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Disclaimer
Source: Department of Commerce - Minority Business Development Agency
Friday January 30th, 2004
Summary: Investment banks use certain dollar sales minimums as criteria
for them to talk to a company. Most undertake a significant amount of research
on companies, and it'’ believed that investment banks identified 75% of their
clients by internal introductions or “leads” while only 25% of the companies
approached the investment banker. If these percentages are even close to
accurate, you have a better chance of being funded by an investment bank if you
have an entrée or can be personally referred to the bank by a good contact.
Often that source is through your existing commercial banking relationship or by
way of your attorney.
THE BASIS FOR DECISIONS
Like the venture capitalist, investment bank decisions are driven by the
performance of a company and by a decision as to the viability and profitability
of the company.
Earnings - A company’s earnings drive the price of the security. For
example, the average multiple for the banking industry is currently six. That
means that banks are selling for six times (6X) their earnings. If an investment
bank would do a bank deal, the public market would probably not purchase bank
stock selling for nine times (9X) earnings.
Further, since banks generally sell the offering to their customers, they are
also concerned about the performance of the company over the next several years
because their customers hold the stock. Earnings growth is another component
which drives the performance of a company.
Marketability – Before a company can raise public money, it must have a
good “story” in order to generate interest. This translates to marketability –
the situation where the company can motivate investment bankers and convince
them that the sale of the stock is highly probable. This generally requires a
record earnings growth, and it also generally requires a large sustainable
market for the product or service that the company is providing.
Sustainability – Although some investment banking firms underwrite trendy
companies, the good houses attempt to underwrite companies which are going to be
good purchases for their retail customers or private investors.
Advantages to Using an Investment Bank
They have financial savvy of the public and private markets versus the typical
entrepreneur. Usually provide pricing, timing, and distribution ideas for the
offering.
The investment banker takes the risk of distributing the securities. After the
contract is signed, the banker is “on the line” for these issues.
Most investment bankers who underwrite also make a market in the security,
therefore, supporting the stock in the marketplace.
Certain investment bankers raise the prestige of a company and can generate
short-term financing just by their affiliation.