the IPO and a
clearing price. The issuer sets a
price well above what any inves-
tor is expected to bid, and then
reduces the price incrementally
as bids start coming in, a classic
example of Dutch auction
method. So, the investors who
bid early and high are allocated
a greater share of the offering.
But again, this is something
called as “Winner‟s Curse” as
they are paying higher than
those who bid later, for the
same issue. Auction based IPO
price determination has helped
in tackling the IPO under pricing
problem significantly, yielding a Based IPO Pricing
much higher value to the issuer, Method.”
which was earlier left on the
table (in the fixed price or book
building methods). Also, it has
been noted that this method
brings in enough transparency
to prevent IPO scams. The
Google IPO of 2004 is a good
example of an IPO through the
auction method, but it had a
limited success in terms of price
discovery.

Auction Method The Google IPO of 2004 is a

Advantages Disadvantages good example of an IPO
through the auction method.
More transparent as lesser discretionary powers A high clearing price scares off retail investors
of the IBs
The severe problem of IPO under pricing is re- It‟s seldom favored by the IB community as they
duced have lesser profits in this method. Only the com-
panies which have significant clout can persuade
the IBs to go for Auction method.
 SPECIAL EDITION Page 5

INVESTMENT BANKING INDUSTRY: A PORTER’S 5 FORCES ANALYSIS

INSIDE STORY HEADLINE

W
APEKSHIT KHARE , PGP12, IIMK

hile analyzing the global investment banking sector ,financial

institutions that provide the investment banking services which
include equity and debt underwriting, and mergers and acquisitions services can be consid-
ered as market players. Companies and governments can be considered as buyers as they seek
the services of investment banks to raise money by issuing and selling securities in the capital
markets and solicit advice on transactions such as mergers and acquisitions.

The majority of clients are large, powerful institutions like governments who have strong powers
to negotiate exert downward pricing pressure on market players and this strengthens buyer
power. The standard fee structure slightly weakens this proposition, though. Thus the buyer power
is moderate for the sector.

Due to stringent regulations in many countries it is problematic to enter the market. Entry might
also be deterred because certain well-recognized companies with trusted reputations exist in the
sector which may find it easier to attract and retain customers. Moreover the entry requires a
“ A good future
large amount of capital which acts as a deterrent. Thus it might be said that entry into this sector
is difficult. for the IB sector
is in store, a
The investment banks rely heavily on number crunching and need to maintain constant touch future which will
with their customers and all this requires heavy IT support. The suppliers thus include Information
see them
and Communication Technology (ICT) supporters and providers of outsourcing services. However
involved in
it being difficult to train employees to use new systems the sector relies heavily on ICT providers.
Skilled employees are often an important requirement of companies in this sector and this makes many mergers
payroll a significant cost. Overall, supplier power is strong in the investment banking sector. and acquisitions
the world over.”
Substitutes or alternatives to the services provided by the investment banks may include recruit-
ing in-house staff to advise companies on activities like mergers & acquisitions and valuations.
But since such services are not required by companies all the time the expenditure would be
more than the benefits. Thus one concludes that the threat of substitutes for the sector is weak.

The investment banking sector is relatively concentrated and is dominated by a number of large
market players, many of which operate on a multinational level. Companies try to maximize mar-
gins by diversifying their services and streamlining their operations. Diversification reduces rivalry
as the companies do not rely on one sector completely. Thus it is evident that the degree of exist-
ing rivalry in the sector is moderate.

