13. Investment Bank

Chapter 13



by: josavere


Basically, it constitutes a service of the consultant's office for special circumstances. It is based on knowledge, trust, and confidentiality. Their functions can be summarized in the following ones: 


This constitutes the main function of the Investment bank, whose service consists of the design and structuring of solutions to satisfy the nontraditional financial needs, of corporative clients.

The main characteristics of this service are:

  • Fiscal and financial planning.
  • Structured financial product design based on the needs of each client.

To the organization that requires east type on watch, one is due to count on the support and experience of a described group as experts, for the search of effective solutions to the financial needs, fiscal and particular.

Some examples of solutions for a corporative client are:

  • Reconstruction of liabilities
  • Estimate of companies
  • Privatizations
  • Secularizations
  • Feluccas
  • Strategic alliances. 


This is a service that the investment bank has, it consists of the coordination and structuring of supply of titles values that will be negotiated through the market of capitals, in the domestic and international markets, such as:

  • Commercial papers
  • Ordinary bonds
  • Common and preferred stocks
  • Bonds Convertible into shares
  • Secularization

For these cases the Investment bank offers:

  • Legal and financial consultant's office to clients who require accessing the market of capital.
  • Structuring of transfer of titles negotiable values in the market of capitals.
  • Transfer and sale of titles. 


A. ACQUISITIONS: generally are structured using originating resources of credits guaranteed in the last instance by the assets of the company to acquire. The cash flow of the business is constituted as the key tool for the analysis of the payment capacity. It can be done through several mechanisms:

I. Buying shares: a society is constituted itself (A); a loan is made without guarantees conditioning this company, to buy shares from the company (B). Closed negotiation, a loan is the grant to company B, so that by a legal channel transfers it to company A With that amount A, cancels the loan that received to buy the shares of B, organization that has become more indebted but with a capacity of payment with the funds that it generates.

With the purchase of shares, A dominates in B. It is important to analyze before making the negotiation, the practical possibility to transfer the loan that B receives to the capacity of payment of B.

a. The moneylender grants credit without guarantees to society A (founded to acquire shares of). After closing the business of the shares, societies A and B merge by an absorption process (B absorbs A) and guarantees the loan that had been granted to A.

1° Step:

Before using this option, it is important to analyze the viability to fuse A and B, each time this type of operation has special regulation.

2° Step:

b. Previous agreement between the societies A and B, to acquire shares of B, paying the shareholders with A on sights a promissory note. After the operation, the moneylender grants credit to B in order to transfer B to the society and it is responsible for the subscribed promissory note.

It's Important to analyze the legality of the crossing of the loan that Receives from A.

In the case of the acquisition of shares, the investment bank, structures the plan, and in addition, it coordinates the process. He receives a commission and in addition, he agrees to a right generally to subscribe a percentage of shares of the new company. 

II. Acquisition of assets: in this case, they appear as a single modality that implies the foundation of a new company or the use of the already existing one A, that it buys the actives and passives of a society B. the moneylender grants credit to the society A guaranteeing in the assets of B, organization that happens to liquidation, with which the founds of the loan go to the shareholders of B.

B. FUSIONS, ABSORPTIONS AND SPLITS: the quick Investment bank consults the office in the purchase - sale, and fusion or partition of the company, design, and coordination of the mechanisms to finance these operations; in this case the investment bank acts as one of the parties, structuring the terms of the negotiation and defining the strategy to carry out the possible operation.

Within the advantages for the user we have the culmination of the operation in the most favorable terms for the client, easy access to buying and selling potentials diminishes the inherent risk to the instrumentation of the operation, among others.

The fusion can be:

a. Simple: through an exchange of actions, giving actions of the buying company to the shareholders of the acquired company.

b. Hostile Taking: it is the purchase of a company against the will of its shareholders and directors. In this case, the investment bank can act on behalf of any of the parties designing the strategy defense or purchase the strategy, to avoid it.

The takeover can be done by the mechanism of purchasing shares with partial payment in cash and the rest in bonds (Junk Bonds) or with another type of financial obligation (promissory note letter, mortgages, etc.), it also can be made by public supply (To tend Offer) to acquire shares on behalf of the public (anonymous).

