- We are all familiar with traditional banks,
we go to them all the time.
What about an investment bank?
Well an investment is not really 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 go public.
I need an expert to walk me through that process.
It's called underwriting.
So investment banks help walk companies, new companies,
through the process of making themselves
public companies through issuing public shares.
Also when one company wants to buy another.
Both the buying company and the target company
typically hire an investment bank
to walk them through the process.
Let's say I want to buy another company for $22 billion.
Note, I choose this number
because this is what Facebook paid
to buy WhatsApp in 2014.
Well this is a big transaction.
And I may not have done anything like this 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 have specialists
that help companies do these large and important deals.
Another important function of an investment bank
is to engage in investment trading.
In essence, investment banks are investment advisors
for very large clients, such as for pension funds,
or for other large investment funds.
If I'm the state of Illinois for example,
and I need to invest my pension fund money,
I'm going to hire an investment bank
to lead me through that process.
So investment banks help in investment trading
for both their clients and also for themselves,
because as investment banks study the market 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.
Investment banks have two primary functions:
one to lead companies through deals
and two to engage in investment trading,
both of as a aid to clients and also for themselves.
Here are two examples of investment banks
helping companies through a deal.
First helping a company go public
by serving as an underwriter.
Facebook went public in May 2012
as a huge initial public offering with lots of interest.
Facebook hired 33 different investment bankers
who split a fee of over $170 million.
These underwriters helped Facebook through this process
because of course, Facebook had never before
done an initial public offering.
The lead underwriters were names you've heard of,
Morgan Stanley, JP Morgan Chase, Goldman Sachs.
These investment banks walked Facebook
through this IPO process.
Second, helping companies with mergers and acquisitions.
Facebook purchased WhatsApp for $22 billion in 2014.
WhatsApp had just barely started in business.
The company had reported total revenue
of just $10 million the year before.
Both the target, WhatsApp, and the buyer, Facebook
had never done a deal this big before.
They needed advisors to walk them through
this acquisition process.
The investment bankers on each side of this transaction
earned about $40 million in fees
in helping Facebook and WhatsApp
make this large deal happen.