Thus it might be said that the investment banking sector is characterized by moderate buyer
power, high supplier power, low threat of substitutes, moderate rivalry and low threat of entry of
new firms. Such a scenario promises a good future for the IB sector, a future which will see them
involved in many mergers and acquisitions the world over.
 IIMK’S FINANCIAL NEWSLETTER
HISTORY OF INVESTMENT BANKING
BEFORE 1900
I n the early 1800s financing of ca-
nals, railroads, and a few industries
in the United States depended heavily on im-
ported capital, chiefly from Britain. In the
1840s, defaults in state securities for a time
cut off the supply of foreign capital and led to
stronger efforts to tap the domestic capital
market, which had been hitherto confined to
wealthy traders and ship owners in New York
City and Philadelphia, Pennsylvania.
Investment banking received a further impetus
during the American Civil War (1861-1865)
from the example of a syndicate of banking
houses, led by the financier, Jay Cooke. The
syndicate sold a billion dollars' worth of govern-
ment bonds to large numbers of individual
investors through the use of thousands of sales-
men and an extensive advertising campaign.
This venture marked the first mass securities-
selling operation carried out in the United
States.
After the Civil War, investment bankers concen-
trated on the sale of railroad bonds. Excessive
commitments in this field led to the panic of
1873, set off by the startling failure of Jay
Cooke and Company. In the 1890s widespread
railway defaults and receiverships occurred
again. Some larger houses, including the firms
of J. P. Morgan and of Kuhn, Loeb, played a
major part in huge mergers. Morgan, in particu-
lar, personally favored monopolies to preserve
business profits and investor confidence.
THE WORLD AT A GLANCE
1. Should the big banks be broken up?
http://hosted.ap.org/dynamic/stories/W/
WALL__MAIN?
SITE=NMALJ&SECTION=HOME&TEMPLATE=
DEFAULT
2.Confession of Risk Manager http://
www.economist.com/finance/
displaystory.cfm?story_id=11897037
3. When will it bottom out? http://
www.bloomberg.com/apps/news?
pid=newsarchive&sid=aw.UBOZvqj8k
1900—1950
I n the period during and following
World War I, the investment-banking
business expanded spectacularly. Many new
and inexperienced firms entered the field. The
ensuing wild competitive race for business
ended during the Great Depression in a col-
lapse of the security markets in 1929 and the
failure of many banking concerns. The abuses
revealed during this period resulted in numer-
ous federal reforms.
Lack of uniformity, weak administration, and,
most importantly, lack of jurisdiction over inter-
state commerce during this period led to the
Federal Securities Act of 1933. Its principal
feature is “full disclosure”, the requirement that
full and accurate information be made available
regarding publicly offered securities through a
registration statement filed with the Securities
and Exchange Commission and through a pro-
spectus (a condensed statement) given to pro-
spective purchasers. Another landmark reform,
the Glass-Steagall Act, instituted in 1933, im-
plemented federal legislation compelling com-
mercial banks to separate themselves from
their securities affiliates, which had previously
played a significant role in investment banking.
However, it was later gradually repealed and
was completely nullified by 1999.
4. International Mergers
http://www.economywatch.com/mergers-
acquisitions/international/
5.Latest Merger Announcement‟s
http://www.theonlineinvestor.com/
mergers/
6. IPO Ratings
http://www.financialexpress.com/news/
Why-IPO-ratings-should-be-
welcomed/127924/
Page 6
VIKASH SHARMA, PGP12, IIMK
POST 1950
P ost World War II, investment
banking scaled new levels,
despite the strong and increasing competition
provided by direct borrowing by corporations
from life-insurance companies and other institu-
tional investors (including pension funds).
In 1964, as a result of recommendations by the
Securities and Exchange Commission, the U.S.
Congress enacted amendments to the federal
securities laws that considerably strengthened
regulation and investor protection. On May 1,
1975, a nearly 200-year-old tradition in the
brokerage business disappeared when the
commission ordered the end of the fixed-rate
brokerage fee. Fees are now negotiated, which
can mean a discount of up to 50 percent in
some cases.
7. BSNL IPO: http://
www.moneycontrol.com/india/news/ipo
-upcoming-issues/plan-bsnl-ipo-price-at-
rs-300-400/sha-raja-/13/57/350909
8. Sub Prime Crisis & FED
http://www.bloomberg.com/apps/
news?
pid=newsarchive&sid=adGM43wQhgjU
9. Kalpana Morparia to head JPMor-
gan‟s India business http://
www.livemint.com/2008/08/2901084
4/Kalpana-Morparia-to-head-JPMor.html
 SPECIAL EDITION
FIN-TERVIEW: KARTIK TALWAR, O3 CAPITAL
FY: What are the key areas in
which o3 Capital has been oper-
ating?
KT: o3 Capital is a knowledge
oriented full services investment
bank and financial services firm
focused on the mid market. o3
Capital offers Investment Bank-
ing, Wealth Advisory and Trading
& Broking Services.
The Investment Banking division
of the firm offers transaction ad-
visory services for M&A and Pri-
vate Equity syndication. The o3
Capital team comprises invest-
ment banking professionals with
extensive experience of advising
clients across sectors.
o3 Capital focuses on a few key
sectors which include IT and
Business Process Outsourcing,
Consumer Products & Services,
Infrastructure, Pharmaceuticals,
Health Care & Life Sciences,
Manufacturing & Allied Services,
Real Estate
FY: What are the upcoming sec-
tors in India that are expected to
see considerable investment in-
terest in the years to come?
KT: With the Indian economy
growing at a rapid pace various
sectors driven by increased con-
sumer and government spending
are expected to outperform the
economy‟s growth rate. With in-
creased government and private
sector spending on, Infrastruc-
ture and Energy /Power are two
such sectors that are expected to
Page 7
more extensively. Apart from this
Media and Entertainment, which are the emphasis which currently is
driven by consumer spending, are more on a solution based ap-
expected to expand prolifically.
proach needs to be on the proc-
Firms that have created a niche for ess based approach to inculcate
themselves and look to add consider- problem solving skills.
able value to their service offerings
such as IT consulting etc. are also gen-
erating a lot of interest and as Indian
firm in core sectors such as IT and
manufacturing strive to move up the
value chain, there is bound to be enor-
mous interest seen in these sectors as
well.
(The views of the author are per-
FY: How relevant did you find your sonal views and do not in any
learning from the B-school at an In- manner reflect the opinions of
vestment Bank? What changes can his employer)
you suggest in typical B-school meth-
odologies that might be more useful
to its graduates when they join Invest-
ment Banks?
KT: Apart from exposure to various
courses in finance, a B-school condi-
tions students to perform in an invest-
ment banking setup. Apart from a
strong background in finance, an in-
vestment banker also requires an ana-
lytical approach to thinking and prob-
lem solving which is the key to ap-
proach any aspect of the job. The abil-
ity to understand and develop a strong
understanding of her/his respective
sector is a must for any investment
banker, which is augmented by the
case study methodology, employed at
most leading B-Schools.
B- School methodologies while cover-
ing various integral aspects can involve
a greater practical aspect, helping stu-
dents ease into an investment banking
scenario. The case study methodology
needs to be extended across verticals
and used more extensively. Apart from
this the emphasis which currently is

Mail us at fy@iimk.ac.in
TEAM FY
Mridul Muralidharan 9946103226
Rohit Jain 9946102149
Saurabh Kumar 9946102142
Viral Shah 9946660709
Page 8
Financially Yours (FY) is the
finance interest group of IIMK.
The prime objective of FY is to
promote and develop an inter-
est in the field of finance.
Through a variety of activities
all round the year like holding
sessions, competitions, orga-
nizing seminars for Horizons
and management events for
Backwaters, FY facilitates the
learning process and encour-
age friendly competition
among fin enthusiasts.
However, being an „interest‟
group our efficient working
depends on enthusiastic par-
ticipation from the students.