In the case of a purchase the Investment bank acts as a negotiator or serves as an advisor:

  • To study the capacity of the buying company
  • To design the strategy to follow
  • To evaluate the alternatives that appear in the market
  • To study the type of relationship between the shareholders and the company that is going to be acquired
  • To determine the price to pay

If the bank is going to defend the company of a hostile takeover, in addition to the legal mechanisms, if they exist for the case, it is in charge of the financial aspect acting as:

  • To make the debts crucial or to increase its cost.
  • To buy shares of the company quickly to avoid interchanging of shares.
  • To offer purchase by the acquired shares paying a premium so that the company or person that had intentions to absorb the company abandons its intention. Greenmail. Using figures like the transfer of preferential shares that grant financial benefits but without the right to the management of the company; in case bonds are had, to turn them into shares, (Person Puts Bonds), etc.
  • To sell assets.
  • Reacquisition of own shares.
  • To induce a third (party) into buying shares of the society.
  • To improve the conditions of the shareholders.
  • To create incompatibilities between the buying society and the organization in the critical moment of being acquired.
  • To structure a fusion with another one.
  • To negotiate oppressive contracts with the members of the administration. 

C. SALE OF COMPANIES: in this case the investment bank can participate as an advisor, presenting/displaying to the buyer (salesman) or, taking the responsibility from the business.

A very important function consists in the process of appraisal of the company (see document on the subject); in order to process a sales notebook of sale with all the information to know about the company, to locate the potential buyers, to define the mechanisms of supply, clauses of confidentiality, technical, legal and financial overhaul of the company, to decide the terms and to define the procedures of closing and proceedings, to perfect the operation. 

D. PRIVATIZATIONS: when the government of a country decides to privatize a company, the investment bank can offer its aid to take the operation to a happy end. Based on the legal level of the country’s development, its access to the international markets of the capital, restrictions, the governmental level of foreign investment, policies, etc., the investment banker can:
Identify companies that can be privatized with a good welcome of investors.

  • Define the valuation method.
  • Study possible use of the market of values.
  • To regulate the supply process respecting the governmental policies as far as a restriction and precedence for investors.
  • Define sales technique (public supply, direct sale, etc.) 

E.FINANCING OF PROJECTS: Structuring and coordination of financing projects through debt, patrimony, or both. The investment bank can be useful in special cases to those financing the single moneylender who has the assets and the cash flow generated by the project to the reimbursement of his credit. In this case, the promoters of the business cannot offer additional guarantees. The Investment bank is in charge of:

  • The foundation of an independent, economically viable organization.
  • Structuring the payment of the debt with a foundation in the projections of cash flow and using as s guarantee the assets of the project.
  • Calculating the economic value of the project, which surpasses the capacity of those who promote it.
  • Prepare the structure of the financial package, by itself, the general documentation is very complicated very extensive (many things involved, accounting and tributary legislation on investment, requirements, etc.)
Among others it acts as follows:
  • To evaluate the project operatively and financially.
  • Determination of the structure capital debt /, more adapted.
  • Attainment and coordination of the financing sources.
  • Integral Consultant's office throughout all the operations.
  • Design of the legal frame.
  • Evaluation of the feasibility study.
  • To structure a financing program.
  • To propose guarantees.
  • To make the goal of the project and to prepare periodic information.

Using the Investment bank, the possibility of success of the project is maximized and the risk for the investors is reduced. 

F. OPERATIONS OF UNDERWRITING: it consists of the purchase of a transfer of values directly to a company to sell later it to other investors. It can make it a single bank or an alliance of banks.

In this case, the bank can take a firm position or act simply as an agent offering the best effort. 

G. RECONSTRUCTION OF LIABILITIES: the Reconstruction of Liabilities consists of the reformulation of the structure of the debt/patrimony of the company, as well as the reconstruction of the conditions of the liabilities of the company. This service has the following characteristics: adjustment of terms of the debt, to the possibilities of generation of resources of the company, determination of the structure more suitable capital debt /, attainment and coordination of the financing sources, and integral consultant's office throughout all the operation.

The reconstruction of liabilities offers the user two important advantages: improvement of the conditions and terms of the liabilities so that it is in good condition for operating and for generating value. 

H. IN CRISIS SITUATIONS: the Investment bank acts as an advisor following the parameters indicated in the document on crisis and alternatives.